Download MBA IB and Marketing 1st and 2nd Semester Quantitative Techniques for Managers Notes

Download MBA (Master of Business Administration) IB and Marketing 1st and 2nd Semester Quantitative Techniques for Managers Notes

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UNIT I

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1 INTRODUCTION TO OPERATIONS RESEARCH

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ON
S

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S
E

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LESSON STRUCTURE

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1.1 Introduction

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1.2 History of Operations Research

1.3 Stages of Development of Operations

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Research

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1.4 Relationship Between Manager and

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OR Specialist

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1.5 OR Tools and Techniques

1.6 Applications of Operations Research

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1.7 Limitations of Operations Research

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1.8 Summary

Objectives

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1.9 Key Terms

After Studying this lesson, you should be able

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1.10 Self Assessment Questions

to:

1.11 Further References

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Understand the meaning, purpose, and

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tools of Operations Research

Describe the history of Operations

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Research

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Describe the Stages of O.R

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Explain the Applications of Operations

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Research

Describe the Limitations of Operation

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Research

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Understand the OR specialist and

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Manager relationship

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MBA-H2040 Quantitative Techniques for Managers

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1.1 Introduction

The British/Europeans refer to "operational research", the Americans to "operations research" - but both

are often shortened to just "OR" - which is the term we will use.

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Another term which is used for this field is "management science" ("MS"). The Americans

sometimes combine the terms OR and MS together and say "OR/MS" or "ORMS". Yet other terms

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sometimes used are "industrial engineering" ("IE") and "decision science" ("DS"). In recent years there

has been a move towards a standardization upon a single term for the field, namely the term "OR".

Operation Research is a relatively new discipline. The contents and the boundaries of the OR are

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not yet fixed. Therefore, to give a formal definition of the term Operations Research is a difficult task.

The OR starts when mathematical and quantitative techniques are used to substantiate the decision being

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taken. The main activity of a manager is the decision making. In our daily life we make the 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

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concerned here with are complex and heavily responsible. Examples are public transportation network

planning in a city having its own layout of factories, residential blocks or finding the appropriate product

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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

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different discipline such as mathematics, statistics, economics, psychology, engineering etc. and

combines these tools to make a new set of knowledge for decision making. Today, O.R. became a

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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,

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machine, and procedures may do not have complete information.

Operations Research can also be treated as science in the sense it describing, understanding and

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predicting the systems behaviour, especially man-machine system. Thus O.R. specialists are involved in

three classical aspect of science, they are as follows:

i) Determining the systems behaviour

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ii) Analyzing the systems behaviour by developing appropriate models
iii) Predict the future behaviour using these models

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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

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operations during World War II, and also successful in other operations. Today business applications are

MBA-H2040 Quantitative Techniques for Managers
primarily concerned with O.R. analysis for the possible alternative actions. The business and industry

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befitted from O.R. in the areas of inventory, reorder policies, optimum location and size of warehouses,

advertising policies, etc.

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As stated earlier defining O.R. is a difficult task. The definitions stressed by various experts and

Societies on the subject together enable us to know what O.R. is, and what it does. They are as follows:

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

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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

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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

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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.

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3. Morse and Kimball have stressed O.R. is a quantitative approach and described it as " a scientific

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method of providing executive departments with a quantitative basis for decisions regarding the
operations under their control".

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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".

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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".

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

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(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".

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1.2 History of Operations Research

Operation Research is a relatively new discipline. Whereas 70 years ago it would have been possible to

study mathematics, physics or engineering (for example) at university it would not have been possible to

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study Operation Research, indeed the term O.R. did not exist then. It was really only in the late 1930's

that operational research began in a systematic fashion, and it started in the UK. As such it would be

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interesting to give a short history of O.R.

1936

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MBA-H2040 Quantitative Techniques for Managers
Early in 1936 the British Air Ministry established Bawdsey Research Station, on the east coast, near

Felixstowe, Suffolk, as the centre where all pre-war radar experiments for both the Air Force and the

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Army would be carried out. Experimental radar equipment was brought up to a high state of reliabilit y

and ranges of over 100 miles on aircraft were obtained.

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It was also in 1936 that Royal Air Force (RAF) Fighter Command, charged specifically with the

air defense of Britain, was first created. It lacked however any effective fighter aircraft - no Hurricanes

or Spitfires had come into service - and no radar data was yet fed into its very elementary warning and

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control system.

It had become clear that radar would create a whole new series of problems in fighter direction

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and control so in late 1936 some experiments started at Biggin Hill in Kent into the effective use of such

data. This early work, attempting to integrate radar data with ground based observer data for fighter

interception, was the start of OR.

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1937

The first of three major pre-war air-defence exercises was carried out in the summer of 1937. The

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experimental radar station at Bawdsey Research Station was brought into operation and the information

derived from it was fed into the general air-defense warning and control system. From the early warning

point of view this exercise was encouraging, but the tracking information obtained from radar, after

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filtering and transmission through the control and display network, was not very satisfactory.

1938

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In July 1938 a second major air-defense exercise was carried out. Four additional radar stations had been

installed along the coast and it was hoped that Britain now had an aircraft location and control system

greatly improved both in coverage and effectiveness. Not so! The exercise revealed, rather, that a new

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and serious problem had arisen. This was the need to coordinate and correlate the additional, and often

conflicting, information received from the additional radar stations. With the outbreak of war apparently

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imminent, it was obvious that something new - drastic if necessary - had to be attempted. Some new

approach was needed.

Accordingly, on the termination of the exercise, the Superintendent of Bawdsey Research Station, A.P.

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Rowe, announced that although the exercise had again demonstrated the technical feasibility of the radar

system for detecting aircraft, its operational achievements still fell far short of requirements. He

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therefore proposed that a crash program of research into the operational - as opposed to the technical -

aspects of the system should begin immediately. The term "operational research" [RESEARCH into

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MBA-H2040 Quantitative Techniques for Managers
(military) OPERATIONS] was coined as a suitable description of this new branch of applied science.

The first team was selected from amongst the scientists of the radar research group the same day.

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1939

In the summer of 1939 Britain held what was to be its last pre-war air defence exercise. It involved some

33,000 men, 1,300 aircraft, 110 antiaircraft guns, 700 searchlights, and 100 barrage balloons. This

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exercise showed a great improvement in the operation of the air defence warning and control system.

The contribution made by the OR team was so apparent that the Air Officer Commander-in-Chief RAF

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Fighter Command (Air Chief Marshal Sir Hugh Dowding) requested that, on the outbreak of war, they

should be attached to his headquarters at Stanmore in north London.

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Initially, they were designated the "Stanmore Research Section". In 1941 they were redesignated

the "Operational Research Section" when the term was formalised and officially accepted, and similar

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sections set up at other RAF commands.

1940

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On May 15th 1940, with German forces advancing rapidly in France, Stanmore Research Section was

asked to analyses a French request for ten additional fighter squadrons (12 aircraft a squadron - so 120

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aircraft in all) when losses were running at some three squadrons every two days (i.e. 36 aircraft every 2

days). They prepared graphs for Winston Churchill (the British Prime Minister of the time), based upon

a study of current daily losses and replacement rates, indicating how rapidly such a move would deplete

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fighter strength. No aircraft were sent and most of those currently in France were recalled.

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This is held by some to be the most strategic contribution to the course of the war made by OR

(as the aircraft and pilots saved were consequently available for the successful air defense of Britain, the

Battle of Britain).

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1941 onward

In 1941, an Operational Research Section (ORS) was established in Coastal Command which was to

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carry out some of the most well-known OR work in World War II.

The responsibility of Coastal Command was, to a large extent, the flying of long-range sorties by

single aircraft with the object of sighting and attacking surfaced U-boats (German submarines). The

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technology of the time meant that (unlike modern day submarines) surfacing was necessary to recharge

batteries, vent the boat of fumes and recharge air tanks. Moreover U-boats were much faster on the

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surface than underwater as well as being less easily detected by sonar.

MBA-H2040 Quantitative Techniques for Managers

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Thus the Operation Research started just before World War II in Britain with the establishment

of teams of scientists to study the strategic and tactical problems involved in military operations. The

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objective was to find the most effective utilization of limited military resources by the use of quantitative

techniques. Following the end of the war OR spread, although it spread in different ways in the UK and

USA.

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In 1951 a committee on Operations Research formed by the National Research Council of USA,

and the first book on "Methods of Operations Research", by Morse and Kimball, was published. In 1952

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the Operations Research Society of America came into being.

Success of Operations Research in army attracted the attention of the industrial mangers who

were seeking solutions to their complex business problems. Now a days, almost every organization in all

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countries has staff applying operations research, and the use of operations research in government has

spread from military to wide variety of departments at all levels. The growth of operations research has

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not limited to the U.S.A. and U.K., it has reached many countries of the world.

India was one the few first countries who started using operations research. In India, Regional

Research Laboratory located at Hyderabad was the first Operations Research unit established during

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1949. At the same time another unit was set up in Defense Science Laboratory to solve the Stores,

Purchase and Planning Problems. In 1953, Operations Research unit was established in Indian Statistical

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Institute, Calcutta, with the objective of using Operations Research methods in National Planning and

Survey. In 1955, Operations Research Society of India was formed, which is one of the first members of

International Federation of Operations Research societies. Today Operations Research is a popular

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subject in management institutes and schools of mathematics.

1.3 Stages of Development of Operations Research

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The stages of development of O.R. are also known as phases and process of O.R, which has six

important steps. These six steps are arranged in the following order:

Step I: Observe the problem environment

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Step II: Analyze and define the problem

Step III: Develop a model

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Step IV: Select appropriate data input

Step V: Provide a solution and test its reasonableness

Step VI: Implement the solution

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MBA-H2040 Quantitative Techniques for Managers

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Step I: Observe the problem environment

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The first step in the process of O.R. development is the problem environment observation. This step

includes different activities; they are conferences, site visit, research, observations etc. These activities

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provide sufficient information to the O.R. specialists to formulate the problem.

Step II: Analyze and define the problem

This step is analyzing and defining the problem. In this step in addition to the problem definition the

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objectives, uses and limitations of O.R. study of the problem also defined. The outputs of this step are

clear grasp of need for a solution and its nature understanding.

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Step III: Develop a model

This step develops a model; a model is a representation of some abstract or real situation. The models

are basically mathematical models, which describes systems, processes in the form of equations,

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formula/relationships. The different activities in this step are variables definition, formulating equations

etc. The model is tested in the field under different environmental constraints and modified in order to

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work. Some times the model is modified to satisfy the management with the results.

Step IV: Select appropriate data input

A model works appropriately when there is appropriate data input. Hence, selecting appropriate input

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data is important step in the O.R. development stage or process. The activities in this step include

internal/external data analysis, fact analysis, and collection of opinions and use of computer data banks.

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The objective of this step is to provide sufficient data input to operate and test the model developed in

Step_III.

Step V: Provide a solution and test its reasonableness

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This step is to get a solution with the help of model and input data. This solution is not implemented

immediately, instead the solution is used to test the model and to find there is any limitations. Suppose if

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the solution is not reasonable or the behaviour of the model is not proper, the model is updated and

modified at this stage. The output of this stage is the solution(s) that supports the current organizational

objectives.

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Step VI: Implement the solution

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MBA-H2040 Quantitative Techniques for Managers
At this step the solution obtained from the previous step is implemented. The implementation of the

solution involves mo many behavioural issues. Therefore, before implementation the implementation

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authority has to resolve the issues. A properly implemented solution results in quality of work and gains

the support from the management.

The process, process activities, and process output are summarized in the following Table 1-1.

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Process Activities

Process

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Process Output

Site visits, Conferences,

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Sufficient information and

Step 1:

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Observations, Research

support to proceed

Observe the problem

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environment

Define: Use, Objectives,

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Clear grasp of need for and

limitations

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Step 2:

nature of solution requested

Analyze and define

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the problem

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Define interrelationships,

Models that works under stated

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Formulate equations,

environmental constraints

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Step 3:
Develop a Model

Use known O.R. Model ,

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Search alternate Model

Analyze: internal-external data,

Sufficient inputs to operate and

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facts

Step 4:

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test model

Select appropriate data

Collect options,

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input

Use computer data banks

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Test the model

Solution(s) that support current

Step 5:

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organizational goals

find limitations

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Provide a solution and
test its reasonableness

update the model

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Step 6:
Implement the

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solution
MBA-H2040 Quantitative Techniques for Managers

Resolve behavioural issues

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Improved working and

Management support for longer

Sell the idea

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run operation of model

Give explanations

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Management involvement

Table 1-1: Process, Process activities, Process output of O.R. development stages

1.4 Relationship between the Manager and O.R. Specialist

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The key responsibility of manager is decision making. The role of the O.R. specialist is to help the

manager make better decisions. Figure 1-1 explains the relationship between the O.R. specialist and the

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manager/decision maker.

STEPS IN PROBLEM RECOGNITION,

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INVOLVEMENT: O.R. SPECIALIST or

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FORMULATION AND SOLUTION

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MANAGER

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Recognize

from

organizational

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Manager

symptoms that a problem exists.

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Decide what variables are involved; state
the problem in quantitative relationships

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Manager and O.R. Specialist

among the variables.

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I

nvestigat

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e met

hods f

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or sol

ving t

he

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problems as stated above; determine

O.R. Specialist

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appropriate quantitative tools to be used.

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Attempt solutions to the problems; find

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various solutions; state assumptions

O.R. Specialist

underlying

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these

solutions;

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test

alternative solutions.

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Determine which solution is most

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effective because of practical constraints

Manager and O.R. Specialist

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wit hin the organi zation; decide what t

he

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solution means for the organization.

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MBA-H2040 Quantitative Techniques for Managers

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Choose the solution to be used.

Manager

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`

S

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h

e

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de

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i

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o

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pe

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a

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a

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r

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Manager and O.R. Specialist

get their understanding and cooperation.

Figure 1-1 Relationship between Manager/Decision Maker and O.R. Specialists

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1.5 O.R. Tools and Techniques

Operations Research uses any suitable tools or techniques available. The common frequently used

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tools/techniques are mathematical procedures, cost analysis, electronic computation. However,

operations researchers 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

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addition to the above techniques, some other common tools are non-linear programming, integer

programming, dynamic programming, sequencing theory, Markov process, network scheduling

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(PERT/CPM), symbolic Model, information theory, and value theory. There is many other Operations

Research tools/techniques also exists. The brief explanations of some of the above techniques/tools are

as follows:

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Linear Programming:

This is a constrained optimization technique, which optimize some criterion within some constraints. In

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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:

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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

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be at the cost of other players and hence they are in conflict.

Decision Theory:

Decision theory is concerned with making decisions under conditions of complete certainty about the

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future outcomes and under conditions such that we can make some probability about what will happen

in future.

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Queuing Theory:

MBA-H2040 Quantitative Techniques for Managers
This is used in situations where the queue is formed (for example customers waiting for service, aircrafts

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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.

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Inventory Models:

Inventory model make a decisions that minimize total inventory cost. This model successfully reduces

the total cost of purchasing, carrying, and out of stock inventory.

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Simulation:

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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. Some times this is a difficult/time consuming procedure. Simulation is used when actual

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experimentation is not feasible or solution of model is not possible.

Non-linear Programming:

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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

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approximation in which a solution lies and then the solution is obtained using linear methods.

Dynamic Programming:

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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:

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If one or more variables of the problem take integral values only then dynamic programming method is

used. For example number or motor in an organization, number of passenger in an aircraft, number of

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generators in a power generating plant, etc.

Markov Process:

Markov process permits to predict changes over time information about the behavior of a system is

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known. This is used in decision making in situations where the various states are defined. The

probability from one state to another state is known and depends on the current state and is independent

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of how we have arrived at that particular state.

MBA-H2040 Quantitative Techniques for Managers

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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

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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

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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) ? is used when activities time is not known

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accurately/ only probabilistic estimate of time is available.

Critical Path Method (CPM) ? is used when activities time is know accurately.

Information Theory:

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This analytical process is transferred from the electrical communication field to O.R. field. The

objective of this theory is to evaluate the effectiveness of flow of information with a given system. This

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is used mainly in communication networks but also has indirect influence in simulating the examination

of business organizational structure with a view of enhancing flow of information.

1.6 Applications of Operations Research

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Today, almost all fields of business and government utilizing the benefits of Operations Research. There

are voluminous of applications of Operations Research. Although it is not feasible to cover all

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applications of O.R. in brief. The following are the abbreviated set of typical operations research

applications to show how widely these techniques are used today:

Accounting:

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Assigning audit teams effectively
Credit policy analysis
Cash flow planning
Developing standard costs
Establishing costs for byproducts

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Planning of delinquent account strategy

Construction:

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Project scheduling, monitoring and control
Determination of proper work force
Deployment of work force
Allocation of resources to projects

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Facilities Planning:

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Factory location and size decision
Estimation of number of facilities required

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Hospital planning

MBA-H2040 Quantitative Techniques for Managers

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International logistic system design
Transportation loading and unloading
Warehouse location decision

Finance:

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Building cash management models
Allocating capital among various alternatives
Building financial planning models
Investment analysis
Portfolio analysis

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Dividend policy making

Manufacturing:

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Inventory control
Marketing balance projection
Production scheduling
Production smoothing

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Marketing:

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Advertising budget allocation
Product introduction timing

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Selection of Product mix
Deciding most effective packaging alternative

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Organizational Behavior / Human Resources:

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Personnel planning
Recruitment of employees
Skill balancing
Training program scheduling

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Designing organizational structure more effectively

Purchasing:

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Optimal buying
Optimal reordering
Materials transfer

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Research and Development:

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R & D Projects control
R & D Budget allocation
Planning of Product introduction

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1.7 Limitations of Operations Research

Operations Research has number of applications; similarly it also has certain limitations. These

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limitations are mostly related to the model building and money and time factors problems involved in its

application. Some of them are as given below:

i)

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Distance between O.R. specialist and Manager

Operations Researchers job needs a mathematician or statistician, who might not be aware of
the business problems. Similarly, a manager is unable to understand the complex nature of

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Operations Research. Thus there is a big gap between the two personnel.

ii)

Magnitude of Calculations

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MBA-H2040 Quantitative Techniques for Managers

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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.

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iii)

Money and Time Costs

The basic data are subjected to frequent changes, incorporating these changes into the

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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 some
time.

iv)

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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.

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models. Importantly O.R. models do not take into account emotional factors or qualitative
factors.

v)

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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 in some times only the psychological factors.

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1.8 Summary

Operations Research is relatively a new discipline, which originated in World War II, and became very

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popular throughout the world. India is one of the few first countries in the world who started using

operations research. Operations Research is used successfully not only in military/army operations but

also in business, government and industry. Now a day's operations research is almost used in all the

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fields.

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Proposing a definition to the operations research is a difficult one, because its boundary and

content are not fixed. The tools for operations search is provided from the subject's viz. economics,

engineering, mathematics, statistics, psychology, etc., which helps to choose possible alternative courses

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of action. The operations research tool/techniques include linear programming, non-linear programming,

dynamic programming, integer programming, Markov process, queuing theory, etc.

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Operations Research has a number of applications. Similarly it has a number of limitations,

which is basically related to the time, money, and the problem involves in the model building. Day-by-

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day operations research gaining acceptance because it improve decision making effectiveness of the

managers. Almost all the areas of business use the operations research for decision making.

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1.9 Key Terms

MBA-H2040 Quantitative Techniques for Managers
OR: Operations Research.

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MS: Management Science.

Symbolic Model: An abstract model, generally using mathematical symbols.

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Criterion: is measurement, which is used to evaluation of the results.

Integer Programming: is a technique, which ensures only integral values of variables in the problem.

Dynamic Programming: is a technique, which is used to analyze multistage decision process.

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Linear Programming: is a technique, which optimizes linear objective function under limited

constraints.

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Inventory Model: these are the models used to minimize total inventory costs.

Optimization: Means maximization or minimization.

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1.10 Self Assessment Questions

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Q1. Define Operations Research.
Q2. Describe the relationship between the manager and O.R. specialist.
Q3. Explain the various steps in the O.R. development process.
Q4. Discuss the applications of O.R.
Q5. Discuss the limitation of O.R.

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Q6. Describe different techniques of O.R.
Q7. Discuss few areas of O.R. applications in your organization or organization you are familiar with.

1.11 Further References

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Hamdy A Taha, 1999. Introduction to Operations Research, PHI Limited, New Delhi.

Sharma, J.K., 1989. Mathematical Models in Operations Research, Tata McGraw Hill Publishing
Company Ltd., New Delhi.

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Beer, Stafford, 1966. Decision and Control, John Wiley & Sons, Inc., New York.
Levin, Rubin, Stinson, Gardner, 1992. Quantitative Approaches to Management, Tata McGraw Hill
Publishing Company Ltd. New Delhi.
Wagner, Harvery M., 1975. Principles of Operations Research, PHI, Egnlewood Cliffs, N.J.

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MBA-H2040 Quantitative Techniques for Managers

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UNIT I

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ON
S

2 LINEAR PROGRAMMING ?GRAPHICAL METHOD

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S
E

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LESSON STRUCTURE

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2.1 Introduction to Linear Programming

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2.2 Linear Programming Problem

Formulation

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2.3 Formulation with Different Types of

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Constraints

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2.4 Graphical Analysis of Linear

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Programming

2.5 Graphical Linear Programming Solution

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2.6 Multiple Optimal Solutions

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2.7 Unbounded Solution

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2.8 Infeasible Solution

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2.9 Summary

2.10 Key Terms

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2.11 Self Assessment Questions

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2.12 Key Solutions

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2.13 Further References

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MBA-H2040 Quantitative Techniques for Managers

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Objectives
After studying this lesson, you should be able
to:

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Formulate Linear Programming Problem
Identify the characteristics of linear

programming problem

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Make a graphical analysis of the linear

programming problem

Solve the problem graphically

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Identify the various types of solutions

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MBA-H2040 Quantitative Techniques for Managers

2.1 Introduction to Linear Programming

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Linear Programming is a special and versatile technique which can be applied to a variety of

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management problems viz. Advertising, Distribution, Investment, Production, Refinery Operations, and

Transportation analysis. The linear programming is useful not only in industry and business but also in

non-profit sectors such as Education, Government, Hospital, and Libraries. The linear programming

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method is applicable in problems characterized by the presence of decision variables. The objective

function and the constraints can be expressed as linear functions of the decision variables. The

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decision variables represent quantities that are, in some sense, controllable inputs to the system being

modeled. An objective function represents some principal objective criterion or goal that measures the

effectiveness of the system such as maximizing profits or productivity, or minimizing cost or

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consumption. There is always some practical limitation on the availability of resources viz. man,

material, machine, or time for the system. These constraints are expressed as linear equations involving

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the decision variables. Solving a linear programming problem means determining actual values of the

decision variables that optimize the objective function subject to the limitation imposed by the

constraints.

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The main important feature of linear programming model is the presence of linearity in the

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problem. The use of linear programming model arises in a wide variety of applications. Some model

may not be strictly linear, but can be made linear by applying appropriate mathematical transformations.

Still some applications are not at all linear, but can be effectively approximated by linear models. The

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ease with which linear programming models can usually be solved makes an attractive means of dealing

with otherwise intractable nonlinear models.

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2.2 Linear Programming Problem Formulation

The linear programming problem formulation is illustrated through a product mix problem. The product

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mix problem occurs in an industry where it is possible to manufacture a variety of products. A product

has a certain margin of profit per unit, and uses a common pool of limited resources. In this case the

linear programming technique identifies the products combination which will maximize the profit

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subject to the availability of limited resource constraints.

Example 2.1:

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Suppose an industry is manufacturing tow types of products P1 and P2. The profits per Kg of the two

products are Rs.30 and Rs.40 respectively. These two products require processing in three types of

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machines. The following table shows the available machine hours per day and the time required on each

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MBA-H2040 Quantitative Techniques for Managers

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machine to produce one Kg of P1 and P2. Formulate the problem in the form of linear programming

model.

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Profit/Kg

P1

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P2

Total available Machine

Rs.30

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Rs.40

hours/day

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Machine 1

3

2

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600

Machine 2

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3

5

800

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Machine 3

5

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6

1100

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Solution:

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The procedure for linear programming problem formulation is as follows:

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Introduce the decision variable as follows:

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Let x1 = amount of P1

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x2 = amount of P2

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In order to maximize profits, we establish the objective function as

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30x1 + 40x2

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Since one Kg of P1 requires 3 hours of processing time in machine 1 while the corresponding

requirement of P2 is 2 hours. So, the first constraint can be expressed as

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3x1 + 2x2 600

Similarly, corresponding to machine 2 and 3 the constraints are

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3x1 + 5x2 800

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5x1 + 6x2 1100

In addition to the above there is no negative production, which may be represented algebraically as

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x1 0

;

x2 0

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Thus, the product mix problem in the linear programming model is as follows:

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Maximize

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30x1 + 40x2

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Subject to:

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3x1 + 2x2 600

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3x1 + 5x2 800

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5x1 + 6x2 1100

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x1 0, x2 0

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2.3 Formulation with Different Types of Constraints

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The constraints in the previous example 2.1 are of "less than or equal to" type. In this section we are

going to discuss the linear programming problem with different constraints, which is illustrated in the

following Example 2.2.

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Example 2.2:

A company owns two flour mills viz. A and B, which have different production capacities for high,

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medium and low quality flour. The company has entered a contract to supply flour to a firm every month

with at least 8, 12 and 24 quintals of high, medium and low quality respectively. It costs the company

Rs.2000 and Rs.1500 per day to run mill A and B respectively. On a day, Mill A produces 6, 2 and 4

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quintals of high, medium and low quality flour, Mill B produces 2, 4 and 12 quintals of high, medium

and low quality flour respectively. How many days per month should each mill be operated in order to

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meet the contract order most economically.

Solution:

Let us define x1 and x2 are the mills A and B. Here the objective is to minimize the cost of the machine

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runs and to satisfy the contract order. The linear programming problem is given by

Minimize

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2000x1 + 1500x2

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Subject to:

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6x1 + 2x2 8

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2x1 + 4x2 12

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4x1 + 12x2 24

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x1 0, x2 0

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2.4 Graphical Analysis of Linear Programming

This section shows how a two-variable linear programming problem is solved graphically, which is
illustrated as follows:

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Example 2.3:
Consider the product mix problem discussed in section 2.2

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Maximize

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30x1 + 40x2

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Subject to:

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3x1 + 2x2 600

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3x1 + 5x2 800

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5x1 + 6x2 1100

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x1 0, x2 0

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MBA-H2040 Quantitative Techniques for Managers
From the first constraints 3x1 + 2x2 600, draw the line 3x1 + 2x2 = 600 which passes through the point
(200, 0) and (0, 300). This is shown in the following graph as line 1.

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300

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3x1 + 2x2 = 600(line 1)

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200

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100

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3x1 + 5x2 = 800(line 2)

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5x1 + 6x2 = 1100(line 3)

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0

50

100

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150

X1

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200

275

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Graph 1: Three closed half planes and Feasible Region

Half Plane

- A linear inequality in two variables is called as a half plane.

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Boundary

- The corresponding equality (line) is called as the boundary of the half plane.

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Close Half Plane ? Half plane with its boundary is called as a closed half plane.

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MBA-H2040 Quantitative Techniques for Managers
In this case we must decide in which side of the line 3x1 + 2x2 = 600 the half plane is located. The

easiest way to solve the inequality for x2 is

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3x1 600 ? 2x2

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And for the fixed x1, the coordinates satisfy this inequality are smaller than the corresponding ordinate

on the line and thus the inequality is satisfied for all the points below the line 1.

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Similarly, we have to determine the closed half planes for the inequalities 3x1 + 5x2 800 and
5x1 + 6x2 1100 (line 2 and line 3 in the graph). Since all the three constraints must be satisfied

simultaneously we have consider the intersection of these three closed half planes. The complete

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intersection of these three closed half planes is shown in the above graph as ABCD. The region ABCD

is called the feasible region, which is shaded in the graph.

Feasible Solution:

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Any non-negative value of x1, x2 that is x1 0 and x2 0 is known as feasible solution of the linear

programming problem if it satisfies all the existing constraints.

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Feasible Region:

The collection of all the feasible solution is called as the feasible region.

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Example 2.4:

In the previous example we discussed about the less than or equal to type of linear programming

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problem, i.e. maximization problem. Now consider a minimization (i.e. greater than or equal to type)

linear programming problem formulated in Example 2.2.

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Minimize

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2000x1 + 1500x2

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Subject to:

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6x1 + 2x2 8

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2x1 + 4x2 12

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4x1 + 12x2 24

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x1 0, x2 0

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The three lines 6x1 + 2x2 = 8, 2x1 + 4x2 = 12, and 4x1 + 12x2 = 24 passes through the point

(1.3,0) (0,4), (6,0) (0,3) and (6,0) (0,2). The feasible region for this problem is shown in the following

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Graph 2. In this problem the constraints are of greater than or equal to type of feasible region, which is

bounded on one side only.

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X2

A

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4

6x

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1 + 2x2 8

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2

2x1 + 4x2 12

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C

4x1 + 12x2 24

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X1

2

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4

6

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Graph 2: Feasible Region

2.5 Graphical Liner Programming Solution

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A two variable linear programming problem can be easily solved graphically. The method is simple but

the principle of solution is depends on certain analytical concepts, they are:

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Convex Region:

A region R is convex if and only if for any two points on the region R the line connecting those points

lies entirely in the region R.

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Extreme Point:

The extreme point E of a convex region R is a point such that it is not possible to locate two distinct

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points in R, so that the line joining them will include E. The extreme points are also called as corner

points or vertices.

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Thus, the following result provides the solution to the linear programming model:

"If the minimum or maximum value of a linear function defined over a convex region exists,

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then it must be on one of the extreme points".

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MBA-H2040 Quantitative Techniques for Managers

In this section we are going to describe linear programming graphical solution for both the

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maximization and minimization problems, discussed in Example 2.3 and Example 2.4.

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Example 2. 5:

Consider the maximization problem described in Example 2.3.

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Maximize

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30x1 + 40x2

Subject to:

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3x1 + 2x2 600

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3x1 + 5x2 800

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5x1 + 6x2 1100

M = 30x

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1 +40x2

1 0, x2 0

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The feasible region identified in the Example 2.3 is a convex polygon, which is illustrated in the
following Graph 3. The extreme point of this convex region are A, B, C, D and E.

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300

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200

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X2

C

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100

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50

100

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150

X1

200

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275

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Graph 3: Graphical Linear Programming Solution

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In this problem the objective function is 30x1 + 40x2. Let be M is a parameter, the graph 30x1 +

40x2 = M is a group of parallel lines with slope ? 30/40. Some of these lines intersects the feasible region

and contains many feasible solutions, whereas the other lines miss and contain no feasible solution. In

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order to maximize the objective function, we find the line of this family that intersects the feasible

region and is farthest out from the origin. Note that the farthest is the line from the origin the greater will

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be the value of M.

Observe that the line 30x1 + 40x2 = M passes through the point D, which is the intersection of the

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lines 3x1 + 5x2 = 800 and 5x1 + 6x2 = 1100 and has the coordinates x1 = 170 and x2 = 40. Since D is the

only feasible solution on this line the solution is unique.

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The value of M is 6700, which is the objective function maximum value. The optimum value

variables are x1 = 170 and X2 = 40.

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The following Table 1 shows the calculation of maximum value of the objective function.

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Extreme Point

Coordinates

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Objective Function

X1 X2

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30x1 + 40x2

A

X1 = 0

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X2 = 0

0

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B

X1 = 0

X2 = 160

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6400

C

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X1 = 110

X2 = 70

6100

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D

X1 = 170

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X2 = 40

6700

E

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X1 = 200

X2 = 0

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6000

Table 1: Shows the objective function Maximum value calculation

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Example 2.6:

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Consider the minimization problem described in Example 2.4.

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Minimize

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2000x1 + 1500x2

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Subject to:

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6x1 + 2x2 8

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2x1 + 4x2 12

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4x1 + 12x2 24

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x1 0, x2 0

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The feasible region for this problem is illustrated in the following Graph 4. Here each of the half

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planes lies above its boundary. In this case the feasible region is infinite. In this case, we are concerned

with the minimization; also it is not possible to determine the maximum value. As in the previous

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MBA-H2040 Quantitative Techniques for Managers

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example let us introduce a parameter M in the objective function i.e. 2000x1 + 1500x2 = M and draw the

lines for different values of M, which is shown in the following Table 2.

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X2

A

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C

0

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2000x1+ 1500x

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2=M

X1

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2

4

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6

8

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Graph 4: Graphical Linear Programming Solution

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Extreme Point

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Coordinates

Objective Function

X1 X2

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2000x1 + 1500x2

A

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X1 = 0

X2 = 4

6000

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B

X1 = 0.5

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X2 = 2.75

5125

C

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X1 = 6

X2 = 0

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12000

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Table 2: Shows the objective function Minimum value computation

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The minimum value is 5125 at the extreme point B, which is the value of the M (objective

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function). The optimum values variables are X1 = 0.5 and X2 = 2.75.

2.6 Multiple Optimal Solutions

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MBA-H2040 Quantitative Techniques for Managers

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When the objective function passed through only the extreme point located at the intersection of two

half planes, then the linear programming problem possess unique solutions. The previous examples i.e.

Example 2.5 and Example 2.6 are of this types (which possessed unique solutions).

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When the objective function coincides with one of the half planes generated by the constraints in

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the problem, will possess multiple optimal solutions. In this section we are going to discuss about the

multiple optimal solutions of linear programming problem with the help of the following Example 2.7.

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Example 2.7:

A company purchasing scrap material has two types of scarp materials available. The first type has 30%

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of material X, 20% of material Y and 50% of material Z by weight. The second type has 40% of

material X, 10% of material Y and 30% of material Z. The costs of the two scraps are Rs.120 and

Rs.160 per kg respectively. The company requires at least 240 kg of material X, 100 kg of material Y

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and 290 kg of material Z. Find the optimum quantities of the two scraps to be purchased so that the

company requirements of the three materials are satisfied at a minimum cost.

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Solution

First we have to formulate the linear programming model. Let us introduce the decision variables x1 and

x2 denoting the amount of scrap material to be purchased. Here the objective is to minimize the

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purchasing cost. So, the objective function here is

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Minimize

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120x1 + 160x2

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Subject to:

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0.3x1 + 0.4x2 240

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0.2x1 + 0.1x2 100

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0.5x1 + 0.3x2 290

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x1 0; x2 0

Multiply by 10 both sides of the inequalities, then the problem becomes

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Minimize

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120x1 + 160x2

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Subject to:

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3x1 + 4x2 2400

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2x1 + x2 1000

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5x1 + 3x2 2900

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x1 0; x2 0

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MBA-H2040 Quantitative Techniques for Managers

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Let us introduce parameter M in the objective function i.e. 120x1 + 160x2 = M. Then we have to

determine the different values for M, which is shown in the following Table 3.

Extreme Point

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Coordinates

Objective Function

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X1 X2

120x1 + 160x2

A

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X1 = 0

X2 = 1000

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160000

B

X1 = 150

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X2 = 740

136400

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C

X1 = 400

X2 = 300

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96000

D

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X1=800

X2=0

96000

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Table 3: Shows the calculation of Minimum objective function value

Note that there are two minimum value for the objective function (M=96000). The feasible

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region and the multiple solutions are indicated in the following Graph 5.

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1100

A

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1000

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900

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800

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B

700

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5x1 + 3x2 2900

600

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500

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1 + x2 1000

400

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300

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200

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3x1 + 4x2 2400

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100

28

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0

D
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X1

Graph 5: Feasible Region, Multiple Optimal Solutions

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The extreme points are A, B, C, and D. One of the objective functions 120x1 + 160x2 = M family

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coincides with the line CD at the point C with value M=96000, and the optimum value variables are x1 =

400, and x2 = 300. And at the point D with value M=96000, and the optimum value variables are x1 =

800, and x2 = 0.

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Thus, every point on the line CD minimizes objective function value and the problem contains

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multiple optimal solutions.

2.7 Unbounded Solution

When the feasible region is unbounded, a maximization problem may don't have optimal solution, since

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the values of the decision variables may be increased arbitrarily. This is illustrated with the help of the

following problem.

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Maximize

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3x1 + x2

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Subject to:

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x1 + x2 6

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-x1 + x2 6

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-x1 + 2x2 -6

and

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x1, x2 0

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Graph 6 shows the unbounded feasible region and demonstrates that the objective function can

be made arbitrarily large by increasing the values of x1 and x2 within the unbounded feasible region. In

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this case, there is no point (x1, x2) is optimal because there are always other feasible points for which

objective function is larger. Note that it is not the unbounded feasible region alone that precludes an

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optimal solution. The minimization of the function subject to the constraints shown in the Graph 6

would be solved at one the extreme point (A or B).

The unbounded solutions typically arise because some real constraints, which represent a

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practical resource limitation, have been missed from the linear programming formulation. In such

situation the problem needs to be reformulated and re-solved.

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MBA-H2040 Quantitative Techniques for Managers

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-x1 + x2 = 6

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6

x1 + x2 = 6

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-x1 + 2x2 = 6

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Graph 6: Unbounded Feasible Region

1

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2

3

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4

5

6

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B

X1

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2.8 Infeasible Solution

A linear programming problem is said to be infeasible if no feasible solution of the problem exists. This

section describes infeasible solution of the linear programming problem with the help of the following

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Example 2.8.

Example 2.8:

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MBA-H2040 Quantitative Techniques for Managers

Minimize

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200x1 + 300x2

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Subject to:

0.4x1 + 0.6x2 240

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0.2x1 + 0.2x2 80

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0.4x1 + 0.3x2 180

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x1, x2 0

On multiplying both sides of the inequalities by 10, we get

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4x1 + 6x2 2400

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2x1 + 2x2 800

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4x1 + 3x2 1800

700

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A

600

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4x1 + 3x2 = 1800

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500

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400

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300

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200

F

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2x1 + 2x2 = 800

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100

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4x1 + 6x2 = 2400

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C

E

500

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600

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100

200

300

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400

X1

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Graph 7: Infeasible Solution

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The region right of the boundary AFE includes all the solutions which satisfy the first (4x1 + 6x2

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2400) and the third (4x1 + 3x2 1800) constraints. The region left of the BC contains all solutions

which satisfy the second constraint (2x1 + 2x2 800).

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MBA-H2040 Quantitative Techniques for Managers

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Hence, there is no solution satisfying all the three constraints (first, second, and third). Thus, the

linear problem is infeasible. This is illustrated in the above Graph 7.

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2.9 Summary

In Operations Research linear programming is a versatile technique with wide applications in various

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management problems. Linear Programming problem has a number of characteristics. That is first we

have to identify the decision variable. The problem must have a well defined objective function, which

are expressed in terms of the decision variables.

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The objective function may have to be maximized when it indicates the profit or production or

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contribution. If the objective function represents cost, in this case the objective function has to be

minimized.

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The management problem is expressed in terms of the decision variables with the objective

function and constraints. A linear programming problem is solved graphically if it contains only two

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variables.

2.10 Key Terms

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Objective Function: is a linear function of the decision variables representing the objective of the

manager/decision maker.

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Constraints: are the linear equations or inequalities arising out of practical limitations.

Decision Variables: are some physical quantities whose values indicate the solution.

Feasible Solution: is a solution which satisfies all the constraints (including the non-negative) presents

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in the problem.

Feasible Region: is the collection of feasible solutions.

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Multiple Solutions: are solutions each of which maximize or minimize the objective function.

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Unbounded Solution: is a solution whose objective function is infinite.

Infeasible Solution: means no feasible solution.

2.11 Self Assessment Questions

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Q1. A juice company has its products viz. canned apple and bottled juice with profit margin Rs.4 and
Rs.2 respectively pre unit. The following table shows the labour, equipment, and ingredients to produce
each product per unit.

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Canned Apple

Bottled Juice

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Total

Labour

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2.0

3.0

12.0

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Equipment

3.2

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1.0

8.0

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MBA-H2040 Quantitative Techniques for Managers
Ingredients

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2.4

2.0

9.0

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Formulate the linear programming problem (model) specifying the product mix which will maximize the
profit without exceeding the levels of resources.

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Q2. An organization is interested in the analysis of two products which can be produces from the idle
time of labour, machine and investment. It was notified on investigation that the labour requirement of
the first and the second products was 4 and 5 units respectively and the total available man hours was
48. Only first product required machine hour utilization of one hour per unit and at present only 10 spare

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machine hours are available. Second product needs one unit of byproduct per unit and the daily
availability of the byproduct is 12 units. According to the marketing department the sales potential of
first product cannot exceed 7 units. In a competitive market, first product can be sold at a profit of Rs.6
and the second product at a profit of Rs.10 per unit.

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Formulate the problem as a linear programming model. Also determine graphically the feasible

region. Identify the redundant constraints if any.

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Q3. Find graphically the feasible region of the linear programming problem given in Q1.

Q4. A bed mart company is in the business of manufacturing beds and pillows. The company has 40
hours for assembly and 32 hours for finishing work per day. Manufacturing of a bed requires 4 hours for

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assembly and 2 hours in finishing. Similarly a pillow requires 2 hours for assembly and 4 hours for
finishing. Profitability analysis indicates that every bed would contribute Rs.80, while a pillow
contribution is Rs.55 respectively. Find out the daily production of the company to maximize the
contribution (profit).

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Q5. Maximize

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1170x1 + 1110x2

Subject to:

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9x1 + 5x2 500

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7x1 + 9x2 300

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5x1 + 3x2 1500

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7x1 + 9x2 1900

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2x1 + 4x2 1000

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x1, x2 0

Find graphically the feasible region and the optimal solution.

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Q6. Solve the following LP problem graphically

Minimize

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2x1 +1.7x2

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Subject to:

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0.15x1 + 0.10x2 1.0

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0.75x1 + 1.70x2 7.5

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1.30x1 + 1.10x2 10.0

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x1, x2 0

Q7. Solve the following LP problem graphically

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MBA-H2040 Quantitative Techniques for Managers

Maximize

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2x1 + 3x2

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Subject to:

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x1 ? x2 1

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x1 + x2 3

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x1, x2 0

Q8. Graphically solve the following problem of LP

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Maximize

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3x1 + 2x2

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Subject to:

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2x1 ? 3x2 0

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3x1 + 4x2 -12

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x1, x2 0

Q9. Solve the following problem graphically

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Maximize

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4x1 + 4x2

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Subject to:

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-2x1 + x2 1

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x1 2

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x1 + x2 3

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x1, x2 0

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2.12 Key Solutions

Q1.

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Canned Apple x1

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Bottled Juice x2

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Maximize

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4x1 + 2x2

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Subject to:

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2x1 + 3x2 12

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3.2x1 + x2 8

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2.4x1 + 2x2 9

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x1, x2 0

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Q2.

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First Product x1

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Second Product x2

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Maximize

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6x1 + 10x2

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Subject to:

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4x1 + 5x2 48

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x1 10

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x2 12

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x1 7

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x1, x2 0

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The constraints x1 10 is redundant.

Q4.

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Beds = 8

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Pillows = 4

Maximum Profits is: Rs.860

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Q5.

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Optimum variables values are: x1=271.4, x2=0

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The maximum value is: 317573

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Q6.

Optimum variables values are: x1=6.32, x2=1.63

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The minimum values is: 15.4

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Q7.

The solution is unbounded

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Q8.

The problem has no feasible solution

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Q9.

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The problem has multiple solutions with the following optimum variable values:

x1=2, x2 =1 or x1=2/3, x2=7/3

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The Maximum objective function value is: 12

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2.13 Further References

Mittal, K.V. 1976. Optimization Methods in Operations Research and Systems Analysis, Wiley Eastern
Ltd, New Delhi.

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Taha, H.A1999. Operations Research An Introduction, PHI Ltd., New Delhi.

Richard I.Levin, David S. Rubin, Joel P. Stinson, Everette S.Gardner, Jr.1992. Quantitative Approaches
to Management, McGraw Hill, NJ.

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MBA-H2040 Quantitative Techniques for Managers

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UNIT I

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ON
S

3 LINEAR PROGRAMMING ? SIMPLEX METHOD

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S
E

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LESSON STRUCTURE

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3.1 Introduction

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3.2 Basics of Simplex Method

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3.3 Simplex Method Computation

3.4 Simplex Method with More Than Two

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Variables

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3.5 Two Phase and M Method

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3.5.1 Two Phase Method

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3.5.2 M Method

3.6 Multiple Solutions

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3.7 Unbounded Solution

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3.8 Infeasible Solution

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3.9 Summary

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3.10

Key Terms

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3.11

Self Assessment Questions

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3.12

Key Solutions

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3.13

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3.13 Further References

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MBA-H2040 Quantitative Techniques for Managers

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Objectives

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After Studying this lesson, you should be able
to:

Understand the basics of simplex method
Explain the simplex calculations

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Describe various solutions of Simplex

Method

Understand two phase and M method

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MBA-H2040 Quantitative Techniques for Managers
3.1 Introduction

The Linear Programming with two variables can be solved graphically. The graphical method of solving

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linear programming problem is of limited application in the business problems as the number of

variables is substantially large. If the linear programming problem has larger number of variables, the

suitable method for solving is Simplex Method. The simplex method is an iterative process, through

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which it reaches ultimately to the minimum or maximum value of the objective function.

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The simplex method also helps the decision maker/manager to identify the following:

Redundant Constraints

Multiple Solutions

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Unbounded Solution

Infeasible Problem

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3.2 Basics of Simplex Method

The basic of simplex method is explained with the following linear programming problem.

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Example 3.1:

Maximize

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60x1 + 70x2

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Subject to:

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2x1 + x2 300

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3x1 + 4x2 509

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4x1 + 7x2 812

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x1, x2 0

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Solution

First we introduce the variables

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s3, s4, s5 0

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So that the constraints becomes equations, thus

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2x1 + x2 + s3 = 300

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3x1 + 4x2 + s4 = 509

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4x1 + 7x2 + s5 = 812

Corresponding to the three constraints, the variables s3, s4, s5 are called as slack variables. Now, the

system of equation has three equations and five variables.

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There are two types of solutions they are basic and basic feasible, which are discussed as follows:

Basic Solution

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We may equate any two variables to zero in the above system of equations, and then the system will

have three variables. Thus, if this system of three equations with three variables is solvable such a

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solution is called as basic solution.

38

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MBA-H2040 Quantitative Techniques for Managers

For example suppose we take x1=0 and x2=0, the solution of the system with remaining three

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variables is s3=300, s4=509 and s5=812, this is a basic solution and the variables s3, s4, and s5 are known

as basic variables where as the variables x1, x2 are known as non-basic variables.

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The number of basic solution of a linear programming problem is depends on the presence of the

number of constraints and variables. For example if the number of constraints is m and the number of

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variables including the slack variables is n then there are at most nCn-m = nCm basic solutions.

Basic Feasible Solution

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A basic solution of a linear programming problem is called as basic feasible solutions if it is feasible it

means all the variables are non-negative. The solution s3=300, s4=509 and s5=812 is a basic feasible

solution.

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The number of basic feasible solution of a linear programming problem is depends on the

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presence of the number of constraints and variables. For example if the number of constraints is m and

the number of variables including the slack variables is n then there are at most nCn-m = nCm basic

feasible solutions.

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Every basic feasible solution is an extreme point of the convex set of feasible solutions and every

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extreme point is a basic feasible solution of the set of given constraints. It is impossible to identify the

extreme points geometrically if the problem has several variables but the extreme points can be

identified using basic feasible solutions. Since one the basic feasible solution will maximize or minimize

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the objective function, the searching of extreme points can be carry out starting from one basic feasible

solution to another.

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The Simplex Method provides a systematic search so that the objective function increases in the

cases of maximization progressively until the basic feasible solution has been identified where the

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objective function is maximized.

3.3 Simplex Method Computation

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This section describes the computational aspect of simplex method. Consider the following linear

programming problem

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Maximize

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60x1 + 70x2

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Subject to:

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2x1 + x2 + s3 = 300

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3x1 + 4x2 + s4 = 509

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4x1 + 7x2 + s5 = 812

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x1, x2, s3, s4 ,s5 0

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MBA-H2040 Quantitative Techniques for Managers

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The profit Z=60x1 + 70x2 i.e. Maximize 60x1 + 70x2

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The standard form can be summarized in a compact table form as

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In this problem the slack variables s3, s4, and s5 provide a basic feasible solution from which the

simplex computation starts. That is s3==300, s4=509 and s5=812. This result follows because of the

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special structure of the columns associated with the slacks.

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If z represents profit then z=0 corresponding to this basic feasible solution. We represent by CB

the coefficient of the basic variables in the objective function and by XB the numerical values of the

basic variable.

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So that the numerical values of the basic variables are: XB1=300, XB2=509, XB3=812. The profit

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z=60x1+70x2 can also expressed as z-60x1-70x2=0. The simplex computation starts with the first

compact standard simplex table as given below:

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CB

Basic

Cj

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60 70 0 0 0

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Variables XB

x1 x2 s3 s4 s5

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s3

300

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2 1 1 0 0

0

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s4

509

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3 4 0 1 0

0

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s5

812

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4 7 0 0 1

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z

-60 -70 0 0 0

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Table 1

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In the objective function the coefficients of the variables are CB1=CB2=CB3=0. The topmost row

of the Table 1 denotes the coefficient of the variables x1, x2, s3, s4, s5 of the objective function

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respectively. The column under x1 indicates the coefficient of x1 in the three equations respectively.

Similarly the remaining column also formed.

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On seeing the equation z=60x1+70x2 we may observe that if either x1 or x2, which is currently

non-basic is included as a basic variable so that the profit will increase. Since the coefficient of x2 is

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higher we choose x2 to be included as a basic variable in the next iteration. An equivalent criterion of

choosing a new basic variable can be obtained the last row of Table 1 i.e. corresponding to z.

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Since the entry corresponding to x2 is smaller between the two negative values, x2 will be

included as a basic variable in the next iteration. However with three constraints there can be only three

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basic variables.

Thus, by bringing x2 a basic variable one of the existing basic variables becomes non-basic. The

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question here is How to identify this variable? The following statements give the solution to this

question.

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Consider the first equation i.e. 2x1 + x2 + s3 = 300

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40
MBA-H2040 Quantitative Techniques for Managers

From this equation

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2x1+s3=300-x2

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But x1=0. Hence, in order that s30

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300-x20

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i.e. x2300

Similarly consider the second equation i.e. 3x1 + 4x2 + s4 = 509

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From this equation

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3x1+s4=509-4x2

But, x1=0. Hence, in order that s40

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509-4x20

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i.e. x2509/9

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Similarly consider the third equation i.e. 4x1 + 7x2 + s5 = 812
From this equation

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4x1+s5=812-7x2

But x1=0. Hence, in order that s50

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812-7x20

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i.e. x2812/7

Therefore the three equation lead to

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x2300,

x2509/9,

x2812/7

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Thus x2=Min (x2300, x2509/9, x2812/7) it means

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x2=Min (x2300/1, x2509/9, x2812/7)=116

Therefore x2=116

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If x2=116, you may be note from the third equation

7x2+s5=812

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i.e. s5=0

Thus, the variable s5 becomes non-basic in the next iteration.

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So that the revised values of the other two basic variables are

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S3=300-x2=184

S4=509-4*116=45

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Refer to Table 1, we obtain the elements of the next Table i.e. Table 2 using the following rules:

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1. We allocate the quantities which are negative in the z-row. Suppose if all the quantities are

positive, the inclusion of any non-basic variable will not increase the value of the objective
function. Hence the present solution maximizes the objective function. If there are more than one
negative values we choose the variable as a basic variable corresponding to which the z value is

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least as this is likely to increase the more profit.

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MBA-H2040 Quantitative Techniques for Managers

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2. Let xj be the incoming basic variable and the corresponding elements of the jth row column be

denoted by Y1j, Y2j and Y3j respectively. If the present values of the basic variables are XB1,
XB2 and XB3 respectively, then we can compute.

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Min [XB1/Y1j, XB2/Y2j, XB3/Y3j] for Y1j, Y2j, Y3j>0.
Note that if any Yij0, this need not be included in the comparison. If the minimum occurs
corresponding to XBr/Yrj then the rth basic variable will become non-basic in the next iteration.

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3. Using the following rules the Table 2 is computed from the Table 1.

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i.

The revised basic variables are s3, s4 and x2. Accordingly, we make CB1=0, CB2=0
and CB3=70.

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ii.

As x2 is the incoming basic variable we make the coefficient of x2 one by dividing
each element of row-3 by 7. Thus the numerical value of the element corresponding

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to x1 is 4/7, corresponding to s5 is 1/7 in Table 2.

iii.

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The incoming basic variable should appear only in the third row. So we multiply the
third-row of Table 2 by 1 and subtract it from the first-row of Table 1 element by
element. Thus the element corresponding to x2 in the first-row of Table 2 is 0.

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Therefore the element corresponding to x1 is

2-1*4/7=10/7 and the element corresponding to s5 is
0-1*1/7=-1/7

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In this way we obtain the elements of the first and the second row in Table 2. In Table 2 the

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numerical values can also be calculated in a similar way.

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CB

Basic

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Cj

60 70 0 0 0

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Variables XB

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x1 x2 s3 s4 s5

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s3

184

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10/7 0 1 0 -1/7

0

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s4

45

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5/7 0 0 1 -4/7

70

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x2

116

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4/7 1 0 0 1/7

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zj-cj

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-140/7 0 0 0 70/7

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Table 2

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Let CB1, CB2, Cb3 be the coefficients of the basic variables in the objective function. For

example in Table 2 CB1=0, CB2=0 and CB3=70. Suppose corresponding to a variable J, the quantity zj is

defined as zj=CB1, Y1+CB2, Y2j+CB3Y3j. Then the z-row can also be represented as Zj-Cj.

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For example:

z1 - c1 = 10/7*0+5/7*0+70*4/7-60 = -140/7

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z5 ? c5 = -1/7*0-4/7*0+1/7*70-0 = 70/7

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1. Now we apply rule (1) to Table 2. Here the only negative zj-cj is z1-c1 = -140/7

Hence x1 should become a basic variable at the next iteration.

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MBA-H2040 Quantitative Techniques for Managers

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2. We compute the minimum of the ratio

184 , 45, 116

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644 , 63 , 203

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Min 10 5 4

= Min 5

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= 63

7 7 7

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This minimum occurs corresponding to s4, it becomes a non basic variable in next iteration.

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3. Like Table 2, the Table 3 is computed sing the rules (i), (ii), (iii) as described above.

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CB

Basic

Cj

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60 70 0 0 0

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Variables XB

x1 x2 s3 s4 s5

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s3

94

0 0 1 -2 1

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x1

63

1 0 0 7/5 -4/5

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x2

80

0 1 0 -4/5 3/5

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zj-cj

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0 0 0 28 -6

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Table 3

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1. z5 ? c5 < 0 should be made a basic variable in the next iteration.

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2. Now compute the minimum ratios

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94, 80
Min 1 3

= 94

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Note: Since y25 = -4/5 < 0, the corresponding ratio is not taken for comparison.

The variable s3 becomes non basic in the next iteration.

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3. From the Table 3, Table 4 is calculated following the usual steps.

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Basic

Cj

60 70 0 0 0

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Variables XB

x1 x2 s3 s4 s5

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0

s5

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94

0 0 1 -2 1

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60

x1

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691/5

1 0 4/5 -1/5 0

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70

x2

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118/5

0 1 -3/5 2/5 0

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zj-cj

0 0 6 16 0

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MBA-H2040 Quantitative Techniques for Managers

Note that zj ? cj 0 for al j, so that the objective function can't be improved any further.

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Thus, the objective function is maximized for x1 = 691/5 and x2=118/5 and

The maximum value of the objective function is 9944.

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3.4

Simplex Method with More Than Two Variables

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In previous section we discussed the simplex method of linear programming problem with two decision
variables. The simplex method computational procedure can be readily extended to linear programming
problems with more than two variables. This is illustrated in this section with the help of the product
mix problem given in the following Example 3.2.

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Example 3.2

An organization has three machine shops viz. A, B and C and it produces three product viz. X, Y and Z
using these three machine shops. Each product involves the operation of the machine shops. The time

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available at the machine shops A, B and C are 100, 72 and 80 hours respectively. The profit per unit of
product X, Y and Z is $22, $6

and $2 respectively. The

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following table shows the time

required for each operation for

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10

7

2

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unit amount of each product.

Determine

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an

appropriate

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product mix so as to maximize

the profit.

2

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3

4

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Machine

1

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2

1

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Shops

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A B C

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Products

Profit/unit

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X $22

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Y $6

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Z $2

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Available Hours 100 72 80

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Solution

First we have to develop linear programming formulation. The linear programming formulation of the
product mix problem is:

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Maximize

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22x1 + 6x2 + 2x3

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Subject to:

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10x1 + 2x2 + x3 100

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7x1 + 3x2 + 2x3 72

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2x1 + 4x2 + x3 80

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x1, x2, x3 0

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MBA-H2040 Quantitative Techniques for Managers
We introduce slack variables s4, s5 and s6 to make the inequalities equation.

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Thus, the problem can be stated as

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Maximize

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22x1 + 6x2 + 2x3

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Subject to:

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10x1 + 2x2 + x3 + s4 = 100

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7x1 + 3x2 + 2x3 + s5 = 72

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2x1 + 4x2 + x3 + s6 = 80

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x1, x2, x3, s4, s5, s6 0

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From the above equation the simplex Table 1 can be obtained in a straight forward manner. Here

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the basic variables are s4, s5 and s6. Therefore CB1 = CB2 = CB3 = 0.

CB

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Basic

Cj

22

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6

2

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0

0

0

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Variable XB

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x1

x2

x3

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s4

s5

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0

s4

100

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10

2

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1

1

0

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0

0

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s5

72

7

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3

2

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0

1

0

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0

s6

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80

2

4

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1

0

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0

1

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zj-cj

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-22

-6

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-2

0

0

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Table 1

1. z1-c1 = -22 is the smallest negative value. Hence x1 should be taken as a basic variable in the next

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iteration.

2. Calculate the minimum of the ratios

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Min 100 , 72 , 80 = 10

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10 7 2

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The variable s4 corresponding to which minimum occurs is made a non basic variable.
3. From the Table 1, the Table 2 is calculated using the following rules:

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i.

The revised basic variables are x1, s5, s6. Accordingly we make CB1=22, CB2=0 and

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CB3=0.

ii.

Since x1 is the incoming variable we make x1 coefficient one by dividing each

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element of row 1 by 10. Thus the numerical value of the element corresponding to x2
is 2/10, corresponding to x3 is 1/10, corresponding to s4 is 1/10, corresponding to s5 is
0/10 and corresponding to s6 is 0/10 in Table 2.

iii.

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The incoming basic variable should only appear in the first row. So we multiply first
row of Table 2 by 7 and subtract if from the second row of Table 1 element by
element.
Thus,

--- Content provided by FirstRanker.com ---

The element corresponding to x1 in the second row of Table 2 is zero

The element corresponding to x2 is 3 ? 7 * 2 = 16

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--- Content provided by‍ FirstRanker.com ---

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10 10

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By using this way we get the elements of the second and the third row in Table 2.

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45

MBA-H2040 Quantitative Techniques for Managers

--- Content provided by⁠ FirstRanker.com ---

Similarly, the calculation of numerical values of basic variables in Table 2 is done.

--- Content provided by FirstRanker.com ---

CB

Basic

Cj

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22

6

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2

0

0

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--- Content provided by‌ FirstRanker.com ---

Variable XB

x1

x2

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x3

s4

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s5

s6

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22

x1

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10

1

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2/10

1/10

1/10

--- Content provided by FirstRanker.com ---

0

0

--- Content provided by FirstRanker.com ---

0

s5

2

--- Content provided by‌ FirstRanker.com ---

0

16/10 13/10 -7/10

--- Content provided by FirstRanker.com ---

1

0

0

--- Content provided by‍ FirstRanker.com ---

s6

60

--- Content provided by⁠ FirstRanker.com ---

0

18/5

4/5

--- Content provided by⁠ FirstRanker.com ---

-1/5

0

--- Content provided by⁠ FirstRanker.com ---

zj-cj

0

--- Content provided by⁠ FirstRanker.com ---

-8/5

1/5

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12/5

0

0

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Table 2

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1. z2-c2 = -8/5. So x2 becomes a basic variable in the next iteration.
2. Calculate the minimum of the ratios

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10, 7 , 60

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Min 2 16 18 = Min 50, 70, 300 = 70

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10 10 5 16 18 16

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Hence the variable s5 will be a non basic variable in the next iteration.

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3. From Table 2, the Table 3 is calculated using the rules (i), (ii) and (iii) mentioned above.

--- Content provided by FirstRanker.com ---

CB

Basic

--- Content provided by FirstRanker.com ---

Cj

22

6

--- Content provided by‌ FirstRanker.com ---

2

0

--- Content provided by‍ FirstRanker.com ---

0

0

--- Content provided by FirstRanker.com ---

Variable XB

x1

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x2

x3

s4

--- Content provided by FirstRanker.com ---

s5

s6

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

x1

73/8

1

--- Content provided by‍ FirstRanker.com ---

0

-1/16

--- Content provided by FirstRanker.com ---

3/16

-1/8

0

--- Content provided by⁠ FirstRanker.com ---

6

x2

--- Content provided by‍ FirstRanker.com ---

30/8

0

1

--- Content provided by‌ FirstRanker.com ---

13/16 -7/16

5/8

--- Content provided by FirstRanker.com ---

0

0

s6

--- Content provided by‌ FirstRanker.com ---

177/4 0

0

--- Content provided by‌ FirstRanker.com ---

-17/8

11/8

-9/4

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

zj-cj

--- Content provided by‍ FirstRanker.com ---

0

0

24/16 24/16 1

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--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

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Table 3

Note that all zj ? cj 0, so that the solution is x1 = 73/8, x2 = 30/8 and s6 = 177/4 maximizes the
objective function.

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The Maximum Profit is: 22*73/8 + 6*30/8 = 1606/8 + 180/8

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--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

= 1786/8 = $223.25

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--- Content provided by‌ FirstRanker.com ---

3.5 Tow Phase and M-Method

In the last two section we discussed the simplex method was applied to linear programming problems

with less than or equal to () type constraints. Thus, there we could introduce slack variables which

--- Content provided by FirstRanker.com ---

provide an initial basic feasible solution of the problem.

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46
MBA-H2040 Quantitative Techniques for Managers

Generally, the linear programming problem can also be characterized by the presence of both

--- Content provided by⁠ FirstRanker.com ---

`less than or equal to' type or `greater than or equal to ()' type constraints. In such case it is not always

possible to obtain an initial basic feasible solution using slack variables.

--- Content provided by FirstRanker.com ---

The greater than or equal to type of linear programming problem can be solved by using the

following methods:

--- Content provided by‌ FirstRanker.com ---

1. Two Phase Method
2. M Method

--- Content provided by‍ FirstRanker.com ---

In this section we will discuss these two methods.

3.5.1 Two Phase Method

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We discuss the Two Phase Method with the help of the following Example 3.3.

Example 3.3

--- Content provided by FirstRanker.com ---

Minimize

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12.5x1 + 14.5x2

--- Content provided by FirstRanker.com ---

Subject to:

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

x1 + x2 2000

--- Content provided by FirstRanker.com ---

0.4x1 + 0.75x2 1000

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

0.075x1 + 0.1x2 200

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

x1, x2 0

Solution

Here the objective function is to be minimized; the values of x1 and x2 which minimized this objective

--- Content provided by‌ FirstRanker.com ---

function are also the values which maximize the revised objective function i.e.

--- Content provided by‌ FirstRanker.com ---

Maximize

--- Content provided by‌ FirstRanker.com ---

-12.5x1 ? 14.5x2

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We can multiply the second and the third constraints by 100 and 1000 respectively for the

--- Content provided by⁠ FirstRanker.com ---

convenience of calculation.

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Thus, the revised linear programming problem is:

--- Content provided by‍ FirstRanker.com ---

Maximize

--- Content provided by FirstRanker.com ---

-12.5x1 ? 14.5x2

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

Subject to:

--- Content provided by FirstRanker.com ---

x1 + x2 2000

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

40x1 + 75x2 100000

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75x1 + 100x2 200000

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--- Content provided by⁠ FirstRanker.com ---

x1, x2 0

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Now we convert the two inequalities by introducing surplus variables s3 and s4 respectively.

The third constraint is changed into an equation by introducing a slack variable s5.

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Thus, the linear programming problem becomes as

--- Content provided by FirstRanker.com ---

47

MBA-H2040 Quantitative Techniques for Managers

--- Content provided by‌ FirstRanker.com ---

Maximize

--- Content provided by FirstRanker.com ---

-12.5x1 ? 14.5x2 = -25/2x1 ? 29/2x2

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Subject to:

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x1 + x2 -s3

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= 2000

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40x1 + 75x2 -s4 = 100000

--- Content provided by FirstRanker.com ---

75x1 + 100x2 +s5 = 200000

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

x1, x2,s3,s4,s5 0

Even though the surplus variables can convert greater than or equal to type constraints into

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equations they are unable to provide initial basic variables to start the simplex method calculation. So

we may have to introduce two more additional variables a6 and a7 called as artificial variable to

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facilitate the calculation of an initial basic feasible solution.

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In this method the calculation is carried out in tow phases hence tow phase method.

Phase I

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In this phase we will consider the following linear programming problem

--- Content provided by FirstRanker.com ---

Maximize

--- Content provided by‍ FirstRanker.com ---

-a6 ?a7

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Subject to:

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x1 + x2 -s3 +a6 = 2000

--- Content provided by⁠ FirstRanker.com ---

40x1 + 75x2 -s4 + a7 = 100000

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

75x1 + 100x2 +s5 = 200000

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

x1, x2.s3,s4,s5,a6,a7 0

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The initial basic feasible solution of the problem is

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a6 = 2000, a7=100000 and s5 = 200000.

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As the minimum value of the objective function of the Phase I is zero at the end of the Phase I

calculation both a6 and a7 become zero.

--- Content provided by‍ FirstRanker.com ---

CB

Basic

--- Content provided by‌ FirstRanker.com ---

C

0

--- Content provided by‌ FirstRanker.com ---

0

0

0

--- Content provided by‌ FirstRanker.com ---

0

-1

--- Content provided by‌ FirstRanker.com ---

-1

j

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variables XB

--- Content provided by‍ FirstRanker.com ---

x

x

s

--- Content provided by FirstRanker.com ---

s

s

--- Content provided by‌ FirstRanker.com ---

a

a

--- Content provided by‌ FirstRanker.com ---

1

2

--- Content provided by‌ FirstRanker.com ---

3

4

5

--- Content provided by FirstRanker.com ---

6

7

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

-1

a

--- Content provided by FirstRanker.com ---

2000

1

--- Content provided by‍ FirstRanker.com ---

1

-1

0

--- Content provided by‍ FirstRanker.com ---

0

1

--- Content provided by FirstRanker.com ---

0

6

--- Content provided by‍ FirstRanker.com ---

-1

a

--- Content provided by‍ FirstRanker.com ---

100000 40

75

0

--- Content provided by FirstRanker.com ---

-1

0

--- Content provided by‍ FirstRanker.com ---

0

1

--- Content provided by FirstRanker.com ---

7

0

--- Content provided by⁠ FirstRanker.com ---

s

200000 75

100

--- Content provided by⁠ FirstRanker.com ---

0

0

--- Content provided by‌ FirstRanker.com ---

1

0

0

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

j-cj

-41

--- Content provided by⁠ FirstRanker.com ---

-76

1

1

--- Content provided by FirstRanker.com ---

0

0

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

Table 1

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Here x2 becomes a basic variable and a7 becomes non basic variable in the next iteration. It is no

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longer considered for re-entry in the table.

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48
MBA-H2040 Quantitative Techniques for Managers

CB

--- Content provided by FirstRanker.com ---

Basic

Cj

--- Content provided by‍ FirstRanker.com ---

0

0

0

--- Content provided by‍ FirstRanker.com ---

0

0

--- Content provided by‌ FirstRanker.com ---

-1

--- Content provided by FirstRanker.com ---

variables XB

x1

--- Content provided by FirstRanker.com ---

x2

s3

s4

--- Content provided by FirstRanker.com ---

s5

a6

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

-1

a6

--- Content provided by⁠ FirstRanker.com ---

2000/3

7/15

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0

-1

1/75

--- Content provided by‌ FirstRanker.com ---

0

1

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

0

x2

--- Content provided by‌ FirstRanker.com ---

4000/3

8/15

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1

0

-1/75

--- Content provided by⁠ FirstRanker.com ---

0

0

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

s5

200000/3 65/3

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0

0

4/3

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1

0

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

zj-cj

-1/15

--- Content provided by‍ FirstRanker.com ---

0

1

-1/75

--- Content provided by⁠ FirstRanker.com ---

0

0

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Table 2

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Then x1 becomes a basic variable and a6 becomes a non basic variable in the next iteration.

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--- Content provided by⁠ FirstRanker.com ---

Basic

Cj

0

--- Content provided by FirstRanker.com ---

0

0

--- Content provided by‌ FirstRanker.com ---

0

0

--- Content provided by FirstRanker.com ---

variables XB

--- Content provided by FirstRanker.com ---

x1

x2

s3

--- Content provided by FirstRanker.com ---

s4

s5

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

0

x1

10000/7

--- Content provided by⁠ FirstRanker.com ---

1

0

--- Content provided by⁠ FirstRanker.com ---

-15/7

1/35

0

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

x2

4000/7

--- Content provided by⁠ FirstRanker.com ---

0

1

8/7

--- Content provided by FirstRanker.com ---

-1/35

0

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

s5

250000/7 0

0

--- Content provided by‌ FirstRanker.com ---

325/7

16/21

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--- Content provided by‍ FirstRanker.com ---

zj-cj

0

--- Content provided by⁠ FirstRanker.com ---

0

0

0

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

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Table 3

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The calculation of Phase I end at this stage. Note that, both the artificial variable have been

removed and also found a basic feasible solution of the problem.

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The basic feasible solution is:

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--- Content provided by‍ FirstRanker.com ---

x1 = 10000/7, x2 = 4000/2, s5 = 250000/7.

Phase II

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The initial basic feasible solution obtained at the end of the Phase I calculation is used as the initial basic
feasible solution of the problem. In this Phase II calculation the original objective function is introduced
and the usual simplex procedure is applied to solve the linear programming problem.

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49

MBA-H2040 Quantitative Techniques for Managers

--- Content provided by‌ FirstRanker.com ---

CB

Basic

--- Content provided by FirstRanker.com ---

Cj

-25/2

--- Content provided by‍ FirstRanker.com ---

-29/2

0

0

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

variables XB

x1

--- Content provided by⁠ FirstRanker.com ---

x2

s3

--- Content provided by‍ FirstRanker.com ---

s4

s5

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

-25/2

--- Content provided by⁠ FirstRanker.com ---

x1

10000/7

--- Content provided by‍ FirstRanker.com ---

1

0

-15/7

--- Content provided by‍ FirstRanker.com ---

1/35

0

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

-29/2

--- Content provided by FirstRanker.com ---

x2

4000/7

0

--- Content provided by FirstRanker.com ---

1

8/7

--- Content provided by⁠ FirstRanker.com ---

-1/35

0

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

0

s5

--- Content provided by FirstRanker.com ---

250000/7 0

0

--- Content provided by⁠ FirstRanker.com ---

325/7

5/7

1

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

zj-cj

0

0

--- Content provided by⁠ FirstRanker.com ---

143/14 2/35

0

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

Table 1

--- Content provided by FirstRanker.com ---

In this Table 1 all zj-cj 0 the current solution maximizes the revised objective function.

--- Content provided by FirstRanker.com ---

Thus, the solution of the problem is:

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

x1 = 10000/7 = 1428 and x2 = 4000/7 = 571.4 and

--- Content provided by FirstRanker.com ---

The Minimum Value of the objective function is: 26135.3

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3.5.2 M Method

In this method also we need artificial variables for determining the initial basic feasible solution. The M

method is explained in the next Example 3.4 with the help of the previous Example 3.3.

--- Content provided by⁠ FirstRanker.com ---

Example 3.4

--- Content provided by‍ FirstRanker.com ---

Maximize

--- Content provided by‍ FirstRanker.com ---

-12.5x1 ? 14.5x2

--- Content provided by‌ FirstRanker.com ---

Subject to:

--- Content provided by‌ FirstRanker.com ---

x1 + x2 ?s3 = 2000

--- Content provided by⁠ FirstRanker.com ---

40x1 + 75x2 -s4 = 100000

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

75x1 + 100x2 +s5 = 200000

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

x1, x2, s3, s4, s5 0.

--- Content provided by‌ FirstRanker.com ---

Introduce the artificial variables a6 and a7 in order to provide basic feasible solution in the second and

third constraints. The objective function is revised using a large positive number say M.

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Thus, instead of the original problem, consider the following problem i.e.

--- Content provided by⁠ FirstRanker.com ---

Maximize

--- Content provided by‌ FirstRanker.com ---

-12.5x1 ? 14.5x2 ? M (a6 + a7)

Subject to:

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

x1 + x2 ?s3 + a6 = 2000

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

40x1 + 75x2 -s4 +a7 = 100000

--- Content provided by‍ FirstRanker.com ---

75x1 + 100x2 +s5 = 200000

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

x1, x2, s3, s4, s5, a6, a7 0.

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50
MBA-H2040 Quantitative Techniques for Managers
The coefficient of a6 and a7 are large negative number in the objective function. Since the objective

function is to be maximized in the optimum solution, the artificial variables will be zero. Therefore, the

--- Content provided by FirstRanker.com ---

basic variable of the optimum solution are variable other than the artificial variables and hence is a basic

feasible solution of the original problem.

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The successive calculation of simplex tables is as follows:

--- Content provided by⁠ FirstRanker.com ---

CB

Basic

--- Content provided by‍ FirstRanker.com ---

Cj

-12.5

-14.5 0

--- Content provided by FirstRanker.com ---

0

0

--- Content provided by‌ FirstRanker.com ---

-M

-M

--- Content provided by‍ FirstRanker.com ---

variables XB

x1

--- Content provided by FirstRanker.com ---

x2

s3

s4

--- Content provided by‍ FirstRanker.com ---

s5

a6

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

-M

a6

--- Content provided by‌ FirstRanker.com ---

2000

1

--- Content provided by⁠ FirstRanker.com ---

1

-1

0

--- Content provided by‍ FirstRanker.com ---

0

1

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

-M

a7

--- Content provided by FirstRanker.com ---

100000 40

75

--- Content provided by⁠ FirstRanker.com ---

0

-1

0

--- Content provided by‌ FirstRanker.com ---

0

1

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

0

s5

200000 75

--- Content provided by‌ FirstRanker.com ---

100

0

--- Content provided by FirstRanker.com ---

0

1

0

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

zj-cj

-41M

-76M M

--- Content provided by‍ FirstRanker.com ---

M

0

--- Content provided by‍ FirstRanker.com ---

0

0

+12.5

--- Content provided by‌ FirstRanker.com ---

+14.5

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

Table 1

Since M is a large positive number, the coefficient of M in the zj ? cj row would decide the

--- Content provided by⁠ FirstRanker.com ---

entering basic variable. As -76M < -41M, x2 becomes a basic variable in the next iteration replacing a7.

The artificial variable a7 can't be re-entering as basic variable.

--- Content provided by FirstRanker.com ---

CB

Basic

--- Content provided by FirstRanker.com ---

Cj

-12.5

--- Content provided by FirstRanker.com ---

-14.5 0

0

0

--- Content provided by FirstRanker.com ---

-M

--- Content provided by FirstRanker.com ---

variables XB

x1

x2

--- Content provided by⁠ FirstRanker.com ---

s3

s4

--- Content provided by‍ FirstRanker.com ---

s5

a6

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

-M

a6

--- Content provided by‌ FirstRanker.com ---

2000/3

7/15

--- Content provided by‍ FirstRanker.com ---

0

-1

1/75

--- Content provided by FirstRanker.com ---

0

1

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

-14.5

x2

--- Content provided by‌ FirstRanker.com ---

4000/3

8/15

1

--- Content provided by FirstRanker.com ---

0

-1/75

--- Content provided by‍ FirstRanker.com ---

0

0

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

0

s5

200000/3 65/3

--- Content provided by‌ FirstRanker.com ---

0

0

--- Content provided by‍ FirstRanker.com ---

4/3

1

0

--- Content provided by‌ FirstRanker.com ---

zj-cj

--- Content provided by FirstRanker.com ---

-7/15M

0

M

--- Content provided by FirstRanker.com ---

-M/75

0

--- Content provided by FirstRanker.com ---

0

+143/30

--- Content provided by‍ FirstRanker.com ---

+29/150

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

Table 2

--- Content provided by‍ FirstRanker.com ---

Now x1 becomes a basic variable replacing a6. Like a7 the variable a6 also artificial variable so it

can't be re-entering in the table.

--- Content provided by‍ FirstRanker.com ---

51

MBA-H2040 Quantitative Techniques for Managers

--- Content provided by FirstRanker.com ---

CB

Basic

--- Content provided by FirstRanker.com ---

Cj

-12.5

--- Content provided by‍ FirstRanker.com ---

-14.5 0

0

0

--- Content provided by FirstRanker.com ---

variables XB

x1

x2

--- Content provided by‍ FirstRanker.com ---

s3

s4

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

-12.5

--- Content provided by FirstRanker.com ---

x1

10000/7

--- Content provided by FirstRanker.com ---

1

0

-15/7

--- Content provided by‍ FirstRanker.com ---

1/35

0

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

-14.5

--- Content provided by FirstRanker.com ---

x2

4000/7

0

--- Content provided by‍ FirstRanker.com ---

1

8/7

--- Content provided by FirstRanker.com ---

-1/35

0

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

0

s5

--- Content provided by⁠ FirstRanker.com ---

250000/7 0

0

--- Content provided by FirstRanker.com ---

325/7

16/21

1

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

zj-cj

0

0

--- Content provided by‌ FirstRanker.com ---

143/14 2/35

0

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

Table 3

--- Content provided by‍ FirstRanker.com ---

Hence

The optimum solution of the problem is x1 = 10000/7, x2 = 4000/7 and

--- Content provided by‌ FirstRanker.com ---

The Minimum Value of the Objective Function is: 26135.3

3.6 Multiple Solutions

--- Content provided by‍ FirstRanker.com ---

The simplex method also helps in identifying multiple solutions of a linear programming problem. This
is explained with the help of the following Example 3.5.

--- Content provided by FirstRanker.com ---

Example 3.5

--- Content provided by FirstRanker.com ---

Consider the following linear programming problem.

--- Content provided by FirstRanker.com ---

Maximize

--- Content provided by⁠ FirstRanker.com ---

2000x1 + 3000x2

--- Content provided by FirstRanker.com ---

Subject to:

--- Content provided by FirstRanker.com ---

6x1 + 9x2 100

--- Content provided by‍ FirstRanker.com ---

2x1 + x2 20

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

x1, x2 0.

Solution

--- Content provided by FirstRanker.com ---

Introduce the slack variables s3 and s4, so that the inequalities can be converted in to equation as

follows:

--- Content provided by⁠ FirstRanker.com ---

6x1 + 9x2 + s3 = 100

--- Content provided by‌ FirstRanker.com ---

2x1 + x2 + s4 = 20

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

x1, x2, s3, s4 0.

--- Content provided by‍ FirstRanker.com ---

The computation of simple procedure and tables are as follows:

--- Content provided by‌ FirstRanker.com ---

52
MBA-H2040 Quantitative Techniques for Managers

--- Content provided by‍ FirstRanker.com ---

CB

Basic

Cj

--- Content provided by‍ FirstRanker.com ---

2000

3000

--- Content provided by FirstRanker.com ---

0

0

--- Content provided by FirstRanker.com ---

variables XB

--- Content provided by‌ FirstRanker.com ---

x1

x2

s3

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

0

s3

--- Content provided by FirstRanker.com ---

100

6

--- Content provided by⁠ FirstRanker.com ---

9

1

0

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

0

s4

20

--- Content provided by⁠ FirstRanker.com ---

2

1

--- Content provided by‍ FirstRanker.com ---

0

1

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

zj-cj

--- Content provided by FirstRanker.com ---

-2000 -3000 0

0

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

Table 1

--- Content provided by FirstRanker.com ---

CB

Basic

--- Content provided by FirstRanker.com ---

Cj

2000

--- Content provided by FirstRanker.com ---

3000

0

0

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

variables XB

x1

x2

--- Content provided by⁠ FirstRanker.com ---

s3

s4

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

x2

100/9

--- Content provided by FirstRanker.com ---

2/3

1

1/9

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

0

s4

--- Content provided by⁠ FirstRanker.com ---

80/9

4/3

--- Content provided by‌ FirstRanker.com ---

0

-1/9

1

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

zj-cj

0

--- Content provided by‌ FirstRanker.com ---

0

3000/9 0

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

Table 2

--- Content provided by FirstRanker.com ---

Here zj-cj 0 for al the variables so that we can't improve the simplex table any more. Hence it

is optimum.

--- Content provided by‍ FirstRanker.com ---

The optimum solution is x1 = 0, x2 = 100/9 and

--- Content provided by FirstRanker.com ---

The maximum value of the objective function is: 100000/3 = 33333.33.

--- Content provided by FirstRanker.com ---

However, the zj-cj value corresponding to the non basic variable x1 is also zero. This indicates

--- Content provided by‌ FirstRanker.com ---

that there is more than one optimum solution for the problem exists.

In order to calculate the value of the alternate optimum solution we have to introduce x1 as a

--- Content provided by‍ FirstRanker.com ---

basic variable replacing s4. The next Table 3 shows the computation of this.

--- Content provided by FirstRanker.com ---

53

MBA-H2040 Quantitative Techniques for Managers

--- Content provided by⁠ FirstRanker.com ---

CB

Basic

C

--- Content provided by FirstRanker.com ---

2000

3000

--- Content provided by‍ FirstRanker.com ---

0

0

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

variables XB

x

x

--- Content provided by‍ FirstRanker.com ---

s

s

--- Content provided by⁠ FirstRanker.com ---

1

2

--- Content provided by‍ FirstRanker.com ---

3

4

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

3000

x

--- Content provided by‍ FirstRanker.com ---

20/3

0

--- Content provided by⁠ FirstRanker.com ---

1

1/6

1/2

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

2000

x

--- Content provided by‌ FirstRanker.com ---

20/3

1

--- Content provided by⁠ FirstRanker.com ---

0

-1/12

3/4

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

j-cj

--- Content provided by FirstRanker.com ---

0

0

--- Content provided by⁠ FirstRanker.com ---

1000/3 3000

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

Table 3

--- Content provided by FirstRanker.com ---

Thus,

--- Content provided by FirstRanker.com ---

x1 = 20/3, x2 = 20/3 also maximize the objective function and

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

The Maximum value of the objective function is: 100000/3 = 33333.33

--- Content provided by‌ FirstRanker.com ---

Thus, the problem has multiple solutions.

3.7 Unbounded Solution

--- Content provided by FirstRanker.com ---

In this section we will discuss how the simplex method is used to identify the unbounded solution. This
is explained with the help of the following Example 3.6.

Example 3.6

--- Content provided by FirstRanker.com ---

Consider the following linear programming problem.

--- Content provided by‌ FirstRanker.com ---

Maximize

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

5x1 + 4x2

--- Content provided by FirstRanker.com ---

Subject to:

--- Content provided by‌ FirstRanker.com ---

x1 ? x2 8

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

x1 7

--- Content provided by FirstRanker.com ---

x1, x2 0.

--- Content provided by FirstRanker.com ---

Solution :

Introduce the slack variables s3 and s4, so that the inequalities becomes as equation as follows:

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

x1 + s3 = 7
x1 ? x2 + s4 = 8

--- Content provided by‌ FirstRanker.com ---

x1, x2, s3, s4 0.

--- Content provided by‌ FirstRanker.com ---

The calculation of simplex procedures and tables are as follows:

--- Content provided by‌ FirstRanker.com ---

54
MBA-H2040 Quantitative Techniques for Managers

--- Content provided by‍ FirstRanker.com ---

CB

Basic

--- Content provided by⁠ FirstRanker.com ---

C

5

4

--- Content provided by‌ FirstRanker.com ---

0

0

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

variables XB

x

--- Content provided by FirstRanker.com ---

x

s

s

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

2

3

4

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

s

7

1

--- Content provided by‍ FirstRanker.com ---

0

1

--- Content provided by‍ FirstRanker.com ---

0

3

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

0

s

--- Content provided by FirstRanker.com ---

8

1

--- Content provided by‍ FirstRanker.com ---

-1

0

1

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

z

j-cj

--- Content provided by FirstRanker.com ---

-5

-4

--- Content provided by⁠ FirstRanker.com ---

0

0

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

Table 1

--- Content provided by‍ FirstRanker.com ---

CB

Basic

--- Content provided by FirstRanker.com ---

C

5

4

--- Content provided by FirstRanker.com ---

0

0

--- Content provided by FirstRanker.com ---

variables XB

x

--- Content provided by FirstRanker.com ---

x

s

s

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

2

3

4

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

x

7

1

--- Content provided by⁠ FirstRanker.com ---

0

1

--- Content provided by FirstRanker.com ---

0

1

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

0

s

--- Content provided by FirstRanker.com ---

1

0

--- Content provided by‍ FirstRanker.com ---

-1

-1

1

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

z

j-cj

--- Content provided by‍ FirstRanker.com ---

0

-4

--- Content provided by FirstRanker.com ---

5

0

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

Table 2

--- Content provided by FirstRanker.com ---

Note that z2-c2 < 0 which indicates x2 should be introduced as a basic variable in the next

iteration. However, both y120, y220.

--- Content provided by FirstRanker.com ---

Thus, it is not possible to proceed with the simplex method of calculation any further as we

cannot decide which variable will be non basic at the next iteration. This is the criterion for unbounded

--- Content provided by FirstRanker.com ---

solution.

NOTE: If in the course of simplex computation zj-cj < 0 but yij 0 for al i then the problem has no

--- Content provided by‌ FirstRanker.com ---

finite solution.

But in this case we may observe that the variable x2 is unconstrained and can be increased

--- Content provided by FirstRanker.com ---

arbitrarily. This is why the solution is unbounded.

3.8 Infeasible Solution

--- Content provided by‍ FirstRanker.com ---

This section illustrates how to identify the infeasible solution using simplex method. This is explained

--- Content provided by‌ FirstRanker.com ---

with the help of the following Example 3.7.

Example 3.7

--- Content provided by FirstRanker.com ---

55

MBA-H2040 Quantitative Techniques for Managers

--- Content provided by‍ FirstRanker.com ---

Consider the following problem.

--- Content provided by‍ FirstRanker.com ---

Minimize

--- Content provided by‌ FirstRanker.com ---

200x1 + 300x2

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

Subject to:

--- Content provided by FirstRanker.com ---

2x1 + 3x2 1200

--- Content provided by FirstRanker.com ---

x1 + x2 400

--- Content provided by‌ FirstRanker.com ---

2x1 + 3/2x2 900

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

x1, x2 0

--- Content provided by⁠ FirstRanker.com ---

Solution

Since it is a minimization problem we have to convert it into maximization problem and introduce the

slack, surplus and artificial variables. The problem appears in the following manner after doing all these

--- Content provided by‌ FirstRanker.com ---

procedure.

--- Content provided by‌ FirstRanker.com ---

Maximize

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

-200x1 - 300x2

--- Content provided by‌ FirstRanker.com ---

Subject to:

--- Content provided by⁠ FirstRanker.com ---

2x1 + 3x2 -s3 +a6 = 1200

--- Content provided by FirstRanker.com ---

x1 + x2 +s4 = 400

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

2x1 + 3/2x2 - s5 + a7 = 900

--- Content provided by⁠ FirstRanker.com ---

x1, x2, s3, s4, s5, a6, a7 0

--- Content provided by⁠ FirstRanker.com ---

Here the a6 and a7 are artificial variables. We use two phase method to solve this problem.

Phase I

--- Content provided by FirstRanker.com ---

Maximize

--- Content provided by‍ FirstRanker.com ---

-a6 ?a7

--- Content provided by FirstRanker.com ---

Subject to:

--- Content provided by FirstRanker.com ---

2x1 + 3x2 -s3 +a6 = 1200

--- Content provided by‍ FirstRanker.com ---

x1 + x2 +s4 = 400

--- Content provided by‍ FirstRanker.com ---

2x1 + 3/2x2 - s5 + a7 = 900

--- Content provided by‍ FirstRanker.com ---

x1, x2, s3, s4, s5, a6, a7 0

--- Content provided by‌ FirstRanker.com ---

The calculation of simplex procedures and tables are as follows:

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

Basic

C

0

--- Content provided by⁠ FirstRanker.com ---

0

0

--- Content provided by⁠ FirstRanker.com ---

0

0

-1

--- Content provided by⁠ FirstRanker.com ---

-1

--- Content provided by‌ FirstRanker.com ---

j

variables XB

--- Content provided by FirstRanker.com ---

x

x

--- Content provided by‍ FirstRanker.com ---

s

s

s

--- Content provided by FirstRanker.com ---

a

a

--- Content provided by‌ FirstRanker.com ---

1

2

--- Content provided by⁠ FirstRanker.com ---

3

4

--- Content provided by FirstRanker.com ---

5

6

7

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

-1

--- Content provided by FirstRanker.com ---

a

1200

2

--- Content provided by FirstRanker.com ---

3

-1

--- Content provided by FirstRanker.com ---

0

0

1

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

6

0

s

--- Content provided by FirstRanker.com ---

400

1

--- Content provided by‌ FirstRanker.com ---

1

0

1

--- Content provided by⁠ FirstRanker.com ---

0

0

--- Content provided by‍ FirstRanker.com ---

1

4

--- Content provided by FirstRanker.com ---

-1

a

--- Content provided by FirstRanker.com ---

900

2

3/2

--- Content provided by FirstRanker.com ---

0

0

--- Content provided by⁠ FirstRanker.com ---

-1

0

0

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

j-cj

-4

--- Content provided by FirstRanker.com ---

-9/2

1

0

--- Content provided by FirstRanker.com ---

1

0

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

Table 1

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

MBA-H2040 Quantitative Techniques for Managers

CB

--- Content provided by‌ FirstRanker.com ---

Basic

C

0

--- Content provided by FirstRanker.com ---

0

0

--- Content provided by‍ FirstRanker.com ---

0

0

-1

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

variables XB

x

--- Content provided by FirstRanker.com ---

x

s

--- Content provided by FirstRanker.com ---

s

s

a

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

2

3

4

--- Content provided by⁠ FirstRanker.com ---

5

7

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

0

x

400

--- Content provided by FirstRanker.com ---

2/3

1

--- Content provided by FirstRanker.com ---

-1/3

0

0

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

2

0

s

--- Content provided by‍ FirstRanker.com ---

0

1/3

--- Content provided by⁠ FirstRanker.com ---

0

1/3

1

--- Content provided by FirstRanker.com ---

0

0

--- Content provided by FirstRanker.com ---

4

-1

--- Content provided by‍ FirstRanker.com ---

a

300

--- Content provided by FirstRanker.com ---

1

0

1/2

--- Content provided by FirstRanker.com ---

0

-1

--- Content provided by FirstRanker.com ---

1

7

--- Content provided by FirstRanker.com ---

j-cj

-1

--- Content provided by⁠ FirstRanker.com ---

0

-1/2

--- Content provided by FirstRanker.com ---

0

1

0

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

Table 2

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

Basic

C

0

--- Content provided by FirstRanker.com ---

0

0

--- Content provided by FirstRanker.com ---

0

0

-1

--- Content provided by FirstRanker.com ---

variables XB

x

--- Content provided by‌ FirstRanker.com ---

x

s

--- Content provided by‌ FirstRanker.com ---

s

s

a

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

2

3

4

--- Content provided by⁠ FirstRanker.com ---

5

7

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

0

x

400

--- Content provided by FirstRanker.com ---

0

1

--- Content provided by‌ FirstRanker.com ---

-1

-2

0

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

2

0

x

--- Content provided by FirstRanker.com ---

0

1

--- Content provided by⁠ FirstRanker.com ---

0

1

3

--- Content provided by‌ FirstRanker.com ---

0

0

--- Content provided by‌ FirstRanker.com ---

1

-1

--- Content provided by FirstRanker.com ---

a

300

--- Content provided by⁠ FirstRanker.com ---

0

0

-1/2

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-3

-1

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1

7

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j-cj

0

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0

1/2

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3

1

0

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Table 3

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Note that zj-cj 0 for al the variables but the artificial variable a7 is still a basic variable. This

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situation indicates that the problem has no feasible solution.

3.9 Summary

The simplex method is very useful and appropriate method for solving linear programming problem

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having more than tow variables. The slack variables are introduced for less that or equal to type, surplus

variables are introduce for greater than or equal to type of linear programming problem. The basic

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feasible solution is important in order to solve the problem using the simplex method.

A basic feasible solution of a system with m-equations and n-variables has m non-negative

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variables called as basic variables and n-m variables with value zero known as non-basic variables. The

objective function is maximized or minimized at one of the basic feasible solutions.

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Surplus variables can't provide the basic feasible solution instead artificial variables are used to

get the basic feasible solutions and it initiate the simplex procedure. Two phase and M-Method are

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available to solve linear programming problem in these case.

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The simplex method also used to identify the multiple, unbounded and infeasible solutions.

3.10 Key Terms

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Basic Variable: Variable of a basic feasible solution has n non-negative value.

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Non Basic Variable: Variable of a feasible solution has a value equal to zero.

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MBA-H2040 Quantitative Techniques for Managers
Artificial Variable: A non-negative variable introduced to provide basic feasible solution and initiate

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the simplex procedures.

Slack Variable: A variable corresponding to a type constraint is a non-negative variable introduced to
convert the inequalities into equations.

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Surplus Variable: A variable corresponding to a type constraint is a non-negative variable introduced
to convert the constraint into equations.

Basic Solution: System of m-equation and n-variables i.e. m<n is a solution where at least n-m
variables are zero.

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Basic Feasible Solution: System of m-equation and n-variables i.e. m<n is a solution where m variables
are non-negative and n-m variables are zero.

Optimum Solution: A solution where the objective function is minimized or maximized.

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3.11 Self Assessment Questions

Q1. A soft drinks company has a two products viz. Coco-cola and Pepsi with profit of $2 an $1 per unit.
The following table illustrates the labour, equipment and materials to produce per unit of each product.

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Determine suitable product mix which maximizes the profit using simplex method.

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Pepsi Coco-cola Total Resources

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Labour

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12

3

2

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2.3

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Equipment

6.9

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1.4

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Material

4.9

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Q2. A factory produces three using three types of ingredients viz. A, B and C in different proportions.
The following table shows the requirements o various ingredients as inputs per kg of the products.

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Ingredients

Products

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C

1

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8

8

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2

4

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6

4

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3

8

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4

0

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The three profits coefficients are 20, 20 and 30 respectively. The factory has 800 kg of ingredients A,

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1800 kg of ingredients B and 500 kg of ingredient C.

Determine the product mix which will maximize the profit and also find out maximum profit.

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MBA-H2040 Quantitative Techniques for Managers

Q3. Solve the following linear programming problem using two phase and M method.

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Maximize

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12x1 + 15x2 + 9x3

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Subject to:

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8x1 + 16x2 + 12x3 250

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4x1 + 8x2 + 10x3 80

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7x1 + 9x2 + 8x3 =105

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x1, x2, x3 0

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Q4. Solve the following linear programming problem using simplex method.

Maximize

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3x1 + 2x2

Subject to:

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x1 ?x2 1

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x1 + x2 3

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x1, x2 0

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Q5. Solve the following linear programming problem using simplex method.

Maximize

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x1 + x2

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Subject to:

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-2x1 + x2 1

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x1 2

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x1 + x2 3

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x1, x2, x3 0

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Q6. Maximize

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P = 3x1 + 4x2 + x3

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Subject to:

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x1 + 2x2 + x3 6

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2x1 +2x3 4

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3x1 + x2 + x3 9

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x1, x2, x3 0

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3.12 Key Solutions

Q1. Coco-Cola = 20/9, Pepsi = 161/90
Maximum Profit = $6.23

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Q2. x1 = 0, x2 = 125, x3 = 75/2
Maximum Profit = 5375

Q3. x1 = 6, x2 = 7, x3 = 0
Maximum Profit = 177

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Q4. Unbounded Solution

Q5. x1 = 2, x2 = 1 or x1 = 2/3, x2 = 7/3

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MBA-H2040 Quantitative Techniques for Managers

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Maximum Profit = 3.

Q6. x1 = 2, x2 = 2, x3 = 0
Maximum P = 14

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3.13. Further References

Hamdy A Taha, 1999. Introduction to Operations Research, PHI Limited, New Delhi.

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Mustafi, C.K. 1988. Operations Research Methods and Practices, Wiley Eastern Limited, New Delhi.

Levin, R and Kirkpatrick, C.A. 1978. Quantitative Approached to Management, Tata McGraw Hill,
Kogakusha Ltd., International Student Edition.

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Peterson R and Silver, E. A. 1979. Decision Systems for Inventory Management and Production
Planning.

Handley, G and T.N. Whitin. 1983. Analysis of Inventory Systems, PHI.

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Starr, M.K. and D.W. Miller. 1977. Inventory Control Theory and Practice, PHI.

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UNIT I

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MBA-H2040 Quantitative Techniques for Managers

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ON
S

4 DUAL LINEAR PROGRAMMING PROBLEMS

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S
E

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LESSON STRUCTURE

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4.1 Introduction

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4.2 Dual Problem Formulation

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4.3 Dual Problem Properties

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4.4 Simple Way of Solving Dual Problem

4.5 Summary

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4.6 Key Terms

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4.7 Self Assessment Questions

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4.8 Key Solutions

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4.9 Further References

Objectives

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After Studying this lesson, you should be able

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to:

Understand the Dual Linear programming

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Problem

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Formulate a Dual Problem

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Solve the Dual Linear Programming

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Problem

Understand the Properties of a Dual

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Problem

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MBA-H2040 Quantitative Techniques for Managers

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4.1 Introduction

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For every linear programming problem there is a corresponding linear programming problem called the

dual. If the original problem is a maximization problem then the dual problem is minimization problem

and if the original problem is a minimization problem then the dual problem is maximization problem.

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In either case the final table of the dual problem will contain both the solution to the dual problem and

the solution to the original problem.

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The solution of the dual problem is readily obtained from the original problem solution if the

simplex method is used.

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The formulation of the dual problem also sometimes referred as the concept of duality is helpful

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for the understanding of the linear programming. The variable of the dual problem is known as the dual

variables or shadow price of the various resources. The dual problem is easier to solve than the original

problem. The dual problem solution leads to the solution of the original problem and thus efficient

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computational techniques can be developed through the concept of duality. Finally, in the competitive

strategy problem solution of both the original and dual problem is necessary to understand the complete

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problem.

4.2 Dual Problem Formulation

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If the original problem is in the standard form then the dual problem can be formulated using the

following rules:

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The number of constraints in the original problem is equal to the number of dual variables. The

number of constraints in the dual problem is equal to the number of variables in the original
problem.

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The original problem profit coefficients appear on the right hand side of the dual problem

constraints.

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If the original problem is a maximization problem then the dual problem is a minimization

problem. Similarly, if the original problem is a minimization problem then the dual problem is a
maximization problem.

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The original problem has less than or equal to () type of constraints while the dual problem has

greater than or equal to () type constraints.

The coefficients of the constraints of the original problem which appear from left to right are

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placed from top to bottom in the constraints of the dual problem and vice versa.

The Dual Linear Programming Problem is explained with the help of the following Example 4.1.

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Example 4.1

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Consider the following product mix problem:

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MBA-H2040 Quantitative Techniques for Managers
Three machine shops A, B, C produces three types of products X, Y, Z respectively. Each product

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involves operation of each of the machine shops. The time required for each operation on various

products is given as follows:

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Machine Shops

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Products

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A

B

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C

Profit per unit

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$12

10

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7

2

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$3

2

3

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Z

$1

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1

2

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1

Available Hours

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100

77 80

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The available hours at the machine shops A, B, C are 100, 77, and 80 only. The profit per unit of

products X, Y, and Z is $12, $3, and $1 respectively.

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Solution:

The formulation of Linear Programming (original problem) is as follows:

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Maximize

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12x1 + 3x2 + x3

Subject to:

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10x1 + 2x2 + x3 100

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7x1 + 3x2 + 2x3 77

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2x1 + 4x2 + x3 80

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x1, x2, x3 0

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We introduce the slack variables s4, s5 and s6 then the equalities becomes as:

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Maximize

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12x1 + 3x2 + x3

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Subject to:

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10x1 + 2x2 + x3

+ s4 = 100

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7x1 + 3x2 + 2x3

+ s5 = 77

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2x1 + 4x2 + x3

+s6 = 80

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x1, x2, x3, s4, s5, s6 0

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Form the above equations, the first simplex table is obtained is as follows:

CB

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Basic

Cj

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12

3

1

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0

0

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0

Variable XB

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x1

x2

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x3

s4

s5

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0

s4

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100

10

2

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1

1

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0

0

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MBA-H2040 Quantitative Techniques for Managers

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0

s5

77

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7

3

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2

0

1

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0

0

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s6

80

2

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4

1

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0

0

1

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zj-cj

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-12

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-3

-1

0

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0

0

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Table 1

Note that the basic variables are s4, s5 and s6. Therefore CB1 = 0, CB2 = 0, CB3 = 0.

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1. The smallest negative element in the above table of z1 ? c1 is -12. Hence, x1 becomes a basic

variable in the next iteration.

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2. Determine the minimum ratios

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Min 100, 72, 80 = 10

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10 7 2

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Here the minimum value is s4, which is made as a non-basic variable.

3. The next Table 2 is calculated using the following rules:

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(i)

The revised basic variables are x1, s5, s6. Accordingly we make CB1=22, CB2=0 and

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CB3=0.

(ii)

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Since x1 is the incoming variable we make x1 coefficient one by dividing each
element of row 1 by 10. Thus the numerical value of the element corresponding to x2
is 2/10, corresponding to x3 is 1/10, corresponding to s4 is 1/10, corresponding to s5 is
0/10 and corresponding to s6 is 0/10 in Table 2.

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(iii)

The incoming basic variable should only appear in the first row. So we multiply first

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row of Table 2 by 7 and subtract if from the second row of Table 1 element by
element.
Thus,
The element corresponding to x1 in the second row of Table 2 is zero

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The element corresponding to x2 is 3 ? 7 * 2 = 16

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10 10

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By using this way we get the elements of the second and the third row in Table 2.

Similarly, the calculation of numerical values of basic variables in Table 2 is done.

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CB

Basic

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Cj

22

6

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2

0

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0

0

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Variable XB

x1

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x2

x3

s4

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s5

s6

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x1

10

1

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2/10

1/10

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1/10

0

0

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0

s5

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7

0

16/10 13/10 -7/10

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1

0

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0

s6

60

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0

18/5

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4/5

-1/5

0

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zj-cj

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0

-3/5

1/5

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6/5

0

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Table 2

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MBA-H2040 Quantitative Techniques for Managers

4. z2-c2 = -3/5. So x2 becomes a basic variable in the next iteration.

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5. Determine the minimum of the ratios

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10, 7 , 60

Min 2 16 18 = Min 50, 70, 300 = 70

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10 10 5 16 18 16

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So that the variable s5 will be a non basic variable in the next iteration.

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6. From Table 2, the Table 3 is calculated using the rules (i), (ii) and (iii) mentioned above.

CB

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Basic

Cj

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12

3

1

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0

0

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0

Variable XB

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x1

x2

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x3

s4

s5

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12

x1

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73/8

1

0

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-1/16

3/16

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-1/8

0

3

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s5

35/8

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0

1

13/16 -7/16

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5/8

0

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0

s6

177/4 0

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0

-17/8

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11/8

-9/4

1

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zj-cj

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0

11/16 15/16 3/8

0

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Table 3

Since all the zi ? cj 0, the optimum solution is as:

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x1 = 73/8 and x2 = 35/8 and

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The Maximum Profit is: $981/8 = $122.625

Suppose an investor is deciding to purchase the resources A, B, C. What offers is he going to produce?

Let, assume that W1, W2 and W3 are the offers made per hour of machine time A, B and C respectively.

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Then these prices W1, W2 and W3 must satisfy the conditions given below:

1. W1, W2, W3 0

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2. Assume that the investor is behaving in a rational manner; he would try to bargain as much as

possible so that the total annual payable to the produces would be as little as possible. This leads
to the following condition:

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Minimize

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100W1 + 77W2 + 80W3

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MBA-H2040 Quantitative Techniques for Managers

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3. The total amount offer by the investor to the three resources viz. A, B and C required to produce

one unit of each product must be at least as high as the profit gained by the producer per unit.

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Since, these resources enable the producer to earn the specified profit corresponding to the
product he would not like to sell it for anything less assuming he is behaving rationally. This
leads to the following conditions:

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10w1 + 7w2 + 2w3 12

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2w1 + 3w2 + 4w3 3

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w1 + 2w2 + w3 1

Thus, in this case we have a linear problem to ascertain the values of the variable w1, w2, w3. The
variables w1, w2 and w3 are called as dual variables.

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Note:

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The original (primal) problem illustrated in this example

a. considers the objective function maximization

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b. contains type constraints
c. has non-negative constraints

This original problem is called as primal problem in the standard form.

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4.3 Dual Problem Properties

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The following are the different properties of dual programming problem:

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i.

If the original problem is in the standard form, then the dual problem solution is obtained

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from the zj ? cj values of slack variables.

For example: In the Example 4.1, the variables s4, s4 and s6 are the slack variables. Hence
the dual problem solution is w1 = z4 ? c4 = 15/16, w2 = z5 ? c5 = 3/8 and w3 = z6 ? c6 = 0.

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ii.

The original problem objective function maximum value is the minimum value of the dual
problem objective function.

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For example:

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From the above Example 4.1 we know that the original problem maximum values

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is 981/8 = 122.625. So that the minimum value of the dual problem objective function is

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100*15/16 + 77*3/8 + 80*0 = 981/8

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Here the result has an important practical implication. If both producer and investor analyzed
the problem then neither of the two can outmaneuver the other.

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iii.

Shadow Price: A resource shadow price is its unit cost, which is equal to the increase in
profit to be realized by one additional unit of the resource.

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For example:

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Let the minimum objective function value is expressed as:

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MBA-H2040 Quantitative Techniques for Managers

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100*15/16 + 77*3/8 + 80*0

If the first resource is increased by one unit the maximum profit also increases by 15/16,
which is the first dual variable of the optimum solution. Therefore, the dual variables are also

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referred as the resource shadow price or imputed price. Note that in the previous example the
shadow price of the third resource is zero because there is already an unutilized amount, so
that profit is not increased by more of it until the current supply is totally exhausted.

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iv.

In the originals problem, if the number of constraints and variables is m and n then the
constraint and variables in the dual problem is n and m respectively. Suppose the slack
variables in the original problem is represented by y1, y1, ....., yn and the surplus variables are

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represented by z1, z2, ..., zn in the dual problem.

v.

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Suppose, the original problem is not in a standard form, then the dual problem structure is
unchanged. However, if a constraint is greater than or equal to type, the corresponding dual
variable is negative or zero. Similarly, if a constraint in the original problem is equal to type,
then the corresponding dual variables is unrestricted in sign.

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Example 4.2

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Consider the following linear programming problem

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Maximize

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22x1 + 25x2 +19x3

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Subject to:

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18x1 + 26x2 + 22x3 350

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14x1 + 18x2 + 20x3 180

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17x1 + 19x2 + 18x3 = 205

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x1, x2, x3 0

Note that this is a primal or original problem.

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The corresponding dual problem for this problem is as follows:

Minimize

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250w1 + 80w2 +105w3

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Subject to:

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18w1 + 4w2 + 7w3 22

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26w1 + 18w2 + 19w3 25

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22w1 + 20w2 + 18w3 19

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w1 0, w2 , and w3 is unrestricted in sign (+ or -).

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Now, we can solve this using simplex method as usual.

4.4 Simple Way of Solving Dual Problem

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Solving of dual problem is simple; this is illustrated with the help of the following Example 4.3.

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MBA-H2040 Quantitative Techniques for Managers
Example 4.3:

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Minimize

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P = x1 + 2x2

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Subject to:

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x1 + x2 8

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2x1 + y 12

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x1 1

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Solution:

Step 1: Set up the P-matrix and its transpose

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1 1 8
2 1 12

P = 1 0 1

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1 2 0

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1 2 1 1

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PT = 1 1 0 2

8

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12 1 0

w1 w2 w3 s1 s2 g z

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1 2 1 1 0 0 1

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Step 2: Form the

constraints and the

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1 1 0 0 1 0 2

objective function

for the dual

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-8 -12 -1 0 0 1 0

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+ 2w2 + w3 1

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w1 + w2 2

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z = 8w1 = 12w2 + 2

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Step 3: Construct the initial simplex tableau for the dual

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Since there are no negative entries in the last column above the third row, we have a standard

simplex problem. The most negative number in the bottom row to the left of the last column is

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-12. This establishes the pivot column. The smallest nonnegative ratio is 1/2. The pivot element

is 2 in the w2-column.

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MBA-H2040 Quantitative Techniques for Managers
Step 4: Pivoting

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w1 w2 w3 s1 s2 g z

Pivoting about the

2 we get:

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1 2 1 1 0 0 1

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1/2 0 -1/2 -1/2 1 0 3/2

-2 0 5 6 0 1 6

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w1 w2 w3 s1 s2 g z

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1/2 1 1/2 1/2 0 0 1/2

1 1 0 0 1 0 2

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-8 -12 -1 0 0 1 0

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w1 w2 w3 s1 s2 g z

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1/2 1 1/2 1/2 0 0 1/2

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1/2 0 -1/2 -1/2 1 0 3/2

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-2 0 5 6 0 1 6

The most negative entry in the bottom row to the left of the last column is -2. The smallest non-

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negative ratio is the 1/2 in the first row. This is the next pivot element.

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w1 w2 w3 s1 s2 g z

1/2 1 1/2 1/2 0 0 1/2

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1/2 0 -1/2 -1/2 1 0 3/2

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Pivoting about the

-2 0 5 6 0 1 6

1/2:

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MBA-H2040 Quantitative Techniques for Managers

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Since there are no negative entries in the bottom row and to the left of the last column, the

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process is complete. The solutions are at the feet of the slack variable columns.

Therefore,

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w1 w2 w3 s1 s2 g z

The

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optimum solution

1 2 1 1 0 0 1

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provided by x1 = 8

and x2 = 0

0 -1 -1 -1 1 0 1

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The

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Minimum Value

is: 8

0 4 7 8 0 1 8

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4.5 Summary

For every linear programming problem there is a dual problem. The variables of the dual problem are

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called as dual variables. The variables have economic value, which can be used for planning its

resources. The dual problem solution is achieved by the simplex method calculation of the original

(primal) problem. The dual problem solution has certain properties, which may be very useful for

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calculation purposes.

4.6 Key Terms

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Original Problem: This is the original linear programming problem, also called as primal problem.

Dual Problem: A dual problem is a linear programming problem is another linear programming
problem formulated from the parameters of the primal problem.

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Dual Variables: Dual programming problem variables.

Optimum Solution: The solution where the objective function is minimized or maximized.

Shadow Price: Price of a resource is the change in the optimum value of the objective function per unit

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increase of the resource.

4.7 Self Assessment Questions

Q1. An organization manufactures three products viz. A, B and c. The required raw material per piece of

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product A, B and C is 2kg, 1kg, and 2kg. Assume that the total weekly availability is 50 kg. In order to

produce the products the raw materials are processed on a machine by the labour force and on a weekly

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MBA-H2040 Quantitative Techniques for Managers
the availability of machine hours is 30. Assume that the available total labour hour is 26. The following

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table illustrates time required per unit of the three products.

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The profit per unit from the products A, B and C are #25, #30 and #40.

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Formulate the dual linear programming problem and determine the optimum values of the dual
variables.

Q2. Consider the following dual problem

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Minimize

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3w1 + 4w2

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Subject to:

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3w1 + 4w2 24

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2w1 + w2 10

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5w1 + 3w2 29

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w1, w2 0

4.8 Key Solutions

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Q1. Minimize

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50w1 + 30w2 + 26w3

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Subject to:

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2w1 + 0.5w2 + w3 25

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w1 + 3w2 + 2w3 30

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2w1 + w2 + w3 40

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w1 = 50/3 = 16.6, w2 = 0 and w3 = 20/3 = 6.6

Q2.

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Maximize

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24x1 + 10x2 + 29x3

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Subject

to:

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Product

Labour

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Machine

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3x1 + 2x2 + 5x3 3

Hour

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Hour

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4x1 + x2 + 3x3 4

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0.5

1

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x1, x2, x3 0 and w1 = 4, w2 = 3

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B

3

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Objective Function Maximum

Value is: 24

C

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1

1

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MBA-H2040 Quantitative Techniques for Managers

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4.9 Further References

Mustafi, C.K. 1988. Operations Research Methods and Practices, Wiley Eastern Limited, New Delhi.

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Hamdy A Taha, 1999. Introduction to Operations Research, PHI Limited, New Delhi.

Peterson R and Silver, E. A. 1979. Decision Systems for Inventory Management and Production
Planning.

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Levin, R and Kirkpatrick, C.A. 1978. Quantitative Approached to Management, Tata McGraw Hill,
Kogakusha Ltd., International Student Edition.

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MBA-H2040 Quantitative Techniques for Managers

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UNIT II

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S
S

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1 TRANSPORTATION PROBLEM

E
L

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LESSON STRUCTURE

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1.5 Introduction

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1.6 Transportation Algorithm

1.7 Basic Feasible Solution of a

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Transportation Problem

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1.8 Modified Distribution Method

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1.9 Unbalanced Transportation Problem

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1.10

Degenerate

Transportation

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Problem

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1.11

Transshipment Problem

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1.12

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Transportation

Problem

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Maximization

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1.13

Summary

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1.14

Key Terms

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1.15

Self Assessment Questions

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1.16

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Key Solutions

1.17

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Further References

Objectives

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After Studying this lesson, you should be able

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to:

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Formulation of a Transportation Problem

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Determine basic feasible solution using

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various methods

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Understand the MODI, Stepping Stone

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Methods for cost minimization

Make unbalanced Transportation Problem

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into balanced one using appropriate

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method

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Solve Degenerate Problem

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Formulate and Solve Transshipment

Problem

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Describe suitable method for maximizing

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the objective function instead of

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minimizing

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MBA-H2040 Quantitative Techniques for Managers

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1.1 Introduction

A special class of linear programming problem is Transportation Problem, where the objective is to

minimize the cost of distributing a product from a number of sources (e.g. factories) to a number of

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destinations (e.g. warehouses) while satisfying both the supply limits and the demand requirement.

Because of the special structure of the Transportation Problem the Simplex Method of solving is

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unsuitable for the Transportation Problem. The model assumes that the distributing cost on a given rout

is directly proportional to the number of units distributed on that route. Generally, the transportation

model can be extended to areas other than the direct transportation of a commodity, including among

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others, inventory control, employment scheduling, and personnel assignment.

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The transportation problem special feature is illustrated here with the help of following Example 1.1.

Example 1.1:

Suppose a manufacturing company owns three factories (sources) and distribute his products to five

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different retail agencies (destinations). The following table shows the capacities of the three factories,

the quantity of products required by the various retail agencies and the cost of shipping one unit of the

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product from each of the three factories to each of the five retail agencies.

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Retail Agency

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Factories

1

2

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3

4

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5

Capacity

1

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1

9

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13

36

51

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50

2

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24

12

16

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20

1

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100

3

14

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33

1

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23

26

150

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Requirement

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100

60

50

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50

40

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300

Usually the above table is referred as Transportation Table, which provides the basic information

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regarding the transportation problem. The quantities inside the table are known as transportation cost per

unit of product. The capacity of the factories 1, 2, 3 is 50, 100 and 150 respectively. The requirement of

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the retail agency 1, 2, 3, 4, 5 is 100,60,50,50, and 40 respectively.

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In this case, the transportation cost of one unit

from factory 1 to retail agency 1 is 1,
from factory 1 to retail agency 2 is 9,
from factory 1 to retail agency 3 is 13, and so on.

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A transportation problem can be formulated as linear programming problem using variables with

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two subscripts.

Let

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MBA-H2040 Quantitative Techniques for Managers

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x11=Amount to be transported from factory 1 to retail agency 1

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x12= Amount to be transported from factory 1 to retail agency 2

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........

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........

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........

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........

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x35= Amount to be transported from factory 3 to retail agency 5.

Let the transportation cost per unit be represented by C11, C12, .....C35 that is C11=1, C12=9, and so on.

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Let the capacities of the three factories be represented by a1=50, a2=100, a3=150.

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Let the requirement of the retail agencies are b1=100, b2=60, b3=50, b4=50, and b5=40.

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Thus, the problem can be formulated as

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Minimize

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C11x11+C12x12+...............+C35x35

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Subject to:

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x11 + x12 + x13 + x14 + x15 = a1

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x21 + x22 + x23 + x24 + x25 = a2

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x31 + x32 + x33 + x34 + x35 = a3

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x11 + x21 + x31 = b1

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x12 + x22 + x32 = b2

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x13 + x23 + x33 = b3

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x14 + x24 + x34 = b4

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x15 + x25 + x35 = b5

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x11, x12, ......, x35 0.

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Thus, the problem has 8 constraints and 15 variables. So, it is not possible to solve such a

problem using simplex method. This is the reason for the need of special computational procedure to

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solve transportation problem. There are varieties of procedures, which are described in the next section.

1.2 Transportation Algorithm

The steps of the transportation algorithm are exact parallels of the simplex algorithm, they are:

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Step 1: Determine a starting basic feasible solution, using any one of the following three methods

1. North West Corner Method
2. Least Cost Method

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3. Vogel Approximation Method

Step 2: Determine the optimal solution using the following method

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1. MODI (Modified Distribution Method) or UV Method.

1.3 Basic Feasible Solution of a Transportation Problem

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MBA-H2040 Quantitative Techniques for Managers
The computation of an initial feasible solution is illustrated in this section with the help of the

example1.1 discussed in the previous section. The problem in the example 1.1 has 8 constraints and 15

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variables we can eliminate one of the constraints since a1 + a2 + a3 = b1 + b2 + b3 + b4 +b5. Thus now the

problem contains 7 constraints and 15 variables. Note that any initial (basic) feasible solution has at

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most 7 non-zero Xij. Generally, any basic feasible solution with m sources (such as factories) and n

destination (such as retail agency) has at most m + n -1 non-zero Xij.

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The special structure of the transportation problem allows securing a non artificial basic feasible

solution using one the following three methods.

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4. North West Corner Method
5. Least Cost Method
6. Vogel Approximation Method

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The difference among these three methods is the quality of the initial basic feasible solution they

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produce, in the sense that a better that a better initial solution yields a smaller objective value. Generally

the Vogel Approximation Method produces the best initial basic feasible solution, and the North West

Corner Method produces the worst, but the North West Corner Method involves least computations.

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North West Corner Method:

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The method starts at the North West (upper left) corner cell of the tableau (variable x11).

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Step -1: Allocate as much as possible to the selected cell, and adjust the associated amounts of capacity
(supply) and requirement (demand) by subtracting the allocated amount.

Step -2: Cross out the row (column) with zero supply or demand to indicate that no further assignments
can be made in that row (column). If both the row and column becomes zero simultaneously, cross out

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one of them only, and leave a zero supply or demand in the uncrossed out row (column).

Step -3: If exactly one row (column) is left uncrossed out, then stop. Otherwise, move to the cell to the
right if a column has just been crossed or the one below if a row has been crossed out. Go to step -1.

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Example 1.2:

Consider the problem discussed in Example 1.1 to illustrate the North West Corner Method of
determining basic feasible solution.

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Retail Agency

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Factories

1

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2

3

4

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5

Capacity

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1

1

9

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13

36

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51

50

2

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24

12

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16

20

1

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100

3

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14

33

1

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23

26

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150

Requirement

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100

60

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50

50

40

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300

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MBA-H2040 Quantitative Techniques for Managers

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The allocation is shown in the following tableau:

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Capacity

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1 9 13 36 51

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50

50

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24 12 16 20 1

100 50

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50 50

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14 33 1 23 26

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10

50

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50

40

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150 140 90 40

Requirement 100

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60

50

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50

40

50 10

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The arrows show the order in which the allocated (bolded) amounts are generated. The starting

basic solution is given as

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x11 = 50,

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x21 = 50, x22 = 50

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x32 = 10, x33 = 50, x34 = 50, x35 = 40

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The corresponding transportation cost is

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50 * 1 + 50 * 24 + 50 * 12 + 10 * 33 + 50 * 1 + 50 * 23 + 40 * 26 = 4420

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It is clear that as soon as a value of Xij is determined, a row (column) is eliminated from further

consideration. The last value of Xij eliminates both a row and column. Hence a feasible solution

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computed by North West Corner Method can have at most m + n ? 1 positive Xij if the transportation

problem has m sources and n destinations.

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Least Cost Method

The least cost method is also known as matrix minimum method in the sense we look for the row and

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the column corresponding to which Cij is minimum. This method finds a better initial basic feasible

solution by concentrating on the cheapest routes. Instead of starting the allocation with the northwest

cell as in the North West Corner Method, we start by allocating as much as possible to the cell with the

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smallest unit cost. If there are two or more minimum costs then we should select the row and the column

corresponding to the lower numbered row. If they appear in the same row we should select the lower

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numbered column. We then cross out the satisfied row or column, and adjust the amounts of capacity

and requirement accordingly. If both a row and a column is satisfied simultaneously, only one is crossed

out. Next, we look for the uncrossed-out cell with the smallest unit cost and repeat the process until we

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are left at the end with exactly one uncrossed-out row or column.

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MBA-H2040 Quantitative Techniques for Managers

Example 1.3:

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The least cost method of determining initial basic feasible solution is illustrated with the help of problem

presented in the section 1.1.

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Capacity

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1 9 13 36 51

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24 12 16 20 1

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100 60

60

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14 33 1 23 26

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50

50

150 100 50

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Requirement 100

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60

50

50

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40

50

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The Least Cost method is applied in the following manner:

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We observe that C11=1 is the minimum unit cost in the table. Hence X11=50 and the first row is

crossed out since the row has no more capacity. Then the minimum unit cost in the uncrossed-out row

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and column is C25=1, hence X25=40 and the fifth column is crossed out. Next C33=1is the minimum unit

cost, hence X33=50 and the third column is crossed out. Next C22=12 is the minimum unit cost, hence

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X22=60 and the second column is crossed out. Next we look for the uncrossed-out row and column now

C31=14 is the minimum unit cost, hence X31=50 and crossed out the first column since it was satisfied.

Finally C34=23 is the minimum unit cost, hence X34=50 and the fourth column is crossed out.

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So that the basic feasible solution developed by the Least Cost Method has transportation cost is

1 * 50 + 12 * 60 + 1 * 40 + 14 * 50 + 1 * 50 + 23 * 50 = 2710

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Note that the minimum transportation cost obtained by the least cost method is much lower than

the corresponding cost of the solution developed by using the north-west corner method.

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Vogel Approximation Method (VAM):

VAM is an improved version of the least cost method that generally produces better solutions. The steps
involved in this method are:

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Step 1: For each row (column) with strictly positive capacity (requirement), determine a penalty by
subtracting the smallest unit cost element in the row (column) from the next smallest unit cost element
in the same row (column).

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78
MBA-H2040 Quantitative Techniques for Managers
Step 2: Identify the row or column with the largest penalty among all the rows and columns. If the

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penalties corresponding to two or more rows or columns are equal we select the topmost row and the
extreme left column.

Step 3: We select Xij as a basic variable if Cij is the minimum cost in the row or column with largest
penalty. We choose the numerical value of Xij as high as possible subject to the row and the column

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constraints. Depending upon whether ai or bj is the smaller of the two ith row or jth column is crossed out.

Step 4: The Step 2 is now performed on the uncrossed-out rows and columns until all the basic variables
have been satisfied.

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Example 1.4:

Consider the following transportation problem

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Destination

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Origin

1

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2

3

4

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ai

1

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20

22

17

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4

120

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2

24

37

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9

7

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70

3

32

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37

20

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15

50

bj

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60

40

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30

110

240

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Note: ai=capacity (supply)
bj=requirement (demand)

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Now, compute the penalty for various rows and columns which is shown in the following table:

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Destination

Origin

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1

2

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3

4

ai Column

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Penalty

1

20

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22

17

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4

120 13

2

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24

37

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9

7

70 2

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3

32

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37

20

15

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50 5

bj

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60

40

30

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110

240

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Row Penalty

4

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15

8

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Look for the highest penalty in the row or column, the highest penalty occurs in the second column and

the minimum unit cost i.e. cij in this column is c12=22. Hence assign 40 to this cell i.e. x12=40 and cross

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out the second column (since second column was satisfied. This is shown in the following table:

Destination

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Origin

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1

2

3

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4

ai Column
Penalty

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1

20

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22 40

17

4

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80 13

2

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24

37

9

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7

70 2

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3

32

37

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20

15

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50 5

bj

60

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40

30

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110

240

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79

MBA-H2040 Quantitative Techniques for Managers

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Row Penalty

4

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15

8

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The next highest penalty in the uncrossed-out rows and columns is 13 which occur in the first row and
the minimum unit cost in this row is c14=4, hence x14=80 and cross out the first row. The modified table
is as follows:

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Destination

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Origin

1

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2

3

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4

ai Column
Penalty

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1

20

22

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17

4 0 13

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40

80

2

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24

37

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9

7

70 2

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3

32

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37

20

15

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50 5

bj

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60

40

30

--- Content provided by FirstRanker.com ---

110

240

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Row Penalty

4

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15

8

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The next highest penalty in the uncrossed-out rows and columns is 8 which occurs in the third column
and the minimum cost in this column is c23=9, hence x23=30 and cross out the third column with
adjusted capacity, requirement and penalty values. The modified table is as follows:

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Destination

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Origin

1

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2

3

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4

ai Column
Penalty

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1

20

22

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17

4 0 13

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40

80

2

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24

37

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9

7

40 17

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30

3

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32

37

20

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15

50 17

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bj

60

40

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30

110

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240

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Row Penalty

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8

15

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8

8

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The next highest penalty in the uncrossed-out rows and columns is 17 which occurs in the second row
and the smallest cost in this row is c24=15, hence x24=30 and cross out the fourth column with the
adjusted capacity, requirement and penalty values. The modified table is as follows:

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Destination

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Origin

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1

2

3

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4

ai Column
Penalty

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1

20

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22

17

4 0 13

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40

80

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2

24

37

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9

7

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10 17

30

30

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3

32

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37

20

15

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50 17

bj

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60

40

30

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110

240

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80
MBA-H2040 Quantitative Techniques for Managers

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Row Penalty

8

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15

8

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The next highest penalty in the uncrossed-out rows and columns is 17 which occurs in the second row
and the smallest cost in this row is c21=24, hence xi21=10 and cross out the second row with the adjusted
capacity, requirement and penalty values. The modified table is as follows:

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Destination

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Origin

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1

2

3

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4

ai Column
Penalty

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1

20

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22

17

4 0 13

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40

80

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2

24

37

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9

7

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0 17

10

30

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30

3

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32

37

20

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15

50 17

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bj

60

40

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30

110

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240

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Row Penalty

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8

15

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8

8

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The next highest penalty in the uncrossed-out rows and columns is 17 which occurs in the third row and
the smallest cost in this row is c31=32, hence xi31=50 and cross out the third row or first column. The
modified table is as follows:

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Destination

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Origin

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1

2

3

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4

ai Column
Penalty

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1

20

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22

17

4 0 13

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40

80

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2

24

37

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9

7

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0 17

10

30

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30

3

--- Content provided by FirstRanker.com ---

32

37

20

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15

0 17

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50

bj

60

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40

30

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110

240

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Row Penalty

8

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15

8

8

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The transportation cost corresponding to this choice of basic variables is

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22 * 40 + 4 * 80 + 9 * 30 + 7 * 30 + 24 * 10 + 32 * 50 = 3520

1.4 Modified Distribution Method

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The Modified Distribution Method, also known as MODI method or u-v method, which provides a

minimum cost solution (optimal solution) to the transportation problem. The following are the steps

involved in this method.

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81

MBA-H2040 Quantitative Techniques for Managers
Step 1: Find out the basic feasible solution of the transportation problem using any one of the three
methods discussed in the previous section.

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Step 2: Introduce dual variables corresponding to the row constraints and the column constraints. If
there are m origins and n destinations then there will be m+n dual variables. The dual variables
corresponding to the row constraints are represented by ui, i=1,2,.....m where as the dual variables
corresponding to the column constraints are represented by vj, j=1,2,.....n. The values of the dual

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variables are calculated from the equation given below

ui + vj = cij if xij > 0

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Step 3: Any basic feasible solution has m + n -1 xij > 0. Thus, there will be m + n -1 equation to
determine m + n dual variables. One of the dual variables can be chosen arbitrarily. It is also to be noted
that as the primal constraints are equations, the dual variables are unrestricted in sign.

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Step 4: If xij=0, the dual variables calculated in Step 3 are compared with the cij values of this allocation
as cij ? ui ? vj. If al cij ? ui ? vj 0, then by the theorem of complementary slackness it can be shown that
the corresponding solution of the transportation problem is optimum. If one or more cij ? ui ? vj < 0, we
select the cell with the least value of cij ? ui ? vj and allocate as much as possible subject to the row and

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column constraints. The allocations of the number of adjacent cell are adjusted so that a basic variable
becomes non-basic.

Step 5: A fresh set of dual variables are calculated and repeat the entire procedure from Step 1 to Step 5.

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Example 1.5:
For example consider the transportation problem given below:

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Supply

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1 9 13 36 51

50

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24 12 16 20 1

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100

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14 33 1 23 26

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150

Demand 100

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70

50

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40

40

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300

Step 1: First we have to determine the basic feasible solution. The basic feasible solution using least

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cost method is

x11=50, x22=60, x25=40, x31=50, x32=10, x33=50 and x34=40

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Step 2: The dual variables u1, u2, u3 and v1, v2, v3, v4, v5 can be calculated from the corresponding cij
values, that is

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u1+v1=1

u2+v2=12

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u2+v5=1

u3+v1=14

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u3+v2=33

u3+v3=1

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u3+v4=23

Step 3: Choose one of the dual variables arbitrarily is zero that is u3=0 as it occurs most often in the

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above equations. The values of the variables calculated are

82

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MBA-H2040 Quantitative Techniques for Managers

u1= -13, u2= -21, u3=0
v1=14, v2=33, v3=1, v4=23, v5=22

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Step 4: Now we calculate cij ? ui ? vj values for all the cells where xij=0 (.e. unallocated cell by the basic
feasible solution)
That is

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Cell(1,2)= c12-u1-v2 = 9+13-33 = -11
Cell(1,3)= c13-u1-v3 = 13+13-1 = 25
Cell(1,4)= c14-u1-v4 = 36+13-23 = 26
Cell(1,5)= c15-u1-v5 = 51+13-22 = 42

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Cell(2,1)= c21-u2-v1 = 24+21-14 = 31
Cell(2,3)= c23-u2-v3 = 16+21-1 = 36
Cell(2,4)= c24-u2-v4 = 20+21-23 = 18
Cell(3,5)= c35-u3-v5 = 26-0-22 = 4

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Note that in the above calculation all the cij ? ui ? vj 0 except for cel (1, 2) where c12 ? u1 ? v2 = 9+13-
33 = -11.

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Thus in the next iteration x12 will be a basic variable changing one of the present basic variables

non-basic. We also observe that for allocating one unit in cell (1, 2) we have to reduce one unit in cells

(3, 2) and (1, 1) and increase one unit in cell (3, 1). The net transportation cost for each unit of such

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reallocation is

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-33 -1 + 9 +14 = -11

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The maximum that can be allocated to cell (1, 2) is 10 otherwise the allocation in the cell (3, 2)

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will be negative. Thus, the revised basic feasible solution is

x11=40, x12=10, x22=60, x25=40, x31=60, x33=50, x34=40

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1.5 Unbalanced Transportation Problem

In the previous section we discussed about the balanced transportation problem i.e. the total supply

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(capacity) at the origins is equal to the total demand (requirement) at the destination. In this section we

are going to discuss about the unbalanced transportation problems i.e. when the total supply is not equal

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to the total demand, which are called as unbalanced transportation problem.

In the unbalanced transportation problem if the total supply is more than the total demand then

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we introduce an additional column which will indicate the surplus supply with transportation cost zero.

Similarly, if the total demand is more than the total supply an additional row is introduced in the

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transportation table which indicates unsatisfied demand with zero transportation cost.

Example 1.6:

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Consider the following unbalanced transportation problem

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Warehouses

83

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MBA-H2040 Quantitative Techniques for Managers
Plant w1 w2 w3 Supply

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20

17

25

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X

400

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10

10

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20

Y

500

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Demand 400

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400

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500

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In this problem the demand is 1300 whereas the total supply is 900. Thus, we now introduce an

additional row with zero transportation cost denoting the unsatisfied demand. So that the modified

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transportation problem table is as follows:

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Warehouses

Plant w1 w2 w3 Supply

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20

17

25

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X

400

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10

10

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20

Y

500

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Unsatisfied

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0

0

0

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Demand

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400

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Demand

400

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400

500

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1300

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Now we can solve as balanced problem discussed as in the previous sections.

1.6. Degenerate Transportation Problem

In a transportation problem, if a basic feasible solution with m origins and n destinations has less than m

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+ n -1 positive Xij i.e. occupied cells, then the problem is said to be a degenerate transportation

problem. The degeneracy problem does not cause any serious difficulty, but it can cause computational

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problem wile determining the optimal minimum solution.

There fore it is important to identify a degenerate problem as early as beginning and take the

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necessary action to avoid any computational difficulty. The degeneracy can be identified through the

following results:

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"In a transportation problem, a degenerate basic feasible solution exists if and only if some

partial sum of supply (row) is equal to a partial sum of demand (column). For example the following

transportation problem is degenerate. Because in this problem

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a1 = 400 = b1

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a2 + a3 = 900 = b2 + b3

Warehouses

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Plant w1 w2 w3 Supply (ai)

84

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MBA-H2040 Quantitative Techniques for Managers

20

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17

25

X

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400

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10

20

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Y

500

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Unsatisfied

0

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0

0

demand

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400

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Demand (bj)

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400

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400

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500

1300

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There is a technique called perturbation, which helps to solve the degenerate problems.

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Perturbation Technique:

The degeneracy of the transportation problem can be avoided if we ensure that no partial sum of

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ai (supply) and bj (demand) is equal. We set up a new problem where

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ai = ai +d

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i = 1, 2, ......, m

bj = bj

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j = 1, 2, ......, n -1

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bn = bn + md

d > 0

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This modified problem is constructed in such a way that no partial sum of ai is equal to the bj.

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Once the problem is solved, we substitute d = 0 leading to optimum solution of the original problem.

Example: 1.7

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Consider the above problem

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Warehouses

Plant w1 w2 w3 Supply (ai)

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20

17

25

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X

400 + d

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10

10

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20

Y

500 + d

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Unsatisfied

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0

0

0

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demand

400 + d

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Demand (bj)

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400

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400

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500 + 3d 1300 + 3d

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Now this modified problem can be solved by using any of the three methods viz. North-west Corner,
Least Cost, or VAM.

1.7 Transshipment Problem

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There could be a situation where it might be more economical to transport consignments in several sages

that is initially within certain origins and destinations and finally to the ultimate receipt points, instead of

transporting the consignments from an origin to a destination as in the transportation problem.

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MBA-H2040 Quantitative Techniques for Managers

The movement of consignment involves tow different modes of transport viz. road and railways

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or between stations connected by metre gauge and broad gauge lines. Similarly it is not uncommon to

maintain dumps for central storage of certain bulk material. These require transshipment.

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Thus for the purpose of transshipment the distinction between an origin and destination is

dropped so that from a transportation problem with m origins and n destinations we obtain a

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transshipment problem with m + n origins and m + n destinations.

The formulation and solution of a transshipment problem is illustrated with the following

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Example 1.8.

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Example 1.8:

Consider the following transportation problem where the origins are plants and destinations are depots.

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Table 1

Depot

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Plant

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Supply

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150

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$3

$15

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300

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$3

$5

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$25

Demand

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150

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150

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150 450

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When each plant is also considered as a destination and each depot is also considered as an

origin, there are altogether five origins and five destinations. So that some additional cost data are

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necessary, they are as follows:

Table 2

Unit transportation cost From Plant To Plant

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Plant A

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Plant B

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From

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Plant A

0

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Plant B

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2

0

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Table 3

Unit transportation cost From Depot To Depot

To

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Depot X

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Depot Y

Depot Z

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MBA-H2040 Quantitative Techniques for Managers

From

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Depot X

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0

25

2

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Depot Y

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2

0

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Depot Z

55

3

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0

Table 4

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Unit transportation cost From Depot to Plant

To

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Plant A

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Plant B

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From

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Depot X

3

15

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Depot Y

25

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Depot Z

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45

55

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Now, from the Table

1, Table 2, Table 3, Table 4

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we obtain the transportation formulation of the transshipment problem, which is shown in the Table 5.

Table 5

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Transshipment Table

Supply

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A

B

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A

150+450=600

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0

55

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1

3

15

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B

300+450=750

2

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0

3

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5

25

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450

3

15

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0

25

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Y

450

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25

3

2

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0

3

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450

45

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55

55

3

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Demand

450

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450

150+450= 150+450= 150+450=

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600

600

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600

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A buffer stock of 450 which is the total supply and total demand in the original transportation

problem is added to each row and column of the transshipment problem. The resulting transportation

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problem has m + n = 5 origins and m + n = 5 destinations.

By solving the transportation problem presented in the Table 5, we obtain

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x11=150

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x13=300

x14=150

x21=3001

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x22=450

x33=300

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x35=150

x44=450

x55=450

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The transshipment problem explanation is as follows:

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MBA-H2040 Quantitative Techniques for Managers

1. Transport x21=300 from plant B to plant A. This increase the availability at plant A to 450 units

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including the 150 originally available from A.

2. From plant A transport x13=300 to depot X and x14=150 to depot Y.
3. From depot X transport x35=150 to depot Z.

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Thus, the total cost of transshipment is:

2*300 + 3 * 150 + 1*300 + 2*150 = $1650

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Note: The consignments are transported from pants A, B to depots X, Y, Z only according to the
transportation Table 1, the minimum transportation cost schedule is x13=150 x21=150 x22=150 with a
minimum cost of 3450.

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Thus, transshipment reduces the cost of consignment movement.

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1.8 Transportation Problem Maximization

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There are certain types of transportation problem where the objective function is to be maximized

instead of minimized. These kinds of problems can be solved by converting the maximization problem

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into minimization problem. The conversion of maximization into minimization is done by subtracting

the unit costs from the highest unit cost of the table.

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The maximization of transportation problem is illustrated with the following Example 1.9.

Example 1.9:

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A company has three factories located in three cities viz. X, Y, Z. These factories supplies consignments

to four dealers viz. A, B, C and D. The dealers are spread all over the country. The production capacity

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of these factories is 1000, 700 and 900 units per month respectively. The net return per unit product is

given in the following table.

Dealers

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Factory

A

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C

D

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capacity

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X

6

6

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6

4

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1000

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4

2

4

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5

700

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Z

900

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5

6

7

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Requirement 900

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800 500 400 2600

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Determine a suitable allocation to maximize the total return.

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88
MBA-H2040 Quantitative Techniques for Managers

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This is a maximization problem. Hence first we have to convert this in to minimization problem.

The conversion of maximization into minimization is done by subtracting the unit cost of the table from

the highest unit cost.

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Look the table, here 8 is the highest unit cost. So, subtract all the unit cost from the 8, and then

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we get the revised minimization transportation table, which is given below.

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Dealers

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Factory

A

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C

D

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capacity

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X

2

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2

2

4

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1000 = a1

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4

6

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4

3

700 =a2

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Z

900 =a3

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3

2

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1

0

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Requirement 900=b1

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800=b2 500=b3 400=b4 2600

Now we can solve the problem as a minimization problem.

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The problem here is degenerate, since the partial sum of a1=b2+b3 or a3=b3. So consider the

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corresponding perturbed problem, which is shown below.

Dealers

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Factory

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B

C

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capacity

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2

2

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2

4

1000+d

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Y

4

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6

4

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3

700+d

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--- Content provided by‌ FirstRanker.com ---

Z

900+d

3

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2

1

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Requirement 900

800 500 400+3d 2600+3d

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First we have to find out the basic feasible solution. The basic feasible solution by lest cost

method is x11=100+d, x22=700-d, x23=2d, x33=500-2d and x34=400+3d.

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Once if the basic feasible solution is found, next we have to determine the optimum solution

using MODI (Modified Distribution Method) method. By using this method we obtain

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u1+v1=2

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u1+v2=2

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u2+v2=6

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u2+v3=4

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u3+v3=1

u3+v4=0

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Taking u1=0 arbitrarily we obtain

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u1=0, u2=4, u3=1 and

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v1=2, v2=3, v3=0

On verifying the condition of optimality, we know that

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MBA-H2040 Quantitative Techniques for Managers

C12-u1-v2 < 0

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and

C32-u3-v2 <0

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So, we allocate x12=700-d and make readjustment in some of the other basic variables.

The revised values are:

x11=200+d, x12=800, x21=700-d, x23=2d, x33=500-3d, and x34=400+3d

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u1+v1=2

u1+v2=2

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u2+v1=4

u2+v3=4

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u3+v3=1

u3+v4=0

Taking u1=0 arbitrarily we obtain

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u1=0, u2=2, u3=-1

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v1=2, v2=2, v3=2, v4=1

Now, the optimality condition is satisfied.

Finally, taking d=0 the optimum solution of the transportation problem is

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X11=200, x12=800, x21=700, x33=500 and x34=400

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Thus, the maximum return is:

6*200 + 6*800 + 4*700 + 7*500 + 8*400 = 15500

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1.9 Summary

Transportation Problem is a special kind of linear programming problem. Because of the transportation

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problem special structure the simplex method is not suitable. But which may be utilized to make

efficient computational techniques for its solution.

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Generally transportation problem has a number of origins and destination. A certain amount of

consignment is available in each origin. Similarly, each destination has a certain demand/requirements.

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The transportation problem represents amount of consignment to be transported from different origins to

destinations so that the transportation cost is minimized with out violating the supply and demand

constraints.

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There are two phases in the transportation problem. First is the determination of basic feasible

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solution and second is the determination of optimum solution.

There are three methods available to determine the basic feasible solution, they are

1. North West Corner Method

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2. Least Cost Method or Matrix Minimum Method
3. Vogel's Approximation Method (VAM)

In order to determine optimum solution we can use either one of the following method

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1. Modified Distribution (MODI) Method

Or

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2. Stepping Stone Method

Transportation problem can be generalized into a Transshipment Problem where transportation

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of consignment is possible from origin to origin or destination as well as destination to origin or

90

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MBA-H2040 Quantitative Techniques for Managers
destination. The transshipment problem may be result in an economy way of shipping in some

situations.

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1.10 Key Terms

Origin:

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is the location from which the shipments are dispatched.

Destination: is the location to which the shipments are transported.
Unit Transportation Cost: is the transportation cost per unit from an origin to destination.

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Perturbation Technique: is a method of modifying a degenerate transportation problem in order to
solve the degeneracy.

1.11 Self Assessment Questions

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Q1. Four companies viz. W, X, Y and Z supply the requirements of three warehouses viz. A, B and C
respectively. The companies' availability, warehouses requirements and the unit cost of transportation
are given in the following table. Find an initial basic feasible solution using

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a. North West Corner Method
b. Least Cost Method
c. Vogel Approximation Method (VAM)

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Warehouses

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Company

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B

C

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Supply

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--- Content provided by FirstRanker.com ---

W

10

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8

9

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--- Content provided by FirstRanker.com ---

X

5

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2

3

20

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Y

30

6

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7

4

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35

7

6

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Requirement

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25

26

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49 100

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Q2. Find the optimum Solution of the following Problem using MODI method.

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Destination

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Source

1

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2

3

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Capacity

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A 42

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9

10

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9

11

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10

12

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Demand 35 40 25 100

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91

MBA-H2040 Quantitative Techniques for Managers
Q3. The ABT transport company ships truckloads of food grains from three sources viz. X, Y, Z to four

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mills viz. A, B, C, D respectively. The supply and the demand together with the unit transportation cost
per truckload on the different routes are described in the following transportation table. Assume that the
unit transportation costs are in hundreds of dollars. Determine the optimum minimum shipment cost of
transportation using MODI method.

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Mill

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Source

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A

B

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D

Supply

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10

2

20

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11

15

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Y

12

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7

9

20

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10

4

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14

16

18

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Demand 5 15 15 15

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Q4. An organization has three plants at X, Y, Z which supply to warehouses located at A, B, C, D, and E
respectively. The capacity of the plants is 800, 500 and 900 per month and the requirement of the
warehouses is 400, 400, 500, 400 and 800 units respectively. The following table shows the unit
transportation cost.

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A

B

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C

D E

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$5

$8

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$6

$6

$3

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$4

$7

$7

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$6

$6

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$8

$4

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$6

$6

$3

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Determine an optimum distribution for the organization in order to minimize the total cost of

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transportation.

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Q5. Solve the following transshipment problem

Consider a transportation problem has tow sources and three depots. The availability, requirements and
unit cost are as follows:

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Depot

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Source

D1

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D2

D3 Availability

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9

8

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S2

1

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7

8

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30

Requirement 20 20 20 60

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In addition to the above, suppose that the unit cost of transportation from source to source and from
depot to depot are as:

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Source

92

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MBA-H2040 Quantitative Techniques for Managers

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S1

S2

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Source

0

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S2 2

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Depot

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D1

D2

D3

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0

2

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Depot

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D2

2

0

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D3 1

9

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0

Find out minimum transshipment cost of the problem and also compare this cost with the corresponding

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minimum transportation cost.

Q6. Saravana Store, T.Nagar, Chennai interested to purchase the following type and quantities of dresses

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Dress

V

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W

X

Y

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Z

Type

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Quantity

150

100

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75

250

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200

Four different dress makers are submitted the tenders, who undertake to supply not more than the
quantities indicated below:

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Dress

A

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B

C

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D

Maker

Dress

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300

250

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150

200

Quantity

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Saravana Store estimates that its profit per dress will vary according to the dress maker as indicates in
the following table:

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V W

X

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Y Z

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2.75

3.5

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4.25

2.25

1.5

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3

3.25

4.5

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1.75

1

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C

2.5

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3.5

4.75

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2

1.25

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D

3.25

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2.75

4

2.5

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1.75

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Determine how should the orders to be places for the dresses so as to maximize the profit.

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1.12 Key Solutions

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Q1. a. x11 = 15, x21 = 10, x22 = 10, x32 = 16, x33 = 14, x43 = 35

Minimum Cost is: 753

b. x13 = 15, x22 = 20, x33 = 30, x41 = 25, x42 = 6, x43 = 4

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Minimum Cost is: 542

c. x13=15, x22=20, x33=30, x41=25, x42=6, x43=4

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Minimum Cost is: 542

Q2. x11=2, x12=40, x21=30, x31=3, x33=25

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Minimum Transportation Optimal cost is: 901.

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Q3. x12=5, x14=10, x22=10, x23=15, x31=5, x34=5

Minimum Optimal Cost is: $435

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Q4. x15=800, x21=400, x24=100, x32=400, x33=200, x34=300, x43=300 (supply shortage)

Minimum Cost of Transportation is: $9200

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Q5. Transportation Problem

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S1-D2=10, S1-D3=20, S2-D1=20, S2-D2=10 and

Minimum Transportation Cost is: 100

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Transshipment Problem

x11=60, x12=10, x15=20, x22=50, x23=40, x33=40, x34=20, x44=60, x55=60 and
Minimum Transshipment Cost is: 100

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Q6. 150 dresses of V and 50 dresses of Z by Dress Maker A

250 dresses of Y by Dress Maker B

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150 dress of Z by Dress Maker C

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100 dress of W and 75 dresses of X by Dress Maker D

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Maximum Profit is: 1687.50

1.13 Further References

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Hamdy A Taha. 1999. Introduction to Operations Research, PHI Limited, New Delhi.

Mustafi, C.K. 1988. Operations Research Methods and Practice, Wiley Eastern Ltd., New Delhi.

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Mittal, K.V. 1976. Optimization Methods in Operations Research and Systems Analysis, Wiley Eastern
Ltd., New Delhi.

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MBA-H2040 Quantitative Techniques for Managers

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UNIT II

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S

2 ASSIGNMENT PROBLEM

S

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E

L

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LESSON STRUCTURE

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2.1 Introduction

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2.2 Assignment Problem Structure and

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Solution

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2.3 Unbalanced Assignment Problem

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2.4 Infeasible Assignment Problem

2.5 Maximization in an Assignment

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Problem

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2.6 Crew Assignment Problem

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2.7 Summary

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2.8 Key Solutions

2.9 Self Assessment Questions

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2.10 Key Answers

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2.11 Further References

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MBA-H2040 Quantitative Techniques for Managers

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Objectives
After Studying this lesson, you should be able

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to:

Assignment Problem Formulation
How to solve the Assignment Problem
How to solve the unbalanced problem

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using appropriate method

Make appropriate modification when

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some problems are infeasible

Modify the problem when the objective is

to maximize the objective function

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Formulate and solve the crew assignment

problems

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MBA-H2040 Quantitative Techniques for Managers

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2.1 Introduction

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The Assignment Problem can define as follows:

Given n facilities, n jobs and the effectiveness of each facility to each job, here the problem is to assign

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each facility to one and only one job so that the measure of effectiveness if optimized. Here the

optimization means Maximized or Minimized. There are many management problems has a assignment

problem structure. For example, the head of the department may have 6 people available for assignment

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and 6 jobs to fill. Here the head may like to know which job should be assigned to which person so that

all tasks can be accomplished in the shortest time possible. Another example a container company may

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have an empty container in each of the location 1, 2,3,4,5 and requires an empty container in each of the

locations 6, 7, 8,9,10. It would like to ascertain the assignments of containers to various locations so as

to minimize the total distance. The third example here is, a marketing set up by making an estimate of

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sales performance for different salesmen as well as for different cities one could assign a particular

salesman to a particular city with a view to maximize the overall sales.

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Note that with n facilities and n jobs there are n! possible assignments. The simplest way of

finding an optimum assignment is to write all the n! possible arrangements, evaluate their total cost and

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select the assignment with minimum cost. Bust this method leads to a calculation problem of formidable

size even when the value of n is moderate. For n=10 the possible number of arrangements is 3268800.

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2.2 Assignment Problem Structure and Solution

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The structure of the Assignment problem is similar to a transportation problem, is as follows:

Jobs

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2

...

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1

c

1

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11 c12 ... c1n

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c

1

21 c21 ... c2n

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. . . . .

Workers

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. . . .

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. . . .

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c

1

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n1 cn2 ... cnn

1 1 ... 1

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MBA-H2040 Quantitative Techniques for Managers

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The element cij represents the measure of effectiveness when ith person is assigned jth job. Assume that

the overall measure of effectiveness is to be minimized. The element xij represents the number of ith

individuals assigned to the jth job. Since ith person can be assigned only one job and jth job can be

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assigned to only one person we have the following

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xi1 + xi2 + ................ + xin = 1, where i = 1, 2, . . . . . . . , n

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x1j + x2j + ................ + xnj = 1, where j = 1, 2, . . . . . . . , n

and the objective function is formulated as

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Minimize c11x11 + c12x12 + ........... + cnnxnn

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xij 0

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The assignment problem is actually a special case of the transportation problem where m = n and

ai = bj = 1. However, it may be easily noted that any basic feasible solution of an assignment problem

contains (2n ? 1) variables of which (n ? 1) variables are zero. Because of this high degree of degeneracy

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the usual computation techniques of a transportation problem become very inefficient. So, hat a separate

computation technique is necessary for the assignment problem.

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The solution of the assignment problem is based on the following results:

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"If a constant is added to every element of a row/column of the cost matrix of an assignment

problem the resulting assignment problem has the same optimum solution as the original assignment

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problem and vice versa". ? This result may be used in two different methods to solve the assignment

problem. If in an assignment problem some cost elements cij are negative, we may have to convert them

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into an equivalent assignment problem where all the cost elements are non-negative by adding a suitable

large constant to the cost elements of the relevant row or column, and then we look for a feasible

solution which has zero assignment cost after adding suitable constants to the cost elements of the

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various rows and columns. Since it has been assumed that all the cost elements are non-negative, this

assignment must be optimum. On the basis of this principle a computational technique known as

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Hungarian Method is developed. The Hungarian Method is discussed as follows.

Hungarian Method:

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The Hungarian Method is discussed in the form of a series of computational steps as follows, when the

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objective function is that of minimization type.

Step 1:

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MBA-H2040 Quantitative Techniques for Managers
From the given problem, find out the cost table. Note that if the number of origins is not equal to the

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number of destinations then a dummy origin or destination must be added.

Step 2:
In each row of the table find out the smallest cost element, subtract this smallest cost element from each

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element in that row. So, that there will be at least one zero in each row of the new table. This new table
is known as First Reduced Cost Table.

Step 3:
In each column of the table find out the smallest cost element, subtract this smallest cost element from

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each element in that column. As a result of this, each row and column has at least one zero element. This
new table is known as Second Reduced Cost Table.

Step 4:
Now determine an assignment as follows:

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1. For each row or column with a single zero element cell that has not be assigned or

eliminated, box that zero element as an assigned cell.

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2. For every zero that becomes assigned, cross out all other zeros in the same row and for

column.

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3. If for a row and for a column there are two or more zero and one can't be chosen by

inspection, choose the assigned zero cell arbitrarily.

4. The above procedures may be repeated until every zero element cell is either assigned

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(boxed) or crossed out.

Step 5:

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An optimum assignment is found, if the number of assigned cells is equal to the number of rows (and
columns). In case we had chosen a zero cell arbitrarily, there may be an alternate optimum. If no
optimum solution is found i.e. some rows or columns without an assignment then go to Step 6.

Step 6:

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Draw a set of lines equal to the number of assignments which has been made in Step 4, covering all the
zeros in the following manner

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1. Mark check () to those rows where no assignment has been made.

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2. Examine the checked () rows. If any zero element cel occurs in those rows, check () the

respective columns that contains those zeros.

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3. Examine the checked () columns. If any assigned zero element occurs in those columns,

check () the respective rows that contain those assigned zeros.

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4. The process may be repeated until now more rows or column can be checked.

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5. Draw lines through all unchecked rows and through all checked columns.

Step 7:

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Examine those elements that are not covered by a line. Choose the smallest of these elements and
subtract this smallest from all the elements that do not have a line through them.

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MBA-H2040 Quantitative Techniques for Managers

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Add this smallest element to every element that lies at the intersection of two lines. Then the

resulting matrix is a new revised cost table.

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Example 2.1:

Problem
A work shop contains four persons available for work on the four jobs. Only one person can work on

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any one job. The following table shows the cost of assigning each person to each job. The objective is to
assign person to jobs such that the total assignment cost is a minimum.

Jobs

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1

2

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20 25 22 28

A

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15 18 23 17

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Persons

B

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19 17 21 24

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25 23 24 24

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Solution

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As per the Hungarian Method

Step 1: The cost Table

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Jobs

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3

4

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A

20 25 22 28

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Persons

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B

15 18 23 17

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C

19 17 21 24

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25 23 24 24

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MBA-H2040 Quantitative Techniques for Managers

Step 2: Find the First Reduced Cost Table

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Jobs

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3

4

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A 0 5 2 8

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0 3 8 2

Persons

B

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2 0 4 7

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2 0 1 1

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Step 3: Find the Second Reduced Cost Table

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Jobs

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1

2

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3

4

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A 0 5 1 7

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0 3 7 1

Persons

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2 0 3 6

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2 0 0 0

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Step 4: Determine an Assignment

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By examine row A of the table in Step 3, we find that it has only one zero (cell A1) box this zero and
cross out all other zeros in the boxed column. In this way we can eliminate cell B1.

Now examine row C, we find that it has one zero (cell C2) box this zero and cross out (eliminate) the

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zeros in the boxed column. This is how cell D2 gets eliminated.

There is one zero in the column 3. Therefore, cell D3 gets boxed and this enables us to eliminate cell
D4.

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Therefore, we can box (assign) or cross out (eliminate) all zeros.

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The resultant table is shown below:

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MBA-H2040 Quantitative Techniques for Managers

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Jobs

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1

2

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3

4

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0 5 1 7

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Persons

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B

0 3 7 1

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C

2 3 6

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D

2 0 0

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Step 5:

0

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The solution obtained in Step 4 is not optimal. Because we were able to make three assignments when
four were required.

Step 6:

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Cover all the zeros of the table shown in the Step 4 with three lines (since already we made three
assignments).

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Check row B since it has no assignment. Note that row B has a zero in column 1, therefore check

column1. Then we check row A since it has a zero in column 1. Note that no other rows and columns are

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checked. Now we may draw three lines through unchecked rows (row C and D) and the checked column

(column 1). This is shown in the table given below:

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Jobs

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1

2

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3

4

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A 5 1 7

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Persons

B

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0 3 7 1

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C

2 3 6

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D

2 0 0

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MBA-H2040 Quantitative Techniques for Managers

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Step 7:
Develop the new revised table.

Examine those elements that are not covered by a line in the table given in Step 6. Take the smallest

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element in this case the smallest element is 1. Subtract this smallest element from the uncovered cells

and add 1 to elements (C1 and D1) that lie at the intersection of two lines. Finally, we get the new

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revised cost table, which is shown below:

Jobs

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1

2

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A 0 4 0 6

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Persons

B

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0 2 6 0

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C

3 0 3 6

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D

3 0 0 0

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Step 8:

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Now, go to Step 4 and repeat the procedure until we arrive at an optimal solution (assignment).

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Step 9:

Determine an assignment

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Examine each of the four rows in the table given in Step 7, we may find that it is only row C which has
only one zero box this cell C2 and cross out D2.

Note that all the remaining rows and columns have two zeros. Choose a zero arbitrarily, say A1 and box

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this cell so that the cells A3 and B1 get eliminated.

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Now row B (cell B4) and column 3 (cell D4) has one zero box these cells so that cell D4 is eliminated.

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Thus, all the zeros are either boxed or eliminated. This is shown in the following table

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MBA-H2040 Quantitative Techniques for Managers

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Jobs

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2

3

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0

A 4 0 6

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Persons

B

0 2 6

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--- Content provided by FirstRanker.com ---

3 3 6

0

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D

3 0 0

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Since the number of assignments equal to the number of rows (columns), the assignment shown

in the above tale is optimal.

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The total cost of assignment is: 78 that is A1 + B4 + C2 + D3

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20 + 17 + 17 + 24 = 78

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2.3 Unbalanced Assignment Problem

0

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In the previous section we assumed that the number of persons to be assigned and the number of jobs

were same. Such kind of assignment problem is called as balanced assignment problem. Suppose if

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the number of person is different from the number of jobs then the assignment problem is called as

unbalanced.

If the number of jobs is less than the number of persons, some of them can't be assigned any job. So that

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we have to introduce on or more dummy jobs of zero duration to make the unbalanced assignment

problem into balanced assignment problem. This balanced assignment problem can be solved by using

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the Hungarian Method as discussed in the previous section. The persons to whom the dummy jobs are

assigned are left out of assignment.

Similarly, if the number of persons is less than number of jobs then we have introduce one or more

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dummy persons with zero duration to modify the unbalanced into balanced and then the problem is

solved using the Hungarian Method. Here the jobs assigned to the dummy persons are left out.

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104

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MBA-H2040 Quantitative Techniques for Managers
Example 2.2:

Solve the following unbalanced assignment problem of minimizing the total time for performing all the
jobs.

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Jobs

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1 2 3 4 5

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--- Content provided by FirstRanker.com ---

A 5 2 4 2 5

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B

2 4 7 6 6

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Workers

C

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6 7 5 8 7

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--- Content provided by‌ FirstRanker.com ---

5 2 3 3 4

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E

8 3 7 8 6

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3 6 3 5 7

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Solution

In this problem the number of jobs is less than the number of workers so we have to introduce a dummy

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job with zero duration.

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105

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MBA-H2040 Quantitative Techniques for Managers
The revised assignment problem is as follows:

Jobs

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1 2 3 4 5 6

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A 5 2 4 2 5 0

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--- Content provided by‍ FirstRanker.com ---

2 4 7 6 6 0

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--- Content provided by‍ FirstRanker.com ---

Workers

--- Content provided by‍ FirstRanker.com ---

C

6 7 5 8 7 0

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--- Content provided by FirstRanker.com ---

D

5 2 3 3 4 0

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--- Content provided by FirstRanker.com ---

8 3 7 8 6 0

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F

3 6 3 5 7 0

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Now the problem becomes balanced one since the number of workers is equal to the number jobs. So
that the problem can be solved using Hungarian Method.

Step 1: The cost Table

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Jobs

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1 2 3 4 5 6

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--- Content provided by‍ FirstRanker.com ---

A 5 2 4 2 5 0

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Workers

B

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2 4 7 6 6 0

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--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

C

6 7 5 8 7 0

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--- Content provided by FirstRanker.com ---

D

5 2 3 3 4 0

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--- Content provided by FirstRanker.com ---

8 3 7 8 6 0

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F

3 6 3 5 7 0

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MBA-H2040 Quantitative Techniques for Managers

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Step 2: Find the First Reduced Cost Table

Jobs

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1 2 3 4 5 6

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--- Content provided by FirstRanker.com ---

A 5 2 4 2 5 0

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--- Content provided by‌ FirstRanker.com ---

2 4 7 6 6 0

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--- Content provided by⁠ FirstRanker.com ---

Workers

--- Content provided by FirstRanker.com ---

C

6 7 5 8 7 0

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--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

D

5 2 3 3 4 0

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--- Content provided by FirstRanker.com ---

8 3 7 8 6 0

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F

3 6 3 5 7 0

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Step 3: Find the Second Reduced Cost Table

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Jobs

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1 2 3 4 5 6

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--- Content provided by‍ FirstRanker.com ---

A 3 0 1 0 1 0

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B

0 2 4 4 2 0

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Workers

C

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4 5 2 6 3 0

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--- Content provided by FirstRanker.com ---

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D

3 0 0 1 0 0

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--- Content provided by⁠ FirstRanker.com ---

E

6 1 4 6 2 0

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--- Content provided by FirstRanker.com ---

1 4 0 3 3 0

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MBA-H2040 Quantitative Techniques for Managers

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Step 4: Determine an Assignment

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By using the Hungarian Method the assignment is made as follows:

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Jobs

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1 2 3 4 5 6

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--- Content provided by FirstRanker.com ---

A 3 0 1

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0 1 0

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--- Content provided by FirstRanker.com ---

B

2 4 4 2 0

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Workers

C

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4

0

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5 2 6 3

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--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

3 0 0 1 0

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--- Content provided by FirstRanker.com ---

E

6 1 4 6 2 0

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--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

F

1 4 3 3 0

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0

Step 5:

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The solution obtained in Step 4 is not optimal. Because we were able to make five assignments

when six were required.

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Step 6:

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Cover all the zeros of the table shown in the Step 4 with five lines (since already we made five

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assignments).

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Check row E since it has no assignment. Not

0 e that row B has a zero in column 6, therefore check

column6. Then we check row C since it has a zero in column 6. Note that no other rows and columns are

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checked. Now we may draw five lines through unchecked rows (row A, B, D and F) and the checked
column (column 6). This is shown in the table given below:

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MBA-H2040 Quantitative Techniques for Managers

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Jobs

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1 2 3 4 5 6

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--- Content provided by FirstRanker.com ---

A 3 0 1

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0 1 0

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B

2 4 4 2 0

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Workers

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C

4

0

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5 2 6 3

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--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

D

3 0 0 1 0

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--- Content provided by‍ FirstRanker.com ---

E

6 1 4 6 2 0

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F

1 4 3 3 0

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0

Step 7:

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Develop the new revised table.

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Examine those elements that are not covered by a line in the table given in Step 6. Take the

smallest element in this case the smallest element is 1. Subtract this smallest element from the

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uncovered cells and add 1 to elements (A6, B6, D6 and F6) that lie at the intersection of two lines.
Finally, we get the new revised cost table, which is shown below:

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Jobs

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1 2 3 4 5 6

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0

109

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--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

A 3 0 1 0 1 1

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--- Content provided by‍ FirstRanker.com ---

B

0 2 4 4 2 1

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Workers

C

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3 4 1 5 2 0

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--- Content provided by‌ FirstRanker.com ---

D

3 0 0 1 0 1

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E

5 0 3 5 1 0

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--- Content provided by‍ FirstRanker.com ---

1 4 0 3 3 1

Step 8:

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Now, go to Step 4 and repeat the procedure until we arrive at an optimal solution (assignment).

Step 9:

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Determine an assignment

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Jobs

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1 2 3 4 5 6

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--- Content provided by FirstRanker.com ---

0

A 3 0 1 1 1

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--- Content provided by‍ FirstRanker.com ---

2 4 4 2 1

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Workers

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C

3

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0 4 1 5 2

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--- Content provided by⁠ FirstRanker.com ---

3 0 0 1 1

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--- Content provided by FirstRanker.com ---

E

5 3 5 1 0 0

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1 4 3 3 1

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MBA-H2040 Quantitative Techniques for Managers
Since the number of assignments equal to the number of rows (columns), the assignment shown in the
above tale is optimal.

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Thus, the worker A is assigned to Job4, worker B is assigned to job 1, worker C is assigned to

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job 6, worker D is assigned to job 5, worker E is assigned to job 2, and worker F is assigned to job 3.
Since the Job 6 is dummy so that worker C can't be assigned.

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The total minimum time is: 14 that is A4 + B1 + D5 + E2 + F3

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2 + 2 + 4 + 3 + 3 = 14

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Example 2.3:

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A marketing company wants to assign three employees viz. A, B, and C to four offices located at

W, X, Y and Z respectively. The assignment cost for this purpose is given in following table.

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Offices

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W

X

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Y Z

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A

160 220 240 200

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Employees

B

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100 320 260 160

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--- Content provided by‌ FirstRanker.com ---

100 200 460 250

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Solution

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Since the problem has fewer employees than offices so that we have introduce a dummy

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employee with zero cost of assignment.

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The revised problem is as follows:

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Offices

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X

Y Z

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MBA-H2040 Quantitative Techniques for Managers

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

160 220 240 200

--- Content provided by FirstRanker.com ---

Employees

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100 320 260 160

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

C

100 200 460 250

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--- Content provided by FirstRanker.com ---

0 0 0 0

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Now the problem becomes balanced. This can be solved by using Hungarian Method as in the

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case of Example 2.2. Thus as per the Hungarian Method the assignment made as follows:

Employee A is assigned to Office X, Employee B is assigned to Office Z, Employee C is

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assigned to Office W and Employee D is assigned to Office Y. Note that D is empty so that no one is
assigned to Office Y.

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The minimum cost of assignment is: 220 + 160 + 100 = 480

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2.4 Infeasible Assignment Problem

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Sometimes it is possible a particular person is incapable of performing certain job or a specific

job can't be performed on a particular machine. In this case the solution of the problem takes into
account of these restrictions so that the infeasible assignment can be avoided.

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The infeasible assignment can be avoided by assigning a very high cost to the cells where

assignments are restricted or prohibited. This is explained in the following Example 2.4.

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Example 2.4:

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A computer centre has five jobs to be done and has five computer machines to perform them.

The cost of processing of each job on any machine is shown in the table below.

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Jobs

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1 2 3 4 5

112

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MBA-H2040 Quantitative Techniques for Managers

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

1

70 30 X 60 30

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--- Content provided by FirstRanker.com ---

Computer 2

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X 70 50 30 30

Machines

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3

60 X 50 70 60

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--- Content provided by FirstRanker.com ---

4

60 70 20 40 X

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--- Content provided by‌ FirstRanker.com ---

30 30 40 X 70

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Because of specific job requirement and machine configurations certain jobs can't be done on

certain machines. These have been shown by X in the cost table. The assignment of jobs to the machines
must be done on a one to one basis. The objective here is to assign the jobs to the available machines so
as to minimize the total cost without violating the restrictions as mentioned above.

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Solution

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Step 1: The cost Table

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Because certain jobs cannot be done on certain machines we assign a high cost say for example

500 to these cells i.e. cells with X and modify the cost table. The revised assignment problem is as
follows:

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Jobs

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

1 2 3 4 5

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

1

70 30 500 60 30

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

Computer 2

500 70 50 30 30

Machines

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

3

60 500 50 70 60

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

4

60 70 20 40 500

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--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

30 30 40 500 70

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MBA-H2040 Quantitative Techniques for Managers

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

Now we can solve this problem using Hungarian Method as discussed in the previous sections.

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Step 2: Find the First Reduced Cost Table

--- Content provided by FirstRanker.com ---

Jobs

--- Content provided by‍ FirstRanker.com ---

1 2 3 4 5

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

1

40 0 470 30 0

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

Computer 2

--- Content provided by FirstRanker.com ---

470 40 20 0 0

Machines

--- Content provided by‌ FirstRanker.com ---

3

10 450 0 20 10

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--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

4

40 50 0 20 480

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

0 0 10 470 40

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

Step 3: Find the Second Reduced Cost Table

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Jobs

--- Content provided by FirstRanker.com ---

1 2 3 4 5

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MBA-H2040 Quantitative Techniques for Managers

--- Content provided by FirstRanker.com ---

40 0 470 30 0

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

Computer 2

470 40 20 0 0

--- Content provided by⁠ FirstRanker.com ---

Machines

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

10 450 0 20 10

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

40 50 0 20 480

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

5

0 0 10 470 40

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

Step 4: Determine an Assignment

--- Content provided by FirstRanker.com ---

Jobs

--- Content provided by‍ FirstRanker.com ---

1 2 3 4 5

--- Content provided by FirstRanker.com ---

40 0 470 30 0

--- Content provided by FirstRanker.com ---

Computer 2

--- Content provided by‍ FirstRanker.com ---

470 40 20 0

Machines

--- Content provided by FirstRanker.com ---

3

10 450 20 10

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

4

40 50 0 20 480

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

0 10

0

--- Content provided by⁠ FirstRanker.com ---

470 40

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Step 5:

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The solution obtained in Step 4 is not optimal. Because we were able to make four assignments

when five were required.

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Step 6:

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Cover all the zeros of the table shown in the Step 4 with four lines (since already we made four

assignments).

0

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MBA-H2040 Quantitative Techniques for Managers

--- Content provided by‌ FirstRanker.com ---

Check row 4 since it has no assignment. Note that row 4 has a zero in column 3, therefore check

column3. Then we check row 3 since it has a zero in column 3. Note that no other rows and columns are
checked. Now we may draw four lines through unchecked rows (row 1, 2, 3 and 5) and the checked

--- Content provided by‌ FirstRanker.com ---

column (column 3). This is shown in the table given below:

Jobs

--- Content provided by⁠ FirstRanker.com ---

1 2 3 4 5

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

1

40 0 470 30 0

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

Computer 2

470 40 20 0

Machines

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

0

3

--- Content provided by FirstRanker.com ---

10 450 20 10

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

40 50 0 20 480

--- Content provided by FirstRanker.com ---

5

0 10

--- Content provided by‌ FirstRanker.com ---

0

470 40

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Step 7:

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Develop the new revised table.

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Examine those elements that are not covered by a line in the table given in Step 6. Take the

smallest element in this case the smallest element is 10. Subtract this smallest element from the

--- Content provided by‌ FirstRanker.com ---

uncovered cells and add 1 to elements (A6, B6, D6 and F6) that lie at the intersection of two lines.
Finally, we get the new revised cost table, which is shown below:

Jobs

--- Content provided by FirstRanker.com ---

1 2 3 4 5

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

1

40 0 471 30 0

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

Computer 2

--- Content provided by‌ FirstRanker.com ---

470 40 21 0 0

Machines

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

3

0 440 0 10 0

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--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

4

30 40 0 10 470

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--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

0 0 11 470 40

Step 8:

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Now, go to Step 4 and repeat the procedure until we arrive at an optimal solution (assignment).

--- Content provided by⁠ FirstRanker.com ---

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MBA-H2040 Quantitative Techniques for Managers

--- Content provided by FirstRanker.com ---

Step 9:

Determine an assignment

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Jobs

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1 2 3 4 5

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1

40 0 471 30

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Computer 2

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470 40 21 0

Machines

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440 0 10 0

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4

30 40 10 470

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0

5

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0 11 470 40

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Since the number of assignments equal to the number of rows (columns), the assignment shown

in the above tale is optimal.

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0

Thus, the Machine1 is assigned to Job5, Machine 2 is assigned to job4, Machine3 is assigned to

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job1, Machine4 is assigned to job3 and Machine5 is assigned to job2.

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The minimum assignment cost is: 170

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0

2.5 Maximization in an Assignment Problem

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There are situations where certain facilities have to be assigned to a number of jobs so as to

maximize the overall performance of the assignment. In such cases the problem can be converted into a
minimization problem and can be solved by using Hungarian Method. Here the conversion of

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maximization problem into a minimization can be done by subtracting all the elements of the cost table
from the highest value of that table.

Example 2.5:

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Consider the problem of five different machines can do any of the required five jobs with

different profits resulting from each assignment as illustrated below:

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Machines

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1 2 3 4 5

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1

40 47 50 38 50

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50 34 37 31 46

Jobs

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50 42 43 40 45

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4

35 48 50 46 46

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5

38 72 51 51 49

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Find out the maximum profit through optimal assignment.

Solution

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This is a maximization problem, so that first we have to find out the highest value in the table

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and subtract all the values from the highest value. In this case the highest value is 72.

The new revised table is given below:

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Machines

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1 2 3 4 5

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1

32 35 22 34 22

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22 38 35 41 26

Jobs

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22 30 29 32 27

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4

37 24 22 26 26

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5

34 0 21 21 23

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This can be solved by using the Hungarian Method.

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By solving this, we obtain the solution is as follows:

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MBA-H2040 Quantitative Techniques for Managers

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Jobs

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Machines

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5

2

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The maximum profit through this assignment is: 264

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2.6 Crew Assignment Problem

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The crew assignment problem is explained with the help of the following problem

Problem:

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A trip from Chennai to Coimbatore takes six hours by bus. A typical time table of the bus service

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in both the direction is given in the Table 1. The cost of providing this service by the company based on
the time spent by the bus crew i.e. driver and conductor away from their places in addition to service
times. The company has five crews. The condition here is that every crew should be provided with more
than 4 hours of rest before the return trip again and should not wait for more than 24 hours for the return
trip. Also the company has guest house facilities for the crew of Chennai as well as at Coimbatore.

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Find which line of service is connected with which other line so as to reduce the waiting time to

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the minimum.

Table 1

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Departure from Route Number

Arrival at

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Arrival at

Route Number Departure from

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Chennai

Coimbatore

Chennai

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Coimbatore

06.00

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1

12.00

11.30

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a

05.30

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07.30

2

13.30

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15.00

b

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09.00

11.30

3

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17.30

21.00

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c

15.00

19.00

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4

01.00

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00.30

d

18.30

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00.30

5

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06.30

06.00

e

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00.00

Solution

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For each line the service time is constant so that it does not include directly in the computation. Suppose

if the entire crew resides at Chennai then the waiting times in hours at Coimbatore for different route

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connections are given below in Table 2.

If route 1 is combined with route a, the crew after arriving at Coimbatore at 12 Noon start at 5.30

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next morning. Thus the waiting time is 17.5 hours. Some of the assignments are infeasible. Route c

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MBA-H2040 Quantitative Techniques for Managers
leaves Coimbatore at 15.00 hours. Thus the crew of route 1 reaching Coimbatore at 12 Noon are unable

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to take the minimum stipulated rest of four hours if they are asked to leave by route c. Hence 1-c is an

infeasible assignment. Thus it cost is M (a large positive number).

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Table 2

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Route a b c d e

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17.5 21 M 6.5 12

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16 19.5 M 5 10.5

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3

12 15.5 21.5 M 6.5

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4

4.5 8 4 17.5 23

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23 M 8.5 12 17.5

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Similarly, if the crews are assumed to reside at Coimbatore then the waiting times of the crew in

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hours at Chennai for different route combinations are given below in Table 3.

Table 3

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Route a b c d e

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1

18.5 15 9 5.5 M

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20 16.5 10.5 7 M

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M 20.5 14.5 11 5.5

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4

7.5 M 22 18.5 13

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5

13 9.5 M M 18.5

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Suppose, if the crew can be instructed to reside either at Chennai or at Coimbatore, minimum

waiting time from the above operation can be computed for different route combination by choosing the
minimum of the two waiting times (shown in the Table 2 and Table 3). This is given in the following

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Table 4.

Table 4

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Route a b c d e

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1

17.5* 15 9 5.5 12*

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2

16* 16.5 10.5 5* 10.5*

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12* 15.5* 14.5 11 5.5

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4.5* 8* 14* 17.5* 13

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5

13 9.5 8.5* 12* 17.5*

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Note: The asterisk marked waiting times denotes that the crew are based at Chennai; otherwise they are
based at Coimbatore.

Now we can solve the assignment problem (presented in Table 4) using Hungarian Method.

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Step 1: Cost Table (Table 5)

Table 5

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Route a b c d e

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1

17.5* 15 9 5.5 12*

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16* 16.5 10.5 5* 10.5*

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12* 15.5* 14.5 11 5.5

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4

4.5* 8* 14* 17.5* 13

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5

13 9.5 8.5* 12* 17.5*

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MBA-H2040 Quantitative Techniques for Managers

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Step 2: Find the First Reduced cost table (Table 6)

Table 6

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Route a b c d e

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1

12 9.5 3.5 0 6.5

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11 11.5 5.5 0 5.5

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6.5 10 9 5.5 0

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4

0 3.5 9.5 13 8.5

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5

4.5 1 0 3.5 9

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Step 3: Find the Second Reduced cost table (Table 7)

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Table 7

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Route a b c d e

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12 8.5 3.5 0 6.5

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2

11 10.5 5.5 0 5.5

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3

6.5 9 9 5.5 0

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4

0 2.5 9.5 13 8.5

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4.5 0 0 3.5 9

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MBA-H2040 Quantitative Techniques for Managers
Step 4: Determine an Assignment (Table 8)

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Table 8

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Route a b c d e

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0

1

12 8.5 3.5 6.5

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11 10.5 5.5 0 5.5

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6.5 9 9 5.5

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4

2.5 9.5 13 8.5

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5

4.5 0 3.5 9 0

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Step 5: The solution obtained in Step 4 is not optimal since the number of assignments are less than the
number of rows (columns).

Step 6: Check () row 2 since it

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0 has no assignment and note that row 2 has a zero in column d, therefore

check () column d also. Then check row 1 since it has zero in column d. Draw the lines through the
unchecked rows and checked column using 4 lines (only 4 assignments are made). This is shown in

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Table 9.

Table 9

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Route a b

0 c d e

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1

12 8.5 3.5 6.5

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2

11 10.5 5.5 0 5.5

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3

6.5 9 9 5.5

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2.5 9.5 13 8.5

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5

4.5 0 3.5 9 0

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MBA-H2040 Quantitative Techniques for Managers

Step 7: Develop a new revised table (Table 10)

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Take the smallest element from the elements not covered by the lines in this case 3.5 is the

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smallest element. Subtract all the uncovered elements from 3.5 and add 3.5 to the elements lie at the
intersection of two lines (cells 3d, 4d and 5d). The new revised table is presented in Table 10.

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Table 10

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Route a b c d e

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8.5 5 0 0 3

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2

7.5 7 2 0 2

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3

6.5 9 9 9 0

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4

0 2.5 9.5 16.5 8.5

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4.5 0 0 7 9

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Step 8: Go to Step 4 and repeat the procedure until an optimal solution if arrived.

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Step 9: Determine an Assignment (Table 11)

Table 11

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Route a b c d e

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MBA-H2040 Quantitative Techniques for Managers

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1

8.5 5

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0 0 3

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2

7.5 7 2 2

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3

6.5 9 9 9

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4

2.5 9.5 16.5 8.5

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4.5 0 7 9 0

The assignment

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illustrated in the above

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Table 11 is optimal since the number of assignments is equal to the number of rows (columns).

Thus, the routes to be prepared to achieve the minimum waiting time are as follows:

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1

0 ?

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c, 2 ? d, 3 ? e, 4 ? a and 5 ? b

By referring Table 5, we can obtain the waiting times of these assignments as well as the residence

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(guest house) of the crews. This is presented in the following Table 12.

Table 12

Routes

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Residence of the Crew

Waiting Time

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0

1 ? c

Coimbatore

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9

2 ? d

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Chennai

5

3 ? e

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Coimbatore

5.5

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4 ? a

Chennai

4.5

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5 - b

Coimbatore

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9.5

2.7 Summary

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The assignment problem is used for the allocation of a number of persons to a number of jobs so that the

total time of completion is minimized. The assignment problem is said to be balanced if it has equal

number of person and jobs to be assigned. If the number of persons (jobs) is different from the number

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of jobs (persons) then the problem is said to be unbalanced. An unbalanced assignment problem can be

solved by converting into a balanced assignment problem. The conversion is done by introducing

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dummy person or a dummy job with zero cost.

Because of the special structure of the assignment problem, it is solved by using a special

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method known as Hungarian Method.

2.8 Key Terms

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Cost Table: The completion time or cost corresponding to every assignment is written down in a table
form if referred as a cost table.

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MBA-H2040 Quantitative Techniques for Managers

Hungarian Method: is a technique of solving assignment problems.

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Assignment Problem: is a special kind of linear programming problem where the objective is to
minimize the assignment cost or time.

Balanced Assignment Problem: is an assignment problem where the number of persons equal to the

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number of jobs.

Unbalanced Assignment Problem: is an assignment problem where the number of jobs is not equal to
the number of persons.

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Infeasible Assignment Problem: is an assignment problem where a particular person is unable to
perform a particular job or certain job cannot be done by certain machines.

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2.9 Self Assessment Questions

Q1. A tourist company owns a one car in each of the five locations viz. L1, L2, L3, L4, L5 and a
passengers in each of the five cities C1, C2, C3, C4, C5 respectively. The following table shows the
distant between the locations and cities in kilometer. How should be cars be assigned to the passengers

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so as to minimize the total distance covered.

Cities

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C1

C 2

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C3 C4 C5

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L1 120 110 115 30 36

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Locations

L2

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125 100 95 30 16

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L3

155 90 135 60 50

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L4

160 140 150 60 60

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L5

190 155 165 90 85

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Q2. Solve the following assignment problem
1 2 3 4 5

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Rs.3 Rs.8 Rs.2 Rs.10 Rs.3

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Rs.8 Rs.7 Rs.2 Rs.9 Rs.7

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3

Rs.6 Rs.4 Rs.2 Rs.7 Rs.5

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4

Rs.8 Rs.4 Rs.2 Rs.3 Rs.5

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Rs.9 Rs.10 Rs.6 Rs.9 Rs.10

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Q3. Work out the various steps of the solution of the Example 2.3.

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Q4. A steel company has five jobs to be done and has five softening machines to do them. The cost of
softening each job on any machine is given in the following cost matrix. The assignment of jobs to
machines must be done on a one to one basis. Here is the objective is to assign the jobs to the machines
so as to minimize the total assignment cost without violating the restrictions.

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Jobs

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1 2 3 4 5

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1

80 30 X 70 30

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Softening 2

70 X 60 40 30

Machines

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3

X 80 60 80 70

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4

70 80 30 50 X

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30 30 50 X 80

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Q5. Work out the various steps of the solution of the problem presented in Example 2.5.

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Q6. A marketing manager wants to assign salesman to four cities. He has four salesmen of varying
experience. The possible profit for each salesman in each city is given in the following table. Find out an
assignment which maximizes the profit.

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Cities

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1 2 3 4

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1

25 27 28 38

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Salesmen 2

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28 34 29 40

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3

35 24 32 33

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4

24 32 25 28

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Q7. Shiva's three wife, Rani, Brinda, and Fathima want to earn some money to take care of personal
expenses during a school trip to the local beach. Mr. Shiva has chosen three chores for his wife:
washing, cooking, sweeping the cars. Mr. Shiva asked them to submit bids for what they feel was a fair
pay for each of the three chores. The three wife of Shiva accept his decision. The following table
summarizes the bid received.

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Chores

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Washing Cooking Sweeping

1 2 3

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Rani 25 18 17

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Wife's Brinda

17 25 15

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Fathima

18 22 32

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Q8. Solve the following problem

Office

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O1 O2 O3 O4

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E1

2600 3200 3400 3000

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Employees E2

2000 4200 3600 2600

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E3

2000 3000 5600 4000

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Q9. The railway operates seven days a week has a time table shown in the following table. Crews
(Driver and Guard) must have minimum rest of six hours between trans. Prepare the combination of
trains that minimizes waiting time away from the city. Note that for any given combination the crew will
be based at the city that results in the smaller waiting time and also find out for each combination the

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city where the crew should be based at.

Train No.

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Departure at

Arrival at

Train No.

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Departure at

Arrival at

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Bangalore

Chennai

Chennai

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Bangalore

101

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7 AM

9 AM

201

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9 AM

11 AM

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102

9 AM

11 AM

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202

10 AM

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12 Noon

103

1.30 PM

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3.30 PM

203

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3.30 PM

5.30 PM

104

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7.30 PM

9.30 PM

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204

8 PM

10 PM

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2.10 Key Solutions

Q1. L1 ? C1, L2 ? C3, L3 ? C2, L4 _ C4, L5 ? C5 and

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Minimum Distance is: 450

Q2. 1 ? 5, 2 ? 3, 3 ? 2, 4 ? 4, 5 ? 1 and
Minimum Cost is: Rs.21

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Q4. 1 ? 2, 2 ? 4, 3 ? 3, 4 ? 4, 5 ? 1 and
Minimum Assignment Cost is:

Q6. 1 - 1, 2 ? 4, 3 ? 3, 4 ? 2 and

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Maximum Profit is: 139

Q7. Rani ? Cooking, Brinda ? Sweeping, Fathima ? Washing and
Minimum Bids Rate is: 51

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Q8. E1 ? O2, E2 ? O4, E3 ? O1
Since E4 is empty, Office O3 cannot be assigned to any one.
Minimum Cost is: 7800

Q9.

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Trains

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Cities

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201 ? 103

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Bangalore

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202 ? 104

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Chennai

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203 ? 101

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Bangalore

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204 ? 102

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Bangalore

2.11 Further References

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Hamdy A Taha, 1999. Introduction to Operations Research, PHI Limited, New Delhi.

Cooper, L and D. Steinberg, 1974. Methods and Applications of Linear Programmings, Saunders,
Philadelphia, USA.

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Mustafi, C.K. 1988. Operations Research Methods and Practices, Wiley Eastern Limited, New Delhi.

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MBA-H2040 Quantitative Techniques for Managers

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UNIT II

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3 INTRODUCTION TO INVENTORY MANAGEMENT

ON
S

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S
E

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LESSON STRUCTURE

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3.1 Introduction

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3.2 Objectives of Inventory

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3.3 Inventory is an Essential Requirement

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3.4 Basic Functions of Inventory

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3.5 Types of Inventory

3.6 Factors Affecting Inventory

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3.7 Summary

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3.8 Key Terms

Objectives

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3.9 Self Assessment Questions

After Studying this lesson, you should be able

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3.10 Further References

to:

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Understand what is inventory

Describe various inventory concepts

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Describe the objectives of inventory

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Explain the functions of inventory

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Describe requirements of inventory

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Explain different types of inventory

Describe different factors affecting

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inventory

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MBA-H2040 Quantitative Techniques for Managers
3.1 Introduction

Simply inventory is a stock of physical assets. The physical assets have some economic value, which

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can be either in the form of material, men or money. Inventory is also called as an idle resource as long

as it is not utilized. Inventory may be regarded as those goods which are procured, stored and used for

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day to day functioning of the organization.

Inventory can be in the form of physical resource such as raw materials, semi-finished goods

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used in the process of production, finished goods which are ready for delivery to the consumers, human

resources, or financial resources such as working capital etc.

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Inventories means measures of power and wealth of a nation or of an individual during centuries

ago. That is a business man or a nation's wealth and power were assessed in terms of grammes of gold,

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heads of cattle, quintals of rice etc.

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In recent past, inventories mean measure of business failure. Therefore, businessmen have

started to put more emphasis on the liquidity of assets as inventories, until fast turnover has become a

goal to be pursues for its own sake.

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Today inventories are viewed as a large potential risk rather than as a measure of wealth due to

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the fast developments and changes in product life. The concept of inventories at present has necessitated

the use of scientific techniques in the inventory management called as inventory control.

Thus, inventory control is the technique of maintaining stock items at desired levels. In other

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words, inventory control is the means by which material of the correct quality and quantity is made

available as and when it is needed with due regard to economy in the holding cost, ordering costs, setup

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costs, production costs, purchase costs and working capital.

Inventory Management answers two questions viz. How much to order? and when to order?

Management scientist insisting that the inventory is an very essential requirement. Why? This is

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illustrated in the next section with the help of materials conversion process diagram.

3.2 Objectives of Inventory

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Inventory has the following main objectives:

To supply the raw material, sub-assemblies, semi-finished goods, finished goods, etc. to

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its users as per their requirements at right time and at right price.

To maintain the minimum level of waste, surplus, inactive, scrap and obsolete items.
To minimize the inventory costs such as holding cost, replacement cost, breakdown cost

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and shortage cost.

To maximize the efficiency in production and distribution.
To maintain the overall inventory investment at the lowest level.
To treat inventory as investment which is risky? For some items, investment may lead to

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higher profits and for others less profit.

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3.3 Inventory is an Essential Requirement

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Inventory is a part and parcel of every facet of business life. Without inventory no business activity can

be performed, whether it being a manufacturing organization or service organization such as libraries,

banks, hospitals etc. Irrespective of the specific organization, inventories are reflected by way of a

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conversion process of inputs to outputs. The conversion process is illustrated in the figure 3.1 as given

below.

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From the figure 3.1 we can see that there may be stock pints at three stages viz. Input,

Conversion Process and Output. The socks at input are called raw materials whereas the stocks at the

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output are called products. The stocks at the conversion process may be called finished or semi-finished

goods or sometimes may be raw material depending on the requirement of the product at conversion

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process, where the input and output are based on the market situations of uncertainty, it becomes

physically impossible and economically impractical for each stock item to arrive exactly where it is

required and when it is required.

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Random Fluctuations

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Conversion

Inputs

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Inventory

process Inventory

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Sock-points

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Comparing Actual Material

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Stock levels to planned levels

Material Sock-Points

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Land

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Outputs

Labour

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Capital

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Management

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Feed Back

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Product Inventory

Stock-points

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Corrective action: More or less Stocks

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Fig: 3.1 Materials Conversion Process

Even it is physically possible to deliver the stock when it is required, it costs more expensive. This is the

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basic reason for carrying the inventory. Thus, inventories play an essential and pervasive role in any

organization because they make it possible:

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MBA-H2040 Quantitative Techniques for Managers

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To meet unexpected demand
To achieve return on investment
To order largest quantities of goods, components or materials from the suppliers at

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advantageous prices

To provide reasonable customer service through supplying most of the requirements from

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stock without delay

To avoid economically impractical and physically impossible delivering/getting right

amount of stock at right time of required

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To maintain more work force levels
To facilitate economic production runs
To advantage of shipping economies
To smooth seasonal or critical demand

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To facilitate the intermittent production of several products on the same facility
To make effective utilization of space and capital
To meet variations in customer demand
To take the advantage of price discount
To hedge against price increases

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To discount quantity

3.4 Basic Functions of Inventory

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The important basic function of inventory is

Increase the profitability- through manufacturing and marketing support. But zero

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inventory manufacturing- distribution system is not practically possible, so it is
important to remember that each rupee invested in inventory should achieve a specific
goal. The other inventory basic functions are

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Geographical Specialization

Decoupling

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Balancing supply and demand and

Safety stock

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Inventory Investment Alternative

Investment is most important and major part of asset, which should be required to produce a minimum

investment return. The MEC (Marginal Efficiency of Capital) concept holds that an organization should

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invest in those alternatives that produce a higher investment return than capital to borrow. The following

figure 3.2 shows that investment alternative A on the MEC curve is acceptable.

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100

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)

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t ( %

A

c

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c

e

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pt

e

d I

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n

v

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entory Investment

e
n

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s
t
m

ve

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A

Cost of Capital

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I
n

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r
n

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t
u

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Reject Inventory Investment

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20

40

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100

Total Investment Alternatives (in %)

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Fig 3.2 Typical MEC curve

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The curve shows that about 20% of the inventory investment alternatives will produce a return

on investment above the capital cost.

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Geographical Specialization

Another basic inventory function is to allow the geographical specialization individual operating units.

There is a considerable distance between the economical manufacturing location and demand areas due

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to factors of production such as raw material, labour, water, power. So that the goods from various

manufacturing locations are collected at a simple warehouse or plant to assemble in final product or to

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offer consumers a single mixed product shipment. This also provides economic specialization between

manufacturing and distribution units/locations of an organization.

Decoupling

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The provision of maximum efficiency of operations within a single facility is also one of the important

basic functions of the inventory. This is achieved by decoupling, which is done by breaking operations

apart so that one operation(s) supply is independent of another(s) supply.

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The decoupling function serves in two ways of purposes, they are

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1. Inventories are needed to reduce the dependencies among successive stages of operations so that
shortage of materials, breakdowns or other production fluctuations at one stage do not cause later stage
to shut down. This is illustrated in the following figure 3.3 in an engineering unit.

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Raw

D i

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e c a

s ti n

g

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D r il l i

n

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g

D e -

b

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ur

ni

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n g

P a c

ki n

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g Finished

Material

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Products

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Inventory

Inventory

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MBA-H2040 Quantitative Techniques for Managers

Fig: 3.3 Decoupling of operation using inventory

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The figure shows that the de-burning, packing could continue to operate from inventories should

die-casting and drilling be shut down or they can be decoupled from the production processes that

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precede them.

2. One organizational unit schedules its operations independently of another organizational unit.

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For example: Consider an automobile organization, here assembly process can be schedule separately
from engine built up operation, and each can be decoupled from final automobile assembly operations
through in process inventories.

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Supply and Demand Balancing

The function of Balancing concerns elapsed time between manufacturing and using the product.

Balancing inventories exist to reconcile supply with demand. The most noticeable example of balancing

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is seasonal production and year round usage like sugar, rice, woolen textiles, etc. Thus the investment of

balancing inventories links the economies of manufacturing with variations of usage.

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Safety Stock

The safety stock also called as buffer stock. The function of safety stock concerns short range variations

in either replacement or demand. Determination of the safety stock size requires a great deal of

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inventory planning. Safety stock provides protection against two types of uncertainty, they are

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1. Sales in excess of forecast during the replenishment period
2. Delays in replenishment

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Thus, the inventories committed to safety stocks denote the greatest potential for improved

performances. There are different techniques are available to develop safety stocks.

3.5 Types of Inventory

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Inventory may be classified into manufacturing, service and control aspects, which is illustrated in the
figure 3.4 as given below:

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MBA-H2040 Quantitative Techniques for Managers

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Raw Materials/Production Inventory

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Work-in-Process Inventory

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Manufacturing M.R.O Inventory

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Aspect

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Finished Goods Inventory

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Miscellaneous Inventory

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Lot Size Stocks

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y

t

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or
n

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Anticipation Stocks

I
n

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Inventory Service Aspect

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e
s

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of

yp

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Fluctuation Stocks

.

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3

i

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g:

F

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Risk Stocks

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A-Items Inventory

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B-Items Inventory

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Control Aspect

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C-Items Inventory

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MBA-H2040 Quantitative Techniques for Managers

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Each inventory type is discussed in detail are as follows:

Raw Material/Manufacturing Inventory

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There are five types of Manufacturing Inventory, they are

Production Inventory

Items going to final product such a raw materials, sub-assemblies purchased from outside are called

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production inventory.

Work-in-Process Inventory

The items in the form of semi-finished or products at different stage of production process are known as

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work-in-process inventory.

M.R.O. Inventory

Maintenance, Repair and Operating supplies such as spare parts and consumable stores, which do not go

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into final product but are consumed during the production process.

Finished Goods Inventory

Finished Goods Inventory includes the products ready for dispatch to the consumers or

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distributors/retailers.

Miscellaneous Inventory

Items excluding those mentioned above, such as waste, scrap, obsolete, and un-saleable items arising

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from the main production process, stationery used in the office and other items required by office,
factory and other departments, etc. are called miscellaneous inventory.

Service Inventory

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The service inventory can be classified into four types, they are:

Lot Size Stocks

Lot size means purchasing in lots. The reasons for this is to

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Obtain quantity discounts
Minimize receiving and handling costs
Reduce purchase and transport costs

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For example: It would be uneconomical for a textile factory to buy cotton everyday rather than in
bulk during the cotton season.

Anticipation Stocks

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Anticipation stocks are kept to meet predictable changes in demand or in availability of raw materials.

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MBA-H2040 Quantitative Techniques for Managers
For example: The purchase of potatoes in the potato season for sale of roots preservation products
throughout the year.
Fluctuation Stocks

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Fluctuation stocks are carried to ensure ready supplies to consumers in the face of irregular fluctuations
in their demands

Risk Stocks

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Risk stocks are the items required to ensure that there is no risk of complete production breakdown. Risk
stocks are critical and important for production.

Control Inventory

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A good way of examining an inventory control is: to make ABC classification, which is also known as

ABC analysis. ABC analysis means the "control" will be "Always Better" if we start with the ABC

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classification of inventory.

The ABC concepts classifies inventories into three groups in terms of percentage of total value

and percentage of number of inventory items, this is illustrated in the figure 3.5 and 3.6 as given below.

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Values

e

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A

A

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10% 70%

Val

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t
age

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A items

20% 20%

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B

B

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e
r
c
e
n

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B i t e

m

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s 70% 10%

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C

i t

e

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m s

C

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Percentage of Numbers Numbers

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Fig: 3.5 ABC Classification (Frequency Form)

Fig: 3.6 ABC Classification (Tabular Form)

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The three groups of inventory items are called A-items group, B-items group, C-items group,

which are explained as follows:

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A-items Group: This constitutes 10% of the total number of inventory items and 70% of total money
value for all the items.

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MBA-H2040 Quantitative Techniques for Managers

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B-items Group: This constitutes 20% of the total number of inventory items and 20 % of total money
value for all the items.

C-items Group: This constitutes 70% of the total number of inventory items and 10 % of total money
value for all the items. This is just opposite of A-items group.

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The ABC classification provides us clear indication for setting properties of control to the items,

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and A-class item receive the importance first in every respect such as tight control, more security, and

high operating doctrine of the inventory control.

The coupling of ABC classification with VED classification enhances the inventory control

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efficiency. VED classification means Vital, Essential and Desirable Classification. From the above

description, it may be noted that ABC classification is based on the logic of proportionate value while

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VED classification based on experience, judgment, etc. The ABC /VED classification is presented in the

following figure 3.7.

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E

D

Total

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A

3

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5

2

10

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B

5

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7

8

20

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C

10

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40

20

70

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Total

18

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52

30

100

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Fig: 3.7 ABC/VED Classifications

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This is an example of a particular case

The values are expressed in percentage

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Note that the total number of categories becomes nine.

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3.6 Factors Affecting Inventory

The main problem of inventory control is to answer tow questions viz.

1. How much to order? and

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2. When to order?

These questions are answered by developing a inventory model, which is based on the

consideration of the main aspects of inventory viz. demand and cost. There are many factors related with

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these tow main factors (Demand and Cost). In this section we will discuss these different factors.

The different factors are:

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Economic Parameters

Demand

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Ordering Cycle
Delivery Lag

Time Horizon

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MBA-H2040 Quantitative Techniques for Managers

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Stages of Inventory

Number of Supply Echelons

Number and Availability of Items

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Government's and Organization's Policy

Economic Parameters

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There are different types of economic parameters, they are:

Purchase Price

Procurement Costs

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Selling Price

Holding Costs

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Shortage costs

Information Processing System Operating Costs

Purchase Cost

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The cost of the item is the direct manufacturing cost if it is produced in in-house or the cost paid to the

supplier for the item received. This cost usually equal to the purchase price. When the marketing price

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goes on fluctuating, inventory planning is based on the average price mostly it is called as a fixed price.

When price discounts can be secured or when large production runs may result in a decrease in the

production cost, the price factor is of special interest.

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Procurement Costs

The costs of placing a purchase order is known as ordering costs and the costs of initial preparation of a

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production system (if in-house manufacturing) is called as set up cost. These costs are called as

procurement cost, but these costs vary directly with each purchase order placed or with set up made and

are normally assumed independent of the quantity ordered or produced.

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Procurement costs include costs of transportation of items ordered, expediting and follow up,

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goods receiving and inspection, administration (includes telephone bills, computer cost, postage, salaries

of the persons working for tendering, purchasing, paper work, etc.), payment processing etc. This cost is

expressed as the cost per order/setup.

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Holding Costs

The holding costs also called as carrying costs. The cost associated with holding/carrying of stocks is

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called holding cost or carrying cost or possession cost. Holding costs includes handling/carrying cost,

maintenance cost, insurance, safety measures, warehouse rent, depreciation, theft, obsolescence, salaries,

interest on the locked money, etc. Thus, by considering all these elements the storage cost is expressed

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either as per unit of item held per unit of time or as a percentage of average money value of investment

held. Therefore the size of all these holding costs usually increases or decreases in proportion to the

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amount of inventory that is carried.

Shortage Costs

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These costs are penalty costs as a result of running out of stock at the time of item is required. There are

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different forms of shortage cost, which is illustrated in the following figure 3.8. One form of the

shortage costs is called as back order on the selling side or backlogging cost on the production side when

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the unsatisfied demand can be satisfied at later stage that is consumers has to wait till they gests the

supply.

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The second form of shortage costs is called as lost sales costs on the selling side or no

backlogging costs on the production side, when the unsatisfied demand is lost or the consumers goes

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some where else instead of waiting for the supply.

Shortage Costs

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Selling Side

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Production Side

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Back order Costs

Lost Sales Costs

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Backlogging

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No Backlogging

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Costs

Costs

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Fig: 3.8 Nature of Shortage Costs

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These includes the costs of production stoppage, overtime payments, idle machine, loss of

goodwill, loss of sales opportunity, special order at higher price, loss of profits etc.

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Information System Operation Costs

Today there are more inventory records should be maintain in the organization, so that some person

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must update the records either by hand or by using computer. If the inventory levels are not recorded

daily, this operating cost is incurred in obtaining accurate physical inventory record counts. The

operating costs are fixed.

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Demand

A commodity demand pattern may be deterministic or probabilistic.

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Deterministic Demand

In this case, the demand is assumed that the quantities of commodity needed over subsequent periods of

time are known with certainty. This is expressed over equal time periods in terms of known constant

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demands or in terms of variable demands. The two cases are called as static and dynamic demands.

Probabilistic Demand

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This occurs when requirements over a certain time period are not known with certainty but their pattern

can be denoted by a known probability distribution. In this case, the probability distribution is said to be

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stationary or non-stationary over time periods. The terms stationary and non-stationary are equivalent to

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the terms static and dynamic in the deterministic demand.

For a given time period the demand may be instantaneously satisfied at the beginning of the time period

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or uniformly during that time period. The effect of uniform and instantaneous demand directly reflects

on the total cost of carrying inventory.

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Ordering Cycle

The ordering cost is related with the inventory situation time measurement. An ordering cycle can be

identified by the time period between two successive placements of orders. The later may be initiated in

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one of two ways as:

Periodic Review

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Continuous Review

Periodic Review
In this case, the orders are placed at equally intervals of time.

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Continuous Review

In this case, an inventory record is updated continuously until a certain lower limit is reached at this
point a new order is placed. Some times this is referred as the two-bin system.

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Delivery Lag

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The requirement of the inventory is felt and an order is placed, it may be delivered instantaneously or

some times it may be needed before delivery if affected. The time period between the placement of the

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requisition for an item and its receipt for actual use is called as delivery lag. The delivery lags also

known as lead time.

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There are four different types of lead time, they are

Administrative Lead Time

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Transportation Lead Time

Suppliers Lead Time

Inspection Lead Time

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The Inspection Lead Time and Administrative Lead Time can be fixed in nature, where as the

Transportation Lead Time and Suppliers Lead Time can never be fixed. It means generally the lead time

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may be deterministic or probabilistic.

Time Horizon

Time horizon is, the planning period over which inventory is to be controlled. The planning period may

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be finite or infinite in nature. Generally, inventory planning is done on annual basis in most of the

organizations.

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MBA-H2040 Quantitative Techniques for Managers

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Stages of Inventory

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In the sequential production process, if the items/parts are stocked at more than one point they are called

multi-stage inventories. This is illustrated in the following figure 3.9.

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Raw

D i

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e c a

s ti n

g

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D r il l i

n

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g

D e -

b

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ur

ni

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n g

P a c

ki n

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g Finished

Material

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Products

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Inventory

Inventory

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Fig: 3.9 Multistage Inventories

Number of Supply Echelons

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Already we saw that there are several stocking points in the inventory system. These stocking points are

organized in such that one points act as a supply source for some other points. For example, the

production factories supplies the products to warehouse and the warehouse supplies to the retailer and

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then to the consumers. In this the each level of movement of the product is called on echelon. This is

illustrated in the figure 3.10 given below.

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Consumer

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Consumer

Retailer

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Consumer

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Warehouse

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Retailer

Production

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Factory

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Warehouse

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Fig: 3.10 Multi Echelon Supply Systems

Number and Availability of Items

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Due to different marker situations some times supply position is poorly affected, which in turn affects

the poison of inventory in the organizations.

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Generally inventory includes more than one item. Therefore the number of items in inventory

affects the situation when these items complete for limited total capital or limited space.

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Government's and Organization's Policy

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There are different governments and as well as organization policies such as import and export,

availability of capital, land, labour, pollutions systems, etc. The government has laid down some policy

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norms for items to be imported as well as for other items like highly inflammable, explosive and other

important materials. Similarly, an organization also has certain policies based on the availability of

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capital, labour, etc. All these policies affect organization inventories level.

We have discussed different factors that affect the inventory in an organization (above). These

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factors are responsible for the development of proper inventory system is called as characteristics of

inventory.

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3.7 Summary

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This lesson illustrated the introduction of inventory and inventory management/control. This lesson also

illustrated the objectives of inventory, inventory functions, inventory types and the various factors

affecting the inventory.

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3.8 Key Terms

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Carrying Cost: Cost of maintaining one unit of an item in the stock per unit of time (normally one
year). The carrying cost also called as Holding Cost.

Decoupling: Use of inventories to break apart operations so that one operations supply is independent of

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another.

Backlog: Accumulation of unsatisfied demands

Delivery Lag: Time between the placing of an order for the item and receipt of the items for use.

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ABC Classification: Classifications of inventories in terms of annual usage value in different categories
of high value (A), medium value (B) and low value (C).

VED Classification: Vital Essential Desirable Classification. This is based on experience/judgment.

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VED classification when coupled with ABC classification enhances the inventory control efficiency.

3.9 Self Assessment Questions

Q1. What is inventory and their Objectives?

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Q2. Discuss different types of inventory.
Q3. What are the major functions of inventory in an organization?
Q4. Explain different factors affect the inventory?
Q5. Some business peoples think that inventory as necessary evil while others think inventory as an
asset. What is your view?

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3.10 Further References

Hamdy A Taha, 1999. Introduction to Operations Research, PHI Limited, New Delhi.

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MBA-H2040 Quantitative Techniques for Managers

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Mustafi, C.K. 1988. Operations Research Methods and Practices, Wiley Eastern Limited, New Delhi.
Levin, R and Kirkpatrick, C.A. 1978. Quantitative Approached to Management, Tata McGraw Hill,
Kogakusha Ltd., International Student Editon.
Levin and Rubin. Quantitative Techniques for Managers, PHI, New Delhi.

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UNIT II

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4 INVENTORY MODELS

ON
S

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S
E

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LESSON STRUCTURE

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4.1 Introduction

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4.2 Deterministic Inventory Model

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4.3 Deterministic Single Item Inventory Model

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4.3.1 Economic Order Quantity Model I

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4.3.2 Economic Order Quantity Model II

4.3.3 Economic Production Quantity Model

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4.3.4 Price Discounts Model

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4.3.5 Dynamic Demand Models

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4.4 Deterministic Multi Items Inventory Model

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4.4.1 Unknown Cost Structure Model

4.4.2 Known Cost Structure Model

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Objectives

4.5 Probabilistic Inventory Models

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After Studying this lesson, you should be able

4.5.1 Single Period Probabilistic Model

to:

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4.5.2 Single Period Discrete Probabilistic

Understand Simple Deterministic

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Demand Model

Inventory Models

4.6 Summary

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Understand Simple Probabilistic

4.7 Key Terms

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Inventory Models

4.8 Self Assessment Questions

Develop Simple Deterministic Inventory

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4.9 Further References

Models

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Illustrate the use of Simple Inventory

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Models in Practical Situations

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Briefly explain Single Item Inventory

Models

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Briefly explain Multi Item Inventory

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Models

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Describe static and dynamic Inventory

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Models

Develop Single Period Probabilistic

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Models

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4.1 Introduction

The methodology for inventory situation modeling is based on four concepts, they are:

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1. Examine the inventory situation, list characteristics and assumption related to the

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inventory situation.

2. Develop the total annual relevant cost equation in narrative form as:

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Total annual

Procurement

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Carrying cost

Stock out costs

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r e l

e

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v

a

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n t

c

o

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s

t = I

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t

e

m

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c

o

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s t +

c

o s t +

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(

c

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y

c

l

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e

s t

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o

c

k

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s +

(cost/sales back

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+ safety

order)

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stocks)

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3. Convert the total annual relevant cost equation from narrative form into the shorthand

logic of mathematics.

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4. Optimize the cost equation by finding the optimum for how much to order (also called

order quantity), when to re-order (also called re-order point) and the total annual
relevant cost.

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In general, the situation of inventory can be classified into tow types viz. deterministic and

stochastic.

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Deterministic- in this variables are known with certainty
Stochastic ? in this variables are probabilistic

This lesson briefly outlines Deterministic Inventory Models and Probabilistic (Discrete

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Demand Distribution Model) Inventory Models.

In this section we will discuss deterministic inventory models and later we will discuss
probabilistic inventory models (section 4.5).

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4.2 Deterministic Inventory Models

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There are different deterministic inventory models, they are:

a. Deterministic single item Inventory Models

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i.

EOQ ? Economic Order Quantity Model ? I

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ii.

EOQ ? Economic Order Quantity Model ? II (instantaneous supply
when shortages are allowed)

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iii.

EPQ ? Economic Production Model (Gradual supply case and shortage
not allowed)

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iv.

Price Discounts Model (instantaneous supply with no shortages)

v.

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Dynamic Demand Models

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b. Deterministic multi-item Inventory Models

i.

Unknown cost structure Model

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ii.

Known cost structure Model

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4.3 Deterministic Single Item inventory Models

Inventory models with all the known parameters with certainty are known as deterministic

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inventory model. In this section we will discuss the deterministic inventory models for sing

item.

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4.3.1 Economic Order Quantity (EOQ) Model I

The EOQ concept applies to the items which are replenished periodically into inventory in

lots covering several periods' needs, subject to the following conditions:

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Consumption of item or sales or usage is uniform and continuous

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The item is replenished in lots or batches, either by manufacturing or by purchasing

Description

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The EOQ model is described under the following situations:

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a. Demand is deterministic and it is denoted by D units per year.
b. Price per Unit or cost of purchase is C.
c. Planning period is one year.

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d. Ordering Cost or Procurement Cost or Replenishment Cost is Co. Suppose if the items

are manufactured it is known as set up cost.

e. Holding Cost (or carrying cost) is Ch per unit of item per one year time period. The

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Ch is expressed either in terms of cost per unit per period or in terms of percentage
charge of the purchase price.

f. Shortage Cost (mostly it is back order cost) is Cs per unit per year.

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g. Order Size is Q.
h. Cycle period of replenishment is t.
i. Delivery lad/Lead Time is L (expressed in units of time)

In this section we will discuss about instantaneous supply when shortages are not allowed.

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That is whatever is demanded, is supplied immediately after the lead time. If we assume these

constraints, a graph of inventory against time will be look like a regular saw-tooth pattern as

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given below (Fig: 4.1).

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Inventory

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Inventory

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Reorder Point

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Q
Q/2

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L

Time

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Reorder Level
t t t

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Fig: 4.1. Saw-Tooth Inventory Model

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- In this model we assumed that the shortages are not allowed, it means that shortage

cost is prohibitive or Cs is too much large or infinite.

- Everything is so known and regular, there is no need of safety stock.

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- Inventory will run out altogether just as the next lot is received.

The different levels of inventories for this model are fixed as follows:

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- Minimum level = Safety Stock (Buffer Stock)
- Maximum level = Minimum level + EOQ
- Reorder level = Minimum level + Lead Time Consumption

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-- In this case safety stock is not needed, so that safety stock is zero i.e. Minimum
level = 0.

-- Maximum Inventory is the ORDER SIZE (lot size).

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-- Maximum Inventory is the ORDER SIZE (lot size).
Therefore, the average inventory per cycle = ?(Maximum level + Minimum level).

Here cycle is the intermittent pattern, in which inventory vary from maximum

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to minimum and then back to maximum.

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-- Maximum inventory is Q

Therefore, the average inventory per cycle = ?(Q+O) =Q/2, and the average

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inventory is time

independent.

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In this case, the Total Annual Relevant Cost is as follows:

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Total annual

Annual Purchase

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+ Annual Ordering

relevant cost

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Cost (PC) +

Cost (OC)

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(TC)

Annual Carrying

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Cost (CC)

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Quantity Ordering Number of Carrying Cost

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Average

= (Price/Unit) Purchased + Cost/Order Orders placed / + per unit
number of

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Per Year

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year

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units carried

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-------------- eq.1

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Note that,
Number of Orders/Year = Annual Demand/Order Size

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= D/Q

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Thus, the eq.1 is written as:

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TC = CD + Co D/Q + Ch Q/2 ------------------- eq.2

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The EOQ or Order Size is that quantity, which minimizes the Total Cost. Total Cost is the

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sum of Fixed Cost and Variable Cost. The Fixed Cost (CD) is independent of Order Size

while the variable Cost is dependent on the Order Size (Q). Since, the fixed cost does not play

any in minimization or maximization process, only variable cost will be minimized here.

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For the total cost to be minimum, the first order derivative of TC is zero, that is,

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dTC/dQ = -CoD/Q2 +Ch/2 = 0 ----- eq.3 or

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CoD/Q = ChQ/2 --------- eq.4

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Annual Ordering Cost = Annual Carrying Cost ----------- eq.5

The eq.5 may also be obtained from the following fig: 4.2

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150

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TOTAL COST
Total Cost Curve

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Annual Carrying
Cost Curve

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Annual Ordering Cost

Curve

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Annual Purchase Cost

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Curve

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ORDER SIZE = Q

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Fig: 4.2. Inventory Control Cost Trade-offs

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Now, if we examine the eq.2 that is the total cost equation, we obtain the relationship

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between the fixed cost and variable cost. This relationship is shown in the above fig.4.2. Note

that the total cost curve has the lowest value just above the intersection of the ordering cost

curve and carrying cost curve, and also at the intersection annual cost is equal to the annual

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carrying cost.

From the eq.4, now we will get

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EOQ = Q* =

2CoD ----------- eq.6

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Ch
The cycle period

t = Optimal Order Quantity or t* = Q* =

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2Co ----------

eq.7
Annual Demand D ChD

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N = Total number of orders per year , which is the reciprocal of cycle period (1/t*)

That is

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N = D =

ChD ------------------ eq.8

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Q 2Co

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The annual cost = TC = CD +

2CoChD ----------- eq.9

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Lead Time Consumption = (Lead time in years) * (Demand Rate per year)

Minimum Level = O

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Maximum Level = Q*

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Reorder Level = LD

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Let us see few example of this case.

Example 4.1

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A manufacturer uses Rs.20, 000 worth of an item during the year. Manufacturer estimated the
ordering cost as Rs.50 per order and holding costs as 12.5% of average inventory value. Find
the optimal order size, number of orders per year, time period per order and total cost.

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Solution

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Given that:

D = Rs.20, 000
Co = Rs.50
Ch = 12.5% of average inventory value / unit

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Total Cost = TC = 25D + (0.125) Q , where Q is order size in Rs.

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Q D

By applying the equations (eq.6) to (eq.9), we will get Q*, t*, N

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Q* =

2CoD

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2 * 50 * 20000

= Rs.4000

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0.125

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t* =

2Co

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ChD

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2 * 50 = 1 years = 73 days

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(0.125) * (20000) 5

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N = 1 = 5

t*

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Note: TC means in this case variable cost only

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TC* =

2 * 50 * 0.125 * 20000

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= Rs.500

Therefore

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Order Size = Q = Rs.4000
Number of order / year = N = 5

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Time period / order = t* = 73 days

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Total Cost = TC* = Rs.500

Example 4.2

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A manufacturer uses an item at a uniform rate of 25,000 units per year. Assume that no
shortage is allowed and delivery is at an infinite rate. The ordering, receiving and hauling cost
is Rs.23 per order, while inspection cost is Rs.22 per order. Interest costs is Rs.0.056 and
deterioration and obsolescence cost is Rs.0.004 respectively per year for each item actually

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held in inventory plus Rs.0.02 per year per unit based on the maximum number of units in
inventory.

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Determine the EOQ. If lead time is 40 days, find reorder level.

Solution

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Given that

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Demand = D = 25000 units/year

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Ordering Cost = Co = 23 + 22 = Rs.45 per order

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Storage cost Ch = 0.056 + 0.004 = Rs0.060 (based on actual inventory (=average

inventory)

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Storage cost Ch = Rs.0.02 per unit/year

(based on maximum inventory)

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Total Variable Cost = TC = 25 * 25000 + 0.060 * Q + 0.02 * Q

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= 625000 + 0.1*Q

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Q 2

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Thus,

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Q* =

2CoD

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= Q* =

2*25*25000 =3535.5 units (3535 units

approximately)

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0.1

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Reorder level = L*D = 40*25000 = 2739.7 units

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365

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That is = 2740 units

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Therefore

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EOQ = Q* = 3535 units

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Reorder level = 2740 units

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Look in to the fig.4.2; in this the total cost curve is almost flat near the minimum cost

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point. This indicates that small variations in optimal order size will not change the total cost

appreciably. For this purpose we will examine the model of sensitivity in the next section.

Model Sensitivity

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In order to examine sensitivity of the model, we compare the sensitivity of the total costs (TC)

for any operating system with the total variable costs for an optimal inventory system (TC*)

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by using the ratio TC/TC*. To do this, we have to calculate TC/TC* as a function of Q/Q*.

154

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Therefore

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CoD + ChQ CoD + ChQ*

TC = Q 2 Q* 2 ---------- eq.10

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Now by substituting Q* =

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2CoD/Ch into equation eq.10 and solving algebraically we get

the relationship as

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TC = 1 Q* + Q ---------------------- eq.11
TC* 2 Q Q* , which is shown in the following figure fig.4.3

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TC/TC*

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2.0

1.5

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1.0

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0.5

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0.5 1.0 1.5 2.0 2.5 3.0 Q/Q*

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Fig: 4.3 Inventory Sensitivity (in case of simple lot size)

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According to this if Q is off from optimal either direction by a factor of 2; costs are

increased by only 25%. This has an important practical implication.

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The model sensitivity is explained with the help of the following example, so that we

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will understand more.

Example 4.3

Consider the Example 4.1. The sensitivity of total cost if order size is Rs.4000, then we will

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get that

TC/TC* = 1 4000 + 4000 = 1

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2 4000 4000

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This indicates that even though order quantity deviates from optimal by Rs.4000 or 100%, the

costs are only 25% higher than the optimal. This excess cost of the non-optimal order quantity

can be found as:

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Excess Cost (Marginal Cost) = 0.25(TC*) = 0.25(500) = Rs.125.

4.3.2 The EOQ Model II

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Here we are going to discuss, Instantaneous Supply When shortages are allowed. In this case,

stock outs are permitted which means that shortage cost is finite or it is not more. The entire

Model I assumptions (a to i) are also good applicable here. The Inventory situation with

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shortages is represented diagrammatically in the following figure fig.4.4.

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Look the figure there are two triangles viz. ABC and CEF.

The triangle ABC denotes inventory, whereas

The triangle CEF denotes the shortage

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I = inventory level
S = shortage level
Q = order size = I + S
Cycle period = t = t1 + t2

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Where t1 is the proportion of cycle period for inventory holding

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t2 is the time of stock out

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Inventory Reorder Point

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Q t2 t2

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B t1 C

F t1 S

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Shortage

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D E

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t t

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Fig: 4.4 Inventory Situation with Shortages

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Total Variable Cost = Annual Ordering Cost + Annual Holding Cost + Annual

Shortage Cost

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= CoD + I2Ch + (Q-I)2Cs ---------------- eq.12

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Q 2Q 2Q

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From this we will get

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EOQ = Q* =

( 2CoD ) ( Co+Ch) -------- eq.13

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Ch Cs

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Inventory Level = I* =

( 2CoD ) ( Cs ) -------- eq.14

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Ch Co+Ch

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Shortage Level = Q* - I* ------------------ eq.15

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Cycle Period = t* = Q* ----------------- eq.16

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Number of Orders/Year = 1

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Therefore

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Total Variable Cost = TC* =

2CoChCsD

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(Ch + Cs) -------------- eq.18

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Thus, if we compare the total variable cost of Model I and Model II we will see that

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2CoChD >

2CoChCsD ---- This implies that the annual

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(Ch + Cs)

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Cost when shortage is allowed is less than the annual inventory management cost when
shortages are not allowed. That is shortage should be allowed whenever the shortage cost is
not very large for reducing the total cost.

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Example 4.4

Consider the following problem.

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Problem

The demand for an inventory item each costing Re5, is 20000 units per year. The ordering

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cost is Rs.10. The inventory carrying cost is 30% based on the average inventory per year.

Stock out cost is Rs.5 per unit of shortage incurred. Find out various parameters.

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Solution

Given that

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Demand = D = 20000

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Ordering Cost = Co = Rs.10

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Carrying Cost = Ch = 30% of Re 5 = 30 * 5 = 1.5

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100

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for Managers

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Stock out Cost = Cs = Rs.5

Now we have to determine the various parameter of EOQ Model II such as EOQ, Inventory

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Level, Shortage Level, Cycle Period, number of orders/year and Total Cost.

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EOQ = Q* =

(2CoD ) ( Co+Ch)

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Ch Cs

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=

2*10*20000 0.30 + 10 = 1657 units

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0.30 5

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Inventory Level = I* =

( 2CoD ) (Cs )

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Ch Co+Ch

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Inventory Level = I* =

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2*10*20000 5 = 804 units

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0.30 10+0.30

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Shortage Level = Q* - I* = 1657 ? 804 = 853 units

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Cycle Period = t* = Q* = 1657 = 30.24 days = 30 days

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D 20000

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Number of Orders/Year = 1 = 1 = D = 20000 = 12 Orders/year

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t* Q*/D Q* 1657

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Total Cost =

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2CoChCsD

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(Ch + Cs)

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=

2*10*0.30*5*20000 = RS.336.4

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0.30+5

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4.3.3 Economic Production Quantity (EPQ) Model

Here we will discuss about Graduate Supply case when Shortages are not allowed. EOQ

model is more common in retail situation, while economic production quantity EPQ is

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basically associated with manufacturing environment. EPQ shows that over a period of time

inventory gradually built and the consumption go side by side where production rate is higher

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than that of consumption rate.

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Assumption (a) to (i) of EOQ Model I also hold good for this model. In this model the

Order Size (Q) is taken as Production Size, the annual production rate is taken as P such that P

> D, otherwise, if P D, the item will be used as fast as it is produced. This situation is

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illustrated in the following figure fig: 4.5.

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Maximum Inventory Level

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B

Rate of

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Decrease of

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Inventory=D

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Rate of increase of

Inventory = P-D

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t1 t2 t1 t2

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A D C Time

t t

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Fig: 4.5 Gradual Replacement Inventory Situation

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In the above figure, t = Cycle Time

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t1 = Production Time

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t2 = Depletion Time and

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t = t1 + t2 of maximum inventory level BD.

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Production Time = t1 = Q

P

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Cycle Time = t = Q

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Maximum Inventory Level = BD = (P ? D) * t1

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= (P ? D) * Q

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Minimum Inventory Level = 0

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Average Inventory Carried = (P ? D) Q + O

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(P ? D) Q

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=

2

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Total Variable Cost/Year = Annual Setup Cost + Annual Carrying Cost

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CoD (P ? D) Q

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=

+ Ch

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----- eq.19

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Q P 2

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Thus,

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EPQ = Q* =

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2CoD

------------------------ eq.20

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Ch(P-D)

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Total Variable Cost = TC* =

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2CoCh(P-D) D --------- eq.21

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The economic production quantity model (gradual supply case and shortage not

allowed) is explained with the help of following Example 4.5.

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Example 4.5

Problem

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An inventory item unit is used at the rate of 200/day, and can be manufactured at a rate of

700/day. It costs Rs.3000 to set up the manufacturing process and Rs.0.2 per unit per day held

in inventory based on the actual inventory any time. Assume that shortage is not allowed.

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Find out the minimum cost and the optimum number of units per manufacturing run.

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Solution

Given that

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Demand, D = 200 units

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Production, P = 700 units

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Set up Cost, Co = Rs.3000

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Holding Cost, Ch = Rs.0.2

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? Minimum Cost = TC* =

2CoCh(P-D) D

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=

2*3000*0.2(700-200) (200)

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= Rs.414

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700

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EPQ = Q* =

2CoD =

2CoD * P

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Ch(P-D) Ch(P-D)

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2*3000*200*700

= 2898.2 = 2898 units

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0.2(700-200)

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Minimum Cost = Rs.414

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Therefore

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Number of units per Manufacturing Run = 2898 units

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4.3.4 Price Discounts Model

In this section we will discuss, instantaneous supply with no shortages. We know very well

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that whenever we make bulk purchasing of items there may be some discount in price is

usually offered by the suppliers. As far as discount concern, there are two types:

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1. Incremental Discount ? discount allowed only for items which are in excess of the

specified amount. In this case, all the prices offered in different slabs are applicable in
finding the total cost.

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2. All units Discount ? discount allowed fro all the items purchased. In this, only one

price at any one slab is applicable for finding the total cost.

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Here we are going to discuss only all units' discount type.
Advantages of Bulk Purchase

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Buying in bulk may results in the following advantages:

less unit price

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less ordering cost
cheaper transportation

fewer stock outs

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sellers preferential treatment

Disadvantages of Bulk Purchase

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Bulk purchase also has the following disadvantages in addition to the above

advantages:

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high carrying cost
lower stock turnover
huge capital required

less flexibility

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older stocks

heavy deterioration

heavy depreciation

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MBA-H2040 Quantitative Techniques

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for Managers

In case of purchased items, if the discounts are allowed, the price C may vary according to the
following

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pattern:

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C = P0 if purchase quantity Q = Q0 < q1

= P1 if purchase quantity q1 Q1 < q2

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..............................................

...............................................

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= Pn if purchase quantity qn < Qn

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where Pj-1 is > Pj, for j = 1, 2, ........, n.

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-------- eq.22

Pj = Price per unit for the jth lot size

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Suppose, shortages are not permitted, the total cost per year is obtained by the following set of
relations:

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TC(Q

Q

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j) = DPj + CoD + 1 ChQj

, where qj

j<qj+1

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----------- eq.23

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and Ch=ipj, i being percentage change for j=0 to n. Since price (or unit cost) varies with
purchase size (Q), the fixed cost term CD in equation eq.23 can't be omitted for minimizing
the total cost (TC).

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Equation eq.23 for quantity discounts are represented in the figure fig: 4.6.

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Total
Cost
(TC)

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163

MBA-H2040 Quantitative Techniques

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for Managers

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O q1 q2

q3

q4 Quantity (Q)

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Fig: 4.6 Quantity Discount

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The heavy curve on the various price discounts shows feasible portion of the total cost

which is a step function. Therefore, for determining the overall optimum, the following steps

of procedure is adopted:

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Step 1: Find EOQ for the lowest price

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That is compute Q*n =

2CoD

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iPn

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If Q* q

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n

n, the optimum order quantity is Q*n.

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If Q*n < qn, then go to Step 2.

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Step 2: Compute Q*n -1 =

2CoD for the next lowest price.

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iPn-1

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If Q*n -1

n-1, then compare the total cost TCn-1 for purchasing Q*n -1 with the total

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cost TCn for purchasing quantity qn and select least cost purchase quantity.

If Q*n -1 < qn-1 then go to Step 3.

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Step 3: Compute Q*n -2 =

2CoD for the next lowest price.

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iPn-2

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If Q*n -2 qn-2, then compare the total cost TCn-2, TCn-1 and TCn for purchase

quantities Q*n -2 , qn-1 and qn respectively and select the optimum purchase quantity.

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If Q*n -1 < qn-2 then go to Step 4.

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Step 4: Continue the procedure until Q*

q

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n -j

n-j. Then compare the total costs TCn-j with TCn-

j+1, .... , TCn-1, TCn for purchase quantities Q*n -j , qn-j+1, .... , qn-1, qn respectively, and select

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the optimum purchase quantity.

The price discount model is explained with the help of the following examples.

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Example 4.6

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Consider the following problem, which explains the price discount model.

Problem

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Suppose, annual demand for an item is 1500 units, ordering cost is Rs.250, inventory carrying
charge is 12% of the purchase price per year and the purchase prices are:

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164
MBA-H2040 Quantitative Techniques
for Managers

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P1 = Rs.5

for purchasing Q1 < 250

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P2 = Rs.4.25 for purchasing 250 Q2 < 500

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P3 = Rs.3.75 for purchasing 500 Q3

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Find out the optimum purchase quantity.

Solution

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Given that

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Demand, D = 1500 units

Ordering Cost, Co = Rs.250

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Carrying Cost, Ch = 12% = i

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This problem belongs to the Step 1. So that as per Step 1

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Q*3 =

2CoD =

2*250*1500 = 1290 units

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iPn

(0.12)(3.75)

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Note that 1290 > 500, Optimum Purchase Quantity = 1290 units.

Example 4.7

Problem

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Consider the problem in Example 4.6 with ordering cost of Rs.10 only. Find out the optimum
purchase quantity.

Solution

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Given that

Demand, D = 1500 units

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Ordering Cost, Co = Rs.10

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Carrying Cost, Ch = 12% = i

In this case,

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Q*3 =

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2CoD =

2*10*1500

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= 258 units

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iPn

(0.12)(3.75)

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Since 258 < 500 = q3, so that we may have to compute

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Q*2 =

2CoD =

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2*10*1500 = 242 units

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iPn

(0.12)(4.25)

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Since 242 < 250 = q2, next we may have to compute

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165

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MBA-H2040 Quantitative Techniques
for Managers

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Q*1 =

2CoD =

2*10*1500 = 224 units

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iPn

(0.12)(5)

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Since 224 > 0, now we have to compare the total cost for purchasing Q*1 = 224, q2 =

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250 and q3 = 500 units respectively.

From equation eq.23

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TC (Qj) = DPj + CoD + 1 ChQj

, where qjQj<qj+1

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We will get

TC1 (for purchasing 224) = 5*1500 + 10*1500 + 1 (0.12) (5)224 = 7634.2

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224 2

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TC2 (for Q2=250) = 4.25*1500 + 10*1500 + 1 (0.12) (4.25)250 = 6498.75

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250 2

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TC3 (for Q3=500) = 3.75*1500 + 10*1500 + 1 (0.12) (3.75)500 = 5767.5

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500 2

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The EPQ for his problem is Q*3 = 500 units

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4.3.5 Dynamic Demand Models

In this model, assume that demand is known with certainty, and although may vary from one

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period to the next period. There are five types of dynamic demand inventory models, they are:

i)

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Production Inventory Model (Incremental Cost Method)

ii)

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Dynamic Inventory Model (Prescribed Rule Method)

iii)

Dynamic Inventory Model (Fixed EOQ Method)

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The above five dynamic demand models of inventory are discussed in details in the following
subsequent sections.

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i) Production Inventory Model

This is also called as Incremental Cost Method. This situation is explained with the help of
the following example 4.8.

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Example 4.8

Consider the following problem.

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Problem

A production factory has a fixed weekly cyclic demand as follows:

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166
MBA-H2040 Quantitative Techniques
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Days

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Mon

Tue

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Wed

Thu

Fri

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Sat

Sun

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Demand

9

17

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2

0

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19

9

14

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in units

Here the policy is to maintain constant daily production seven days a week. Shortage cost is

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Rs.4 per unit per day and storage cost depends upon the size of Q, the quantity carried, as
follows:

Cost per unit for one

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=1

=4

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=10

day(Rs.)

Q

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1Q3

4Q20

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20Q

And the chargers are based on the situation at the end of the day.

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Determine the optimal starting stock level.

Solution

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Let the production rate be the average of the total sales which is

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= 9 + 17 + 2 + 0 + 19 + 9 + 14 = 10 units/days

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Day

On hand

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Demand

Inventory

Shortage

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Carrying

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stock start

cost (Rs.)

cost (Rs.)

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of day

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Mon

8

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9

-1

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4

0

7

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Tue

-1+10=9

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17

-8

32

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Wed

-8+10+=2

2

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0

0

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0

Next

Thu

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0+10=10

0

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10

0

44

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we will

Fri

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10+10=20

19

1

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0

1

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find the

Sat

1+10=11

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9

2

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0

2

total

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Sun

2+10=12

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14

-2

8

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0

weekly

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Mon

-2+10=8

Total Cost 44 + 43 = 87

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cost for
different starting stocks, which is illustrated in the following tables.

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Table 4.1 shows for starting stock 8, Table 4.2 shows for starting stock 9 and Table

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4.3 shows for starting stock 10.

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167

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MBA-H2040 Quantitative Techniques

Day

On hand

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Demand

Inventory

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Shortage

Carrying

for Managers

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stock start

cost (Rs.)

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cost (Rs.)

of day

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Mon

9

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9

0

0

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Tue

0+10=10

17

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-7

28

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0

Wed

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-7+10+=3

2

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1

0

1

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Table

Thu

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1+10=11

0

11

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0

44

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4.1

Fri

11+10=21

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19

2

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0

2

Cost

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Sat

2+10=12

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9

3

0

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3

Analysi

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Sun

3+10=13

14

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-1

4

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0

s with

Mon

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-1+10=9

Total Cost 32 + 50 = 82

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Initial

Stock 8

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Day

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On hand

Demand

Inventory

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Shortage

Carrying

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stock start

cost (Rs.)

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cost (Rs.)

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of day

Mon

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10

9

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1

0

1

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Tue

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1+10=11

17

-6

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24

0

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Wed

-6+10+=4

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2

2

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0

2

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Thu

2+10=12

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0

12

0

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--- Content provided by FirstRanker.com ---

Fri

12+10=22

19

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3

0

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3

Sat

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3+10=13

9

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4

0

16

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Sun

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4+10=14

14

0

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0

0

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Mon

0+10=10

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Total Cost 24 + 70 = 94

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Table 4.2 Cost Analysis with Initial Stock 9

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Table 4.3 Cost Analysis with Initial Stock 10

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Therefore

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The optimal solution for starting stock of 9 units is on MONDAY.

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Minimum Total Cost for this is Rs.82.

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168

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MBA-H2040 Quantitative Techniques
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Procedure for solving such incremental problem is cost analysis, which is self

explanatory.

ii) Dynamic Inventory Model (Prescribed Rule Method)

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Some times, the organization dealing with inventory may prescribe some rule of procurement
of items of inventory. For example

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- Procuring every month
- Procuring every three months

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The prescribed rule method is explained with the help of the following Example 4.9.

Example 4.9
Consider the following problem.

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169

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MBA-H2040 Quantitative Techniques
for Managers

Problem

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An organization estimates the demand of an item as follows:

Month

Jan

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Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

Demand 140 98

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62

134 20

72

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22

164

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139 170 248

51

1320

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The organization has decided that their ordering cost is Rs.54 and carrying charge per unit per

month is 2% at the end of each month. The cost of item per unit is Rs.20. Assume that the

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supply is instantaneous, there in no stock outs and no lead time. Only full month requirement

is ordered.

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Solution

The following table is used for determining the total cost for the policy of quarterly ordering.

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Month

Jan

Feb Mar Apr May Jun

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Jul

Aug Sep Oct

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Nov Dec Total

Starting

0

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160 62

0

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92

72

0

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303 139 0

299 51

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--

Inventory

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300 --

--

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226 --

--

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325 --

--

469 --

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--

1320

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Replenishment

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140 98

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62

134 20

72

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22

164 139 170 248 51

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1320

Requirements

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160 62

0

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92

72

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0

303 139 0

299 51

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0

1178

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Ending
Inventory

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Table 4.4 Total Cost Analysis for Quarterly Policy

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Therefore

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Total Carrying Cost = 1178*(0.02)*(20) = Rs.471.2

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Total Replenishment Cost = 4*54 = Rs.216

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Total Annual Cost = 216 + 471.2 = Rs.687.2

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iii) Dynamic Inventory Model (Fixed EOQ Method)

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The Fixed EOQ Method is explained with the help of the following Example 4.10.

Example 4.10

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Consider the problem of Example 4.9.

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Problem

An organization estimates the demand of an item as follows:

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Month

Jan

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Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

Demand 140 98

62

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134 20

72

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22

164

139 170 248

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51

1320

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170

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MBA-H2040 Quantitative Techniques
for Managers

The organization has decided that their ordering cost is Rs.54 and carrying charge per unit per

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month is 2% at the end of each month. The cost of item per unit is Rs.20. Assume that the

supply is instantaneous, there in no stock outs and no lead time. Only full month requirement

is ordered.

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Solution

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Average Monthly Demand = Demand = 1320 = 110 units/month

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Month 12

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EOQ =

2*54*110 = 172 (approximately)

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(0.02)*(20)

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In this case the organization has to ordered full month requirement, therefore 172 lies between

140 and 248 units, but 172 is more closer to 140 than 248, so that the organization order one

month requirement at the beginning of the January.

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Similarly, at the beginning of the February, the organization order two month

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requirement.

The detailed result is illustrated in the following Table 4.5

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Month

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Jan

Feb Mar Apr May Jun

Jul

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Aug Sep Oct

Nov Dec Total

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Starting

0

0

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62

0

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92

72

0

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164 0

0

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0

0

--

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Inventory

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140 160 --

226 --

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--

186 --

139 170 248 51

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1320

Replenishment

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140 98

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62

134 20

72

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22

164 139 170 248 51

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1320

Requirements

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Ending

0

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62

0

92

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72

0

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164 0

0

0

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0

0

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390

Inventory

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Table 4.5 EOQ Total Cost Analysis

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Therefore

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Total Ordering Cost = 8*54 = Rs.432

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Total Carrying Cost = 390*0.4 = Rs.156

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Thus, the Total Cost is reduced if EOQ policy is used instead of three month

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(quarterly) rule.

4.4 Deterministic Multi Item Inventory Models

When there is more than one item in the inventory is called as multi item inventory. Since this

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contains more items, the inventory control requires special type of care. This type of

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inventory problems may different types of constraints like capital, cost structure, storage

space, purchasing load etc. As the number of constraints increase the problem becomes more

complex. In this section we will discuss some examples of this type of inventory.

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There are two types of multi item inventory model which is based on the structure of

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the cost, they are:

1. Model with Unknown Cost Structure
2. Model with Known Cost Structure

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4.4.1 Unknown Cost Structure Model

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In India most of the organizations do not maintain the proper inventory records which may

provide sufficient cost information to generate the two basic parameters viz. procurement cost

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and carrying cost of inventory control. Some organizations in some situations have not

developed cost structure related to inventory control, but still they wish to minimize total cost

of inventory. There may be critical situations, in which an organization may need to take

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immediate actions to improve the situation without considering the structure of cost.

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The use of inventory models without cost information is impossible, but we will show

here that it is possible to get many of benefits of inventory techniques even when carrying

cost and ordering cost are not known. In such a problem, there are two different approaches,

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they are:

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1. Minimize the Total Carrying Cost while keeping the number of orders/year fixed

or

2. Minimize the Total Number of orders/year while keeping the same level of

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inventory.

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Minimize the Total Carrying Cost while keeping the number of orders/year fixed Model

As per the EOQ model

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Q* = 2CoD

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or

Q* = 2CoD * D

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Ch

Suppose = 2Co = Constant, because ordering cost and carrying cost are deterministic
values.

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Therefore

Q* = * D ------------ eq.24

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The equation eq.24 tells that EOQ is proportional to the square root of demand for any

inventory item of control.

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For this equation, we get

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= Q* = Q*D = D = Square root of Demand ----------- eq.25

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D D (D/Q*) Number of orders/year

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Since is constant for any single item of inventory, we take as the constant for all

the inventory items. Thus, we take

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= D

or = Sum of square roots of Demand of each inventory item -

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eq.26

(D/Q*) Sum of the number of orders/year for each item

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This model is explained with the help of the following Example 4.11.

Example 4.11
Consider the following problem.

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Problem

An organization has the following procurement pattern of six items irrespective of their
demand level. Reduce the inventory levels while keeping total number of orders/year fixed.

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Item No.

Number of

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Demand

Order Size

Average

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Orders/Year (Rs.)

(Rs.)

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Inventory

1

5

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2000,000

500000

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250000

2

5

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700,000

260000

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130000

3

5

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100,000

23500

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11750

4

5

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9,000

10000

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5000

5

5

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5,000

700

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350

6

5

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2,700

500

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250

Solution

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First we find the value of = D

---------- eq.27

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(D/Q*)

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Therefore

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D = 1414 + 836 + 316 + 95 + 70 + 52 = Rs.2783

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(D/Q*) = 5 + 5 + 5 + 5 + 5 + 5 = 30

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Thus, = D

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= 2783 = 92.7

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(D/Q*) 30

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Now we will analyze the ordering quantity, which is illustrated in the following Table

4.6.

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Demand

D

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EOQ=

Number of Average

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Item No.

(D) (Rs.)

D

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orders/year Inventory =
=D/EOQ

EOQ/

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Number of
orders/year

1

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2000,000

1414 92.7

131077.8

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15.258

4369

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2

700,000

836

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92.7

77497.2

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9.0

2583

3

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100,000

316

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92.7

29293.2

3.41

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976

4

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9,000

95

92.7

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8806.5

1.0

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293

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5

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5,000

70

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92.7

6489

0.77

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216

6

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2,700

52

92.7

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4820.4

0.56

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160

29.998

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8597

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Table 4.6 Analysis of Ordering Quantity

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Thus, according to the policy of the organization ordering for six items a year each

item, Total Average Inventory becomes Rs.397350.

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But, as per the new schedule as obtained in the above Table , the Average Inventory is

Rs.8597 which is much less and at the same time total Number of Orders remains same.

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Therefore, substantial savings can still be achieved when cost information is known.

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Minimize the Total Number of orders/year (or purchasing workload) while keeping the

same level of inventory Model

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We will know that

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Q* = D or

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= Q*

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Now onwards, we will take = Q* ------- eq.28 for all inventory items.

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This model is explained with the help of the previous Example 4.11.

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Here we will discuss about how to minimize the number of orders or purchasing

workload.

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Problem

An organization has the following procurement pattern of six items irrespective of their

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demand level. Reduce the inventory levels while keeping total number of orders/year fixed.

Item No.

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Number of

Demand

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Order Size

Average

Orders/Year (Rs.)

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(Rs.)

Inventory

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1

5

2000,000

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500000

250000

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2

5

700,000

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260000

130000

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3

5

100,000

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23500

11750

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4

5

9,000

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10000

5000

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5

5

5,000

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700

350

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6

5

2,700

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500

250

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Solution

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Here K= Sum of the order size

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Sum of square root of Demand

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K= 50000+260000+23500+10000+700+500 = 794700 = 285.555
1414+836+316+95+70+52 2783

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Item

Demand

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EOQ= D

Number of Average

No.

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(D) (Rs.)

orders/year Inventory =
=D/EOQ

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EOQ/2

1

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2000,000

1414 285.555 403774.77

4.95

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201887.385

2

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700,000

836

285.555 238723.98

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2.93

119361.99

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3

100,000

316

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285.555 90235.38

1.10

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45117.69

4

9,000

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95

285.555 27127.725

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0.33

13563.8625

5

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5,000

70

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285.555 19988.85

0.25

9994.425

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6

2,700

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52

285.555 14848.86

0.18

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7424.43

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9.74

397349.8

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EOQ=794700

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Table 4.7 Analysis for Reducing Number of Orders

Thus, from the Table 4.7, it is obvious that the total purchasing workload has reduced by

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35%. Therefore, there is a definite saving of cost by applying these methods for multiple

items even when cost information is not known.

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4.4.2 Known Cost Structure Model

We may classify the models with known cost structures into two main types, they are:

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Model without Limitations

Model with Limitations

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Here we will discuss these models, if we know the complete cost structure. In this model let

us consider the following symbolic notation:

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-

Demand

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Coj

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-

Ordering Cost

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Chj

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-

Holding Cost or Carrying Cost for jth item respectively.

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Model without Limitations

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In any situation the items may be purchased according to their individual economic order

quantities, if there are no restrictions for the items being storing.

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In this case,

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Total Variable Cost per annum for n-items can be represented as

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TC = CojDj + ChjQj and -------------------eq.29

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J=1 Qj

2

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The optimum Order Size for each item is

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Qj* =

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2CojDj

for j = 1,........., n ---------------- eq.30

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Chj

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Model with Limitations

We know that the different constraints on inventories are available capital, order size per year,

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storage space, etc. In this case we will consider a single constraint for the discussion of this

model. Note that the constraints capital and storage space are interchangeable.

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Let

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Qj is the order quantity for item j

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Fj is the storage space (or floor space) for one unit of item j

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(or) Fj ? the capital requirement for one unit of item j, since the storage

space and

the capital are interchangeable.

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F is the total available storage space (floor space) or available capital

Then the constraints are as follows:

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F1Q1 + F2Q2 + ............ FnQn F -------------eq.31

j=1

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Here the objective is to minimize the total inventory cost expressed by the equation eq.29. So

that in order to solve this problem first we have to convert the constraint problem into

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unconstrained minimization problem and then the optimum result is obtained.

The problem is to minimize the function known as Lagrange Function:

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n n

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L(, Q

) =

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1, Q2, ..., Qn

CojDj + ChjQj + ( FjQj - F) ---------eq.32

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j=1 Qj 2 j=1

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Then, the values of optimal sizes are

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Qj* =

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2CojDj

for j = 1,........., n ------------eq.33

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(C +2 F

hj

j)

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The known cost structures model is explained with the following Example 4.12.

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Example 4.12

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Consider the following problem.

Problem

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A retail shop purchases three items of inventory viz. A, B and C respectively. The shop works

on the limitations that the shop is not able to invest more than Rs.40000 at any time. The other

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shop relevant information is given in the following table:

Item

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A

B

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C

Demand rage (units/year) ? Dj

20000

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1000

2000

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Purchase Cost/unit ? Cj

40

200

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100

Ordering Cost/Order ? Coj

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100

150

200

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Holding or Carrying Cost - J

40%

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40%

40%

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Solution

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In the absence of constraints, the Optimal Order Sizes are:

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Q1 =

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2*100*20000 = 500

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(.40) (40)

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Q2 =

2*150*1000 = 61

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(.40)(200)

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Q3 =

2*200*2000 = 141

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(.40) (100)

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Now we know the optimal sizes, so that with these optimal sizes we may determine

the maximum investment, that is

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Maximum Investment = 500 * 40 + 61 * 200 + 141 * 100

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= 20000 + 12200 + 14100

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= Rs. 46300

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for Managers

Note that the Maximum Investment Rs.46300 is greater than the allowable investment
capacity i.e. Rs.40000 in inventory.

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Therefore, equation eq.33 is used with the following alteration

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Qj* =

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2*Coj*Dj for j = 1, 2, 3. Since, there are only three items. --- eq.34

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Cj(J+2)

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Note that here = is the solution of the equation.

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3

Qj* =

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2*Coj*Dj * Cj = 40000

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j=1

Cj(J+2)

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40*20000*100 +

150*1000*200 +

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200*2000*100 = 40000

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0.1+

0.1+

0.1+

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= 0.16899919

Now we will substitute the value of in equation eq.34

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Therefore, now the order size becomes

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Q*1 = 368

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Q*2 = 45

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Q*3 = 104

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That is,

If limitations are not imposed on the purchase of quantities,

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The optimal Total Cost = 2*100*20000 + 2*150*1000 + 2*200*2000

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500

61

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141

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= 8000 + 4918 + 5674

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= Rs.18592

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But, under the limitations,

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The optimal Total Cost = 2*100*20000 + 2*150*1000 + 2*200*2000

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368+2*0.17*40 45+2*0.17*200 104+2*0.17*100

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= 18934.19, which is higher than the total cost without

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limitations.

Note:

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Many times the application of the equation

Q*j =

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2CojDj

for j = 1,........., n ------------eq.33

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(Chj+2 Fj)

to find optimal order quantities under limitations does not help to obtain the result. Therefore,
we have to apply trial and error procedure in the following manner:

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i)

First determine the EOQ's for all type of inventory items without considering the

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limitation that is taking =0 and then find Qj. If these values satisfy the constraint

(eq.31), then this solution becomes optimal because the constraint is not active.

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ii)

If the constraint is not satisfied by the values obtained under (i) above, we give

some value to (arbitrarily but institutively) for example say =h and solve for

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Qjs. Qjs satisfy the constraint, these are optimal quantities. Otherwise, we

interpolate or extrapolate the value in between 0 and h or beyond h. With this
value of , the order sizes obtained wil be approximately optimal.

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4.5 Probabilistic Inventory Models

In previous sections, we have discussed simple deterministic inventory models where each

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and every influencing factor is completely known. Generally in actual business environment

complete certainty never occurs. Therefore, here we will discuss some practical situations of

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inventory problems by relaxing the condition of certainty for some of the factors.

The major influencing factors for the inventory problems are Demand, Price and Lead

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Time. There are also other factors like Ordering Cost, Carrying Cost or Holding Cost and

Stock out Costs, but their nature is not so much disturbing. Because of this their estimation

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provides almost, on the average, as known as values. Even Price can also be averaged out to

reflect the condition of certainty. But there are situations where Price fluctuations are too

much in the market and hence they influence the inventory decisions. Similarly, the demand

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variations or consumption variation of an item as well as the lead time variation influence the

overall inventory policy. In this section we will discuss single period probabilistic models.

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4.5.1 Single Period Probabilistic Models

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Single Period Discrete Probabilistic Model deals with the inventory situation of the items like

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perishable goods, seasonal goods and spare parts requiring one time purchase only. These

items demand may by discrete or continuous. In these models the lead time is very much

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important because purchases are made only once.

In single period model, the problem is analyzed using incremental (or

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marginal) analysis and the decision procedure consists of a sequence of steps. In such cases,

there are two types of cost involved. There are Under Stocking Cost and Over Stocking Cost.

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These two costs describe opportunity losses incurred when the number of units stocked is not

exactly equal to the number of units actually demanded.

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In this section we will use the following symbols:

D = Demand for each unit of item (or a random variable)
Q = Number of units stocked or to be purchased
C1 = Under Stocking Cost some times also known as over ordering cost. This is an

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opportunity loss associated with each unit left unsold i.e.

C1 = S ? Ch/2 ? Cs

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C2 = Over Stocking Cost some times also known as under ordering cost. This is an

opportunity loss due to not meeting the demand, i.e

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C2 = C + Ch ? V

Where

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C = cost/unit

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Ch = carrying cost/unit for the entire period

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Cs = shortage cost

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V = salvage value

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S = selling price

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In this section we are going to discuss only discrete demand distribution.

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4.5.2 Single Period Discrete Probabilistic Demand Model (Discrete Demand

Distribution)

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Here we will discuss the following methods of solving the single period discrete probabilistic
demand.

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a. Incremental Analysis Method
b. Payoff Matrix Method

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a. Incremental Analysis Method

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The Cost equation is developed as follows:

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For any quantity in stock Q, only D units are consumed (or demanded). Then for

specific period of time, the cost associated with Q units in stock is either:

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MBA-H2040 Quantitative Techniques

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for Managers

i)

(Q-D)C2, where D is the number of units demanded or consumed is less that or

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equal to the number of units Q in stock. That is D Q.

ii)

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(D-Q)C1, where the number of units required is greater than the number of units Q
in stock. That is D > Q.

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We know that D is a random variable, so its probability distribution of demand is known.

(D) represents the probability that the demand is D units, such that total probability is one.

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That is (0) + (1) + ................. + (D) + ............. = (D) = 1 ------- eq. p1

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D=0

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The total expected cost is the sum of expected cost of under-stocking and over-stocking.
Therefore

The Total Expected Cost, say f(Q), is given by

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Q

f(Q) = C2 (Q-D) (D) + C1 (D-Q) (D) -------------------- eq.p2

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D=0 D=Q+1

Suppose, Q* is the optimal quantity stocked, then the total expected cost f(Q*) will be

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minimum. Thus, if we stock one unit more or less than the optimal quantity, the total expected
cost will be higher than the optimal.

Thus,

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Q*+1

f(Q*+1) = C2 (Q*+1-D) (D) + C1 (D-Q*-1) (D)

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D=0 D=Q*+2

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Q* Q*

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= C2 (Q*-D) (D) + C2 (D-Q*) (D) + C2 (D) - C1

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(D)

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D=0 D=Q*+1 D=0

D=Q*+1

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= f(Q*) + (C2+C1) (D) - C1 --------------- eq.p3

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D=0

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Thus,

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f(Q*+1) ? f(Q*) = (C2+C1) (DQ*) ? C1 0 --------- eq.p4

Q*

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where (DQ*) = (D) - is a cumulative probability.

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D=0

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Similarly, we obtain

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f(Q*-1) ? f(Q*) = C1 ? (C2+C1) (DQ*-1) 0 ------eq.p5

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We will obtain the following from the above equations eq.p4 and eq.p5

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(DQ*-1) C1 (DQ*) --------------------- eq.p6

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C2+C1

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Therefore, the optimal stock level Q* satisfies the relationship (eq.p6).

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Note that for practical application of (eq.p6), the three step procedure is as follows:

Step 1:

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From the data, prepare a table showing the probability (D), and cumulative probability
(DQ) for each reasonable value of D.

Step 2:

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Calculate the ratio C1 which is called as service level.

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C2+C1

Step 3:

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Determine the value of Q which satisfies the inequality eq.p6.

This situation is explained with the following Example 4.13.

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Example 4.13

An organization stocks seasonal products at the start of the season and cannot reorder. The

inventory item costs him Rs.35 each and he sells at Rs.50 each. For any item that cannot be

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met on demand, the organization has estimated a goodwill cost of Rs.25. Any unsold item will

have a salvage value of Rs.20. Holding cost during the period is estimated to be 10% of the

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price. The probability distribution of demand is as follows:

Units Stocked

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2

3

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4

5

6

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Probability of

0.35

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0.25

0.20

0.15

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0.05

Demand (D=Q)

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Determine the Optimum Number of Items to be stocked.

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Solution

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Now we have to follow the above sequence of steps.

Step 1:

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We will prepare the Table 4.8 containing the data regarding demand distribution as
follows:

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MBA-H2040 Quantitative Techniques
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Units Stocked

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Probability of

Cumulative

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Demand (D=Q) Probability (DQ)

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2

0.35

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0.35

3

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0.25

0.60

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4

0.20

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0.80

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5

0.15

0.95

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0.05

1.00

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Table 4.8 Probability Distribution of Demand

Step 2:

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Calculate the ratio C1 which is called as service level.

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C2+C1

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We see that

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S=50, C=35, Ch=0.1*35= 3.5, V=20, Cs=25

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Therefore

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C2 = C+Ch-V = 35+3.5-20 = 18.5

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C1 = S-C-Ch + Cs = 50-35-3.5 + 25 = 38.25

2

2

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Thus, C1 = 38.25 = 0.6740

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C2+C1 18.5+38.25

Step 3:

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Look into the Table 4.8, the ratio 0.6740 lies between cumulative probabilities of 0.60 and
0.80 which in turn reflect the values of Q as 3 and 4 (units stocked).

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That is

(D3) = 0.60<0.6740<0.80 = (D4)

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Therefore, the optimal number of units to stock is 4 units.

Cost of Under Stocking Estimation

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Suppose, in the previous Example 4.13, the under stocking cost is not known, but the decision

maker policy is to maintain a stock level of say 5 units. We can determine for what values of

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C1(under estimating cost) does Q*=5?

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In this case, we have the following inequality:

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(D4) C1 (D5)

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C2+C1

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That is

(D4) C1 (D5) or

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18.5+C1

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0.80 C1 0.95

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18.5+C1

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So that the Minimum Value of C1 is determine by letting

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C1 = 0.80 or C1 = (0.80)(18.5) = Rs.74

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18.5+C1 (1-0.80)

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Similarly, the Maximum Value of C1 is determine by letting

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C1 = 0.95 or C1 = (0.95)(18.5) = Rs.351.5

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18.5+C1 (1-0.95)

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Therefore

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74C1351.5

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Perishable Products Inventory

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Many of the organization manage merchandise which contains negligible utility if it is not

sold almost immediately. The examples of such kind of products are newspaper, fresh

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produce, printed programmes for special events and other perishable products. Generally such

inventory items have high mark-up. The major difference between the wholesale cost and the

retail price is due to the risk vendor faces in stocking the inventory. Vendor faces

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obsolescence costs on the one hand and opportunity costs on the other.

All this kind of problems can be very easily solved with the help of the above

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discussed model. This is explained in the following Example 4.14.

Example 4.14

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A boy selling newspaper, he buys papers for Rs.0.45 each and sells them for Rs.0.70 each.

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The condition here is the boy cannot return unsold newspapers. The following table shows the

daily demand distribution. If each days demand is independent of the pervious days demand,

how many news papers should he order each day?

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Number of

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240

250

260

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270

280

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290

300

310

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320

330

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Customers

Probability

0.01

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0.03

0.06

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0.10

0.20

0.25

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0.15

0.10

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0.05

0.05

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Solution

Step 1:

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MBA-H2040 Quantitative Techniques
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Prepare a following Table 4.9 showing the probability (D), and cumulative probability
(DQ) for each reasonable value of D.

Number of

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240

250

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260

270

280

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290

300

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310

320

330

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Customers

Probability

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0.01

0.03

0.06

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0.10

0.20

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0.25

0.15

0.10

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0.05

0.05

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Cumulative

0.01

0.04

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0.10

0.20

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0.40

0.65

0.80

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0.90

0.95

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1.00

Probability

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Table 4.9 Probability Discrete Distribution of Demand

Step 2:

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C1 = 0.25 = 0.25 = 0.357

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C2+C1 0.45+0.25 0.70

Step 3:

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Thus, the Value of Q such that

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(DQ*-1) 0.357 (DQ*) this gives

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Q* = 280

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Therefore

The newspaper boy should buy 280 papers each day.

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b. Payoff Matrix Method

The Payoff Matrix Method of single period Discrete Probabilistic Demand Model is explained

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with the help of the following Example 4.15.

Example 4.15

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Consider the example 4.13 i.e.

An organization stocks seasonal products at the start of the season and cannot reorder.

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The inventory item costs him Rs.35 each and he sells at Rs.50 each. For any item that cannot

be met on demand, the organization has estimated a goodwill cost of Rs.25. Any unsold item

will have a salvage value of Rs.20. Holding cost during the period is estimated to be 10% of

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the price. The probability distribution of demand is as follows:

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Units Stocked

2

3

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4

5

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6

Probability of

0.35

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0.25

0.20

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0.15

0.05

Demand (D=Q)

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Determine the Optimum Number of Items to be stocked.

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In this case the organization has five reasonable courses of action. The organization

can stock the items from 2 to 6 units. There is no possible reason to stock more than 6 items

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MBA-H2040 Quantitative Techniques
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since the organization can never sell more than 6 items and there is no possible reason for

ordering less than 2 items. Since there are five courses of action for stocking and five levels of

demand, it follows that there are 25 combinations of one course of action and one level of

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demand. For these 25 combinations, we can determine the organization payoffs in the form of

payoff matrix.

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As per the information of cost given in the problem, the payoffs are obtained for the

following two situations:

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When demand is not more than the stock level

When demand is more than the stock quantity.

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That is

Payoffs For

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QD

Q<D

Item Cost

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-35Q

-35Q

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Sale of items

50D

50Q

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Goodwill Cost

-

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-25(D-Q)

Salvage Cost

20(Q-D)

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-

Holding Cost

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-3.5(Q-D)-3.5D/2

-3.5Q/2

Total payoff

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-18.50Q+31.75D

38.25Q-25D

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The payoff matrix will be 5X5. Each element of the matrix can be computed by above

total payoffs for demand less than, equal to, or greater than the order size (Q). When demand

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is less than or equal to the order size, we have the following contributions to the payoff.

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Here the organization buys the items for Rs.Rs.35Q and the organization sells D of

them for Rs.50D, the organization earns salvage of Rs.20 (Q-D) for unsold items, and the

organization incurs holding cost of Rs.(.10)(35)(Q-D) on unsold items an average holding

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cost of (.10)(35)D/2 on the sold items during the period. Thus the total payoff becomes -

128.5Q+31.75D for demand less or equal to order size.

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If demand is more than the order size, the contributory payoff will consist of the

following:

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- Purchase Cost Rs.35Q
- Selling Profit of Rs.50Q
- Goodwill Cost Rs.25(D-Q) and

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- Holding Cost of Rs. (0.10)(35)Q/2

Thus, the total payoff for demand more than order size is 38.25Q-25D.

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The payoff matrix is as follows (Table 4.10):

Units Demanded D

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2 3 4 5
6
Units stocked or 2 26.50 1.50 -23.50 -48.5 -

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MBA-H2040 Quantitative Techniques

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73.5
Order Size (Q) 3 8.0 39.75 14.75 -10.25 -
35.25

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4 -10.5 21.25 53.0 28.0
3.0
5 -29.0 2.75 34.5 66.25
41.25
6 -47.5 -15.75 16.0 47.75

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79.5

Probability of Demand 0.35 0.25 0.20 0.15
0.05

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Table 4.10 Payoff Matrix

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Now we will determine the expected payoff for each order size or courses of action.

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The procedure for computing the expected values is simple, as follows:

Procedure: For any given course of action multiply each possible payoff for that

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course of action by the corresponding probability of the given level of demand and add all of
these products up.

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Thus, for first course of action of order size 2 units, the expected value of payoff is:

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(26.5)(0.35) + (1.5)(0.25) + (-23.5)(0.2) + (-48.5)(0.15) + (-73.5)(0.05) = Rs.-6

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For order size 3 units

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(8.0)(0.35) + (39.75)(0.25) + (14.75)(0.2) + (-10.25)(0.15) + (-35.25)(0.05) =

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Rs.12.3875

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For order size 4 units

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(-10.5)(0.35) + (21.25)(0.25) + (53)(0.2) + (28)(0.15) + (3)(0.05) = Rs.20.2625

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For order size 5 units

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(-29)(0.35) + (2.75)(0.25) + (34.5)(0.2) + (66.25)(0.15) + (41.25)(0.05) =

Rs.9.4375

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For order size 6 units

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(-47.5)(0.35) + (-15.75)(0.25) + (16)(0.2) + (47.75)().15) + (79.5)(0.05) = Rs.-

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6.225

Therefore, we compute all the expected values:

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Order Size Q

2

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3

4

5

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6

Expected value

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Rs.-6

Rs.12.3875 Rs.20.2625 Rs.9.4375

Rs.-

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6.225

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Here the objective is to select course of action which provides the highest payoff.

Thus, the organization should order for 4 units for the highest expected payoff value of
Rs.20.2625.

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Note: If we compare the two methods i.e. incremental analysis and payoff matrix, if we see

the solution that incremental analysis provides only the optimum level of purchase quantity

and does not indicate about the level of expected profit. But, the payoff matrix method

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provides both the answers i.e. optimum purchase quantity as well as the optimum expected

profit.

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The interesting is here, we may also convert the payoff matrix to opportunity cost

matrix, where the opportunity cost is, in short, a cost sustained because the decision taken is

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not the best in terms of the level of demand which actually occurs.

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The computation of opportunity cost matrix from the payoff matrix is very easy. Take

any column of the payoff matrix corresponding to a specific level of demand and select the

largest payoff if the payoffs are profits, the smallest payoff if the payoffs are costs. Then

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subtract each payoff in the same column from the largest payoff to get the corresponding

opportunity costs in the case of profits. If it is cost, subtract the smallest payoff from each

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payoff in the same column to get the opportunity costs.

In this Example 4.15, we may obtain the opportunity cost matrix as follows (Table

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4.11):

Units Demanded D

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2 3 4 5 6
Order size
2 0 38.25 76.5 114.75 153.0
3 18.5 0 38.25 76.5 114.75

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4 37.0 18.5 0 38.25 76.5
5 55.5 37.0 18.5 0 38.0
6 74.0 55.5 37.0 18.5 0

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Probability of
Demand 0.35 0.25 0.20 0.15 0.05

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Table 4.11 Opportunity Cost Matrix

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Now, we have to determine the expected opportunity costs for each alternative courses

of action. The objective is to select the course of action which provides minimum expected

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opportunity costs.

Therefore,

The expected opportunity cost for the first alternative course of action of order size 2

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is:

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(0)(.35) + (38.25)(.25) + (76.5)(.2) + (114.75)(0.15) + (153)(.05) = Rs.49.725

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For order size 3 units

(18.5)(.35) + (0)(.25) + (38.25)(.2) + (76.5)(.15) + (114.75)(.05) = Rs.31.3375

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For order size 4 units

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(37)(.35) + (18.5)(.25) + (0)(.2) + (38.25)(.15) + (76.5)(.05) = Rs.27.1375

For order size 5 units

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(55.5)(.35) + (37)(.25) + (18.5)(.2) + (0)(.15) + (38)(.05) = Rs.34.275

For order size 6 units

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(74)(.35) + (55.5)(.25) + (37)(.2) + (18.5)(.15) + (0)(.05) = Rs.49.95

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That is, the following are the obtained expected opportunity costs;

Order Size Q

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2

3

4

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5

6

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Expected Cost

Rs.

Rs.31.3375 Rs.27.1375 Rs.34.275 Rs.49.95

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49.725

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Thus, the decision is to select the minimum expected cost is that, the organization

should store 4 units for the lowest cost of Rs.27.1375

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Relationship between the Payoff Matrix and Opportunity Cost Matrix

Here, we may find a relationship between the payoff matrix and the opportunity cost

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matrix, as follows:

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Let

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EOC = K ? EP

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Where,

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EOC = Expected Opportunity Cost

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EP = Expected Payoff or profit

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K = Constant or

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K = (26.5)(.35) + (39.75)(.25) + (53)(.2) + (66.25)(.15) + (79.5)(.05)

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= 43.735

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That is K = sum of the expected value of the largest elements in each column

of the

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payoff matrix.

= the expected value of the payoffs for all the best courses of action.
Or

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The expected opportunity cost for a given courses of action= K(43.735)-Expected pay of for
each
courses of action -
(eq1)

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Thus, it is obvious from the above equation eq1 that the maximum value of EP will

simultaneously produce, the minimum of EOC. The two analyses namely, the payoff matrix

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method and the opportunity cost matrix method produce the same result.

Suppose, if the original matrix is in terms of costs it can by similar reasoning, be

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shown that the above relationship (eq1) will be of the following form:

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EOC = EP ? K

In this case EP is in terms of costs.

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4.6 Summary

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In this lesson various deterministic inventory models have been developed for various

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operating conditions. Here we discussed single item inventory and as well as multi item

inventory models. In this lesson we also discussed probabilistic discrete demand models for

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single period inventory items.

4.7 Key Terms

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Inventory ? stores of goods or stocks.

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Ordering Cost - Cost involved in placing an order.

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Procurement Cost ? Same as ordering cost.

Replenishment Cost ? Same as ordering cost.

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Set up Cost ? Cost associated with the setting of machine for production.

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Shortage Cost ? Costs associated with the demand when stocks have been depleted, it

is

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generally called as back order costs.

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Safety Stock ? Extra Stocks.

Perishable Product ? The inventories that deteriorate with time.

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Deterministic Model ? An inventory model where all the factors are completely

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known.

Discrete Probability Distribution ? A probability distribution in which the variable

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is allowed

to take only limited number of values.

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Expected Opportunity Cost ? Expected value of the variable indicating opportunity

costs.

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Expected payoff ? Expected value of the variable indicating payoffs.

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Expected Value ? The average value or mean.

Minimum Value ? This is also known as safety stock or the buffer stock.

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Maximum Value ? Level of inventory beyond which inventory is not allowed.

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Payoff ? The benefit which accrues form a given combination of decision alternative

courses of

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action and state of nature.

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Reorder Level ? The stock level which is sufficient for the lead time consumption,

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and an order

is initiated when inventory dips to this level.

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Under Stocking Cost ? Cost relating to the out of stock situation under the

probabilistic

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situation.

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Over Stocking Cost ? This is the cost of keeping more units than demanded.

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Opportunity Cost Matrix ? Matrix of opportunity Costs.

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4.8 Self Assessment Questions

Q1. A Production unit uses Rs.10,000 worth of an item during the year. The production units
estimated the ordering cost as Rs.25 per order and holding cost as 12.5 percent of the average

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inventory value. Determine the optimal order size, number of orders per year, time period per
order and total cost.

Answer

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Order Size = Q* = Rs.2000

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No. of orders per year = N = 5

Time period per order = t* = 73 days

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Total Cost = TC* = Rs.250

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Q2. The usage of an inventory item each costing Re 1, is 10000 units/year and the ordering
cost is Rs.10, carrying charge is 20% based on the average inventory per year, stock out cost
is Rs.5 per unit of shortage incurred. Determine EOQ, inventory level, shortage level, cycle
period, number of order per year and the total cost.

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Answer

EOQ = Q* = 1020 units

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Inventory Level = I* = 980 units

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Shortage Level = 40 units

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Cycle Period = t* = 37 days

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No. of orders/year = 10

Total Cost = Rs.400

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Q3. The demand for a unit of item is at the rate of 200 per day and can be produced at a rate
of 800 per day. It costs Rs.5000 to set up the production process and Rs.0.2 per unit per day
held in inventory based on the actual inventory any time. Assume that the shortage is not

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allowed. Find out the minimum cost and the optimum number of units per production run.

Answer

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Hint: D=200 P=800 Co=Rs.5000 Ch=Rs.0.2

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Q* = 3651 units

TC* = Rs.547.7

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Q4. The demand for an item is 2400 units per year. The ordering cost is Rs.100, inventory
holding cost is 24 percent of the purchase price per year. Determine the optimum purchase
quantity if the purchase prices are as follows:

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P1 = Rs.10 for purchasing Q1 < 500

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P2 = Rs.9.25 for purchasing 500 Q2 < 750

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P3 = Rs.8.75 for purchasing 750 Q3

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Answer

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Economic Purchase Quantity = EPQ = Q* = 750 units

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Q5. A company follows the following procurement pattern of five items irrespective of their
level of demand. Reduce the inventory levels while keeping the same total number of orders

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per annum.

Item

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Demand/Year Number of

Order size ($)

Average

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($)

orders/year

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Inventory

1

1000,000

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5

250,000

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125,000

2

640,000

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5

160,000

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80,000

3

90,000

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5

22,500

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11,250

4

2,500

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5

625

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350

5

1,600

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5

400

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200

Answer

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According to the company policy, ordering five times a year each item, total average

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inventory becomes $.216800.

But after the analysis of ordering quantity the average inventory becomes $.7698.32,

which is much less, at the same time the number of orders almost remain same. Thus,

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substantial savings can still be achieved when cost information is not known.

Q6. Suppose the carrying cost is 30% per unit/year, unit price is Rs.4, and the ordering cost is

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Rs.30 per order for an item used in an organization in the following pattern:

Month

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Jan

Feb

Mar

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Apr

May

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Jun

Jul

Aug

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Sep

Oct

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Nov

Dec

Demand 200

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220

150

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170

210

200

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180

220

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170

200

160

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140

Determine the ordering schedule and the total inventory cost using the following method.

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1. Prescribed Rule Method
2. Fixed EOQ Method

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Q7. The following numbers indicate the annual values in dollars of some thirty inventory
items of materials selected at random. Carry out an ABC analysis and list out the values of
three items viz. A-items, B-items and C-items.

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1

2

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3

9

75

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3

4

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6

13

2

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3

12

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100

2

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7

40

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15

55

1

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12

25

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15

8

10

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1

20

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30

1

4

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Q8. An organization stoking two products. The organization has limited storage space and
can't store more than 40 units. The following are the demand distribution for the products:

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Product1 Product2
Demand Probability of Demand Demand Probability of Demand
10 0.10 10 0.05
20 0.20 20 0.20
30 0.35 30 0.30

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40 0.25 40 0.13
50 0.10 50 0.10

If the inventory holding cost is Rs.10 (product 1) and Rs15 (product 2) per unit of the ending

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inventories, the shortage costs are Rs.20 and Rs.50 per unit at the ending shortage for the first
and second products respectively. Determine the economic order quantities for both the
products.

4.9 Further References

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Hamdy A Taha, 1999. Introduction to Operations Research, PHI Limited, New Delhi.

Mustafi, C.K. 1988. Operations Research Methods and Practices, Wiley Eastern Limited,
New Delhi.

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Levin, R and Kirkpatrick, C.A. 1978. Quantitative Approached to Management, Tata
McGraw Hill, Kogakusha Ltd., International Student Edition.

Peterson R and Silver, E. A. 1979. Decision Systems for Inventory Management and

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Production Planning.

Handley, G and T.N. Whitin. 1983. Analysis of Inventory Systems, PHI.

Starr, M.K. and D.W. Miller. 1977. Inventory Control Theory and Practice, PHI.

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UNIT III

NETWORK PROBLEMS

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Introduction

A network consists of several destinations or jobs which are linked with one another. A

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manager will have occasions to deal with some network or other. Certain problems pertaining

to networks are taken up for consideration in this unit.

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LESSON 1

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SHORTEST PATH PROBLEM

LESSON OUTLINE

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The description of a shortest path problem.

The determination of the shortest path.

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LEARNING OBJECTIVES

After reading this lesson you should be able to

- understand a shortest path problem

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- understand the algorithm for a shortest path problem
-

work out numerical problems

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THE PROBLEM

Imagine a salesman or a milk vendor or a post man who has to cover certain previously earmarked places to

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perform his daily routines. It is assumed that all the places to be visited by him are connected well for a suitable

mode of transport. He has to cover all the locations. While doing so, if he visits the same place again and again

on the same day, it will be a loss of several resources such as time, money, etc. Therefore he shall place a

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constraint upon himself not to visit the same place again and again on the same day. He shall be in a position to

determine a route which would enable him to cover all the locations, fulfilling the constraint.

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The shortest route method aims to find how a person can travel from one location to another, keeping

the total distance traveled to the minimum. In other words, it seeks to identify the shortest route to a series of

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destinations.

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EXAMPLE

Let us consider a real life situation involving a shortest route problem.

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A leather manufacturing company has to transport the finished goods from the factory

to the store house. The path from the factory to the store house is through certain

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intermediate stations as indicated in the following diagram. The company executive wants to

identify the path with the shortest distance so as to minimize the transportation cost. The

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problem is to achieve this objective.

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95 Store house

2

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Factory 40

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70

6

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100

5

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3

Linkages from Factory to Store house

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The shortest route technique can be used to minimize the total distance from a node designated as the

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starting node or origin to another node designated as the final node.

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In the example under consideration, the origin is the factory and the final node is the store house.

STEPS IN THE SHORTEST ROUTE TECHNIQUE

The procedure consists of starting with a set containing a node and enlarging the set by choosing a node in each

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subsequent step.

Step 1:

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First, locate the origin. Then, find the node nearest to the origin. Mark the distance between the origin and the

nearest node in a box by the side of that node.

In some cases, it may be necessary to check several paths to find the nearest node.

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Step 2:

Repeat the above process until the nodes in the entire network have been accounted for. The last distance placed

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in a box by the side of the ending node will be the distance of the shortest route. We note that the distances

indicated in the boxes by each node constitute the shortest route to that node. These distances are used as

intermediate results in determining the next nearest node.

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SOLUTION FOR THE EXAMPLE PROBLEM

Looking at the diagram, we see that node 1 is the origin and the nodes 2 and 3 are neighbours

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to the origin. Among the two nodes, we see that node 2 is at a distance of 40 units from node

1 whereas node 3 is at a distance of 100 units from node 1. The minimum of {40, 100} is 40.

Thus, the node nearest to the origin is node 2, with a distance of 40 units. So, out of the two

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nodes 2 and 3, we select node 2. We form a set of nodes {1, 2} and construct a path

connecting the node 2 with node 1 by a thick line and mark the distance of 40 in a box by the

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side of node 2. This first iteration is shown in the following diagram.

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95 Store house

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2

4

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6

Factory

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65 70

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100

3

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ITERATION No. 1

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Now we search for the next node nearest to the set of nodes {1, 2}. For this purpose, consider those

nodes which are neighbours of either node 1 or node 2. The nodes 3, 4 and 5 fulfill this condition. We calculate

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the following distances.

The distance between nodes 1 and 3 = 100.

The distance between nodes 2 and 3 = 35.

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The distance between nodes 2 and 4 = 95.

The distance between nodes 2 and 5 = 65.

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Minimum of {100, 35, 95, 65} = 35.

Therefore, node 3 is the nearest one to the set {1, 2}. In view of this observation, the set of nodes is enlarged

from {1, 2} to {1, 2, 3}. For the set {1, 2, 3}, there are two possible paths, viz. Path 1 2 3 and Path 1

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3 2. The Path 1 2 3 has a distance of 40 + 35 = 75 units while the Path 1 3 2 has a distance of

100 + 35 = 135 units.

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Minimum of {75, 135} = 75. Hence we select the path 1 2 3 and display this path by thick edges. The

distance 75 is marked in a box by the side of node 3. We obtain the following diagram at the end of Iteration

No. 2.

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95 Store house

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2

4

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Factory

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65

70

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100

3

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ITERATION No. 2

REPEATING THE PROCESS

We repeat the process. The next node nearest to the set {1, 2, 3} is either node 4 or node 5.

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Node 4 is at a distance of 95 units from node 2 while node 2 is at a distance of 40 units

from node 1. Thus, node 4 is at a distance of 95 + 40 = 135 units from the origin.

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As regards node 5, there are two paths viz. 2 5 and 3 5, providing a link to the origin. We already

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know the shortest routes from nodes 2 and 3 to the origin. The minimum distances have been indicated in boxes

near these nodes. The path 3 5 involves the shortest distance. Thus, the distance between nodes 1 and 5 is 95

units (20 units between nodes 5 and 3 + 75 units between node 3 and the origin). Therefore, we select node 5

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and enlarge the set from {1, 2, 3} to {1, 2, 3, 5}. The distance 95 is marked in a box by the side of node 5. The

following diagram is obtained at the end of Iteration No. 3.

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95 Store house

2

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40

6

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35

65

70

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40

5

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Factory 100

3

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20 95

75

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ITERATION No. 3

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Now 2 nodes remain, viz., nodes 4 and 6. Among them, node 4 is at a distance of 135 units from the

origin (95 units from node 4 to node 2 + 40 units from node 2 to the origin). Node 6 is at a distance of 135

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units from the origin (40 + 95 units). Therefore, nodes 4 and 6 are at equal distances from the origin. If we

choose node 4, then travelling from node 4 to node 6 will involve an additional distance of 40 units. However,

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node 6 is the ending node. Therefore, we select node 6 instead of node 4. Thus the set is enlarged from {1, 2, 3,

5} to {1, 2, 3, 5, 6}. The distance 135 is marked in a box by the side of node 6. Since we have got a path

beginning from the start node and terminating with the stop node, we see that the solution to the given problem

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has been obtained. We have the following diagram at the end of Iteration No. 4.

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95 Store house

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2

4

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65

70

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135

5

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Factory

100

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20

95

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ITERATION No. 4

MINIMUM DISTANCE

Referring to the above diagram, we see that the shortest route is provided by the path 1 2

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3 5 6 with a minimum distance of 135 units.

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QUESTIONS

1. Explain the shortest path problem.

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2. Explain the algorithm for a shortest path problem

3. Find the shortest path of the following network:

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30

3

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5

40
40
30 50 30

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1

45

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6

25

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35

2

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4

4. Determine the shortest path of the following network:

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16

5

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7
9 7

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1

4

15

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6

8 4
25

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LESSON 2

MINIMUM SPANNING TREE PROBLEM

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LESSON OUTLINE

The description of a minimum spanning tree problem.

The identification of the minimum spanning tree.

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LEARNING OBJECTIVES

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After reading this lesson you should be able to

-

understand a minimum spanning tree problem

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-

understand the algorithm for minimum spanning tree problem

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-

locate the minimum spanning tree

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-

carry out numerical problems

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Tree: A minimally connected network is called a tree. If there are n nodes in a network, it

will be a tree if the number of edges = n-1.

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Minimum spanning tree algorithm

Problem : Given a connected network with weights assigned to the edges, it is required to

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find out a tree whose nodes are the same as those of the network.

The weight assigned to an edge may be regarded as the distance between the two

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nodes with which the edge is incident.

Algorithm:

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The problem can be solved with the help of the following algorithm.

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The procedure consists of selection of a node at each step.

Step 1: First select any node in the network. This can be done arbitrarily. We will start with

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this node.

Step 2: Connect the selected node to the nearest node.

Step 3: Consider the nodes that are now connected. Consider the remaining nodes. If there is

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no node remaining, then stop. On the other hand, if some nodes remain, among them find out

which one is nearest to the nodes that are already connected. Select this node and go to Step

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2.

Thus the method involves the repeated application of Steps 2 and 3. Since the number

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of nodes in the given network is finite, the process will end after a finite number of steps. The

algorithm will terminate with step 3.

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How to break ties:

While applying the above algorithm, if some nodes remain in step 3 and if there is a tie in the

nearest node, then the tie can be broken arbitrarily.

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As a consequence of tie, we may end up with more than one optimal solution.

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Problem 1:

Determine the minimum spanning tree for the following network.

60

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5

2

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70

60 60 80

100

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1

3

40 120 50

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201

4

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6

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80 50 60

30

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90

Solution:

Step 1: First select node 1. (This is done arbitrarily)

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Step 2: We have to connect node 1 to the nearest node. Nodes 2, 3 and 4 are adjacent to node
1. They are at distances of 60, 40 and 80 units from node 1. Minimum of {60, 40, 80} = 40.
Hence the shortest distance is 40. This corresponds to node 3. So we connect node 1 to node
3 by a thick line. This is Iteration No. 1.

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60

5

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2 70

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7

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3

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8

80 50 60

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30

90

6

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Iteration No. 1

Step 3: Now the connected nodes are 1 and 3. The remaining nodes are 2, 4, 5, 6, 7 and 8.

Among them, nodes 2 and 4 are connected to node 1. They are at distances of 60 and 80 from

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node 1. Minimum of {60, 80} = 60. So the shortest distance is 60. Next, among the nodes 2,

4, 5, 6, 7 and 8, find out which nodes are connected to node 3. We find that all of them are

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connected to node 3. They are at distances of 60, 50, 80, 60, 100 and 120 from node 3.

Minimum of {60, 50, 80, 60, 100, 120} = 50. Hence the shortest distance is 50.

Among these nodes, it is seen that node 4 is nearest to node 3.

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Now we go to Step 2. We connect node 3 to node 4 by a thick line. This is Iteration

No.2.

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5

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2

70

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60 60 80

100

7

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3

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40 120 50

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8

80 50 60

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30

90

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6

4

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Iteration No. 2

Next go to step 3.

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Now the connected nodes are 1, 3 and 4. The remaining nodes are 2, 5, 6, 7 and 8.

Node 2 is at a distance of 60 from node 1. Nodes 5, 6, 7 and 8 are not adjacent to node 1. All

of the nodes 2, 5, 6, 7 and 8 are adjacent to node 3. Among them, nodes 2 and 6 are nearer to

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node 3, with equal distance of 60.

Node 6 is adjacent to node 4, at a distance of 90. Now there is a tie between nodes 2

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and 6. The tie can be broken arbitrarily. So we select node 2. Connect node 3 to Node 2 by

a thick line. This is Iteration No. 3.

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60 60 80

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90

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4

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Iteration No. 3

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We continue the above process.

Now nodes 1, 2, 3 and 4 are connected. The remaining nodes are 5, 6, 7 and 8. None

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of them is adjacent to node 1. Node 5 is adjacent to node 2 at a distance of 60. Node 6 is at a

distance of 60 from node 3. Node 6 is at a distance of 90 from node 4. There is a tie between

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nodes 5 and 6. We select node 5. Connect node 2 to node 5 by a thick line. This is Iteration

No. 4.

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5

2

70

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60 60 80

100

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1

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40 120 50

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80 50 60

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30

90

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6

4

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Iteration No. 4

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Now nodes 1, 2, 3, 4 and 5 are connected. The remaining nodes are 6, 7 and 8. Among them,

node 6 is at the shortest distance of 60 from node 3. So, connect node 3 to node 6 by a thick

line. This is Iteration No. 5.

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5

2

70

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60 60 80

100

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40 120 50

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30

90

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6

4

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Iteration No. 5

Now nodes 1, 2, 3, 4, 5 and 6 are connected. The remaining nodes are 7 and 8. Among them,

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node 8 is at the shortest distance of 30 from node 6. Consequently we connect node 6 to node

8 by a thick line. This is Iteration No. 6.

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60

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6

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Iteration No. 6

Now nodes 1, 2, 3, 4, 5, 6 and 8 are connected. The remaining node is 7. It is at the shortest

distance of 50 from node 8. So, connect node 8 to node 7 by a thick line. This is Iteration

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No.7.

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90

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4

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Iteration No. 7

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Now all the nodes 1, 2, 3, 4, 5, 6, 7 and 8 are connected by seven thick lines. Since no node

is remaining, we have reached the stopping condition. Thus we obtain the following minimum

spanning tree for the given network.

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5

2

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40 50

50 60

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Minimum Spanning Tree

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QUESTIONS

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1. Explain the minimum spanning tree algorithm.

2. From the following network, find the minimum spanning tree.

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75

6

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2

80 55 90

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100

1

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3

70 40

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25 60

5

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30

4

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3. Find the minimum spanning tree of the following network:

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12

5

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2 15

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5 8

2 10 13

8

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1

3

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6

9 4 10

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5

7

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4

4

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LESSON 3

PROJECT NETWORK

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LESSON OUTLINE

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The key concepts

Construction of project network diagram

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LEARNING OBJECTIVES

After reading this lesson you should be able to

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- understand the definitions of important terms
-

understand the development of project network diagram

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-

work out numerical problems

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KEY CONCEPTS

Certain key concepts pertaining to a project network are described below:

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1. Activity

An activity means a work. A project consists of several activities. An activity takes time. It

is represented by an arrow in a diagram of the network. For example, an activity in house

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construction can be flooring. This is represented as follows:

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flooring

Construction of a house involves various activities. Flooring is an activity in this project. We

can say that a project is completed only when all the activities in the project are completed.

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2. Event

It is the beginning or the end of an activity. Events are represented by circles in a project

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network diagram. The events in a network are called the nodes. Example:

Start Stop

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Punching

Starting a punching machine is an activity. Stopping the punching machine is another activity.

3. Predecessor Event

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The event just before another event is called the predecessor event.

4. Successor Event

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The event just following another event is called the successor event.

Example: Consider the following.

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1

2

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4

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In this diagram, event 1 is predecessor for the event 2.

Event 2 is successor to event 1.

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Event 2 is predecessor for the events 3, 4 and 5.

Event 4 is predecessor for the event 6.

Event 6 is successor to events 3, 4 and 5.

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5. Network

A network is a series of related activities and events which result in an end product or service.

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The activities shall follow a prescribed sequence. For example, while constructing a house,

laying the foundation should take place before the construction of walls. Fitting water tapes

will be done towards the completion of the construction. Such a sequence cannot be altered.

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6. Dummy Activity

A dummy activity is an activity which does not consume any time. Sometimes, it may be

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necessary to introduce a dummy activity in order to provide connectivity to a network or for

the preservation of the logical sequence of the nodes and edges.

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7. Construction of a Project Network

A project network consists of a finite number of events and activities, by adhering to a certain

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specified sequence. There shall be a start event and an end event (or stop event). All the

other events shall be between the start and the end events. The activities shall be marked by

directed arrows. An activity takes the project from one event to another event.

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An event takes place at a point of time whereas an activity takes place from one point

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of time to another point of time.

CONSTRUCTION OF PROJECT NETWORK DIAGRAMS

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Problem 1:

Construct the network diagram for a project with the following activities:

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Activity

Name of

Immediate

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EventEvent

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Activity

Predecessor
Activity

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12

A

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-

13

B

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-

14

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C

-

25

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D

A

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36

E

B

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46

F

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C

56

G

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Solution:

The start event is node 1.

The activities A, B, C start from node 1 and none of them has a predecessor activity. A joins

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nodes1 and 2; B joins nodes 1 and 3; C joins nodes 1 and 4. So we get the following:

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A

2

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1

3

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B

C

4

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This is a part of the network diagram that is being constructed.

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Next, activity D has A as the predecessor activity. D joins nodes 2 and 5. So we get

A D

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1

2

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5

Next, activity E has B as the predecessor activity. E joins nodes 3 and 6. So we get

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B E

1

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3

6

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Next, activity G has D as the predecessor activity. G joins nodes 5 and 6. Thus we obtain

D G

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2

5

6

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Since activities E, F, G terminate in node 6, we get

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5

G

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6

E

4

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F

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6 is the end event.

Combining all the pieces together, the following network diagram is obtained for the given

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project:

D

5

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A G

Start event End event
B E

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1

3

6

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C F

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We validate the diagram by checking with the given data.

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Problem 2:

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Develop a network diagram for the project specified below:

Activity

Immediate

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Predecessor Activity

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A

-

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B

A

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C, D

B

E

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C

F

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D

G

E, F

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Solution:

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Activity A has no predecessor activity. i.e., It is the first activity. Let us suppose that activity

A takes the project from event 1 to event 2. Then we have the following representation for A:

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A

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1

2

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For activity B, the predecessor activity is A. Let us suppose that B joins nodes 2 and 3. Thus

we get

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A B

1

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2

3

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Activities C and D have B as the predecessor activity. Therefore we obtain the following:

C

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B

4

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2

3

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5

Activity E has D as the predecessor activity. So we get

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C E

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3

4

6

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Activity F has D as the predecessor activity. So we get

D F

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3

5

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6l

"

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Activity G has E and F as predecessor activities. This is possible only if nodes 6 and 6l are

one and the same. So, rename node 6l as node 6. Then we get

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D F

3

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5

6!

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and

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E

6

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7

G

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5

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F

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G is the last activity.

Putting all the pieces together, we obtain the following diagram the project network:

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Start event C

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4 E End event

A B G

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1

2

3

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7

D F

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The diagram is validated by referring to the given data.

Note: An important point may be observed for the above diagram. Consider the following
parts in the diagram

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C E

3

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4

6

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and

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D F

3

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5

6l

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We took nodes 6 and 6l as one and the same. Instead, we can retain them as different nodes.

Then, in order to provide connectivity to the network, we join nodes 6l and 6 by a dummy

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activity. Then we arrive at the following diagram for the project network:

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4

Start event C E

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6

G

1

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2

3

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A B dummy
activity

7

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D F End event

5

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6l

!

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QUESTIONS:

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1. Explain the terms: event, predecessor event, successor event, activity, dummy

activity, network.

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2. Construct the network diagram for the following project:

Activity

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Immediate

Predecessor Activity

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A

-

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B

-

C

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A

D

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B

E

A

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F

C, D

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G

E

H

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E

I

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F, G

J

H, I

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LESSON 4

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CRITICAL PATH METHOD (CPM)

LESSON OUTLINE

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The concepts of critical path and critical activities

Location of the critical path

Evaluation of the project completion time

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LEARNING OBJECTIVES

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After reading this lesson you should be able to

-

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understand the definitions of critical path and critical activities

- identify critical path and critical activities
- determine the project completion time

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INTRODUCTION

The critical path method (CPM) aims at the determination of the time to complete a project

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and the important activities on which a manager shall focus attention.

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ASSUMPTION FOR CPM

In CPM, it is assumed that precise time estimate is available for each activity.

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PROJECT COMPLETION TIME

From the start event to the end event, the time required to complete all the activities of the

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project in the specified sequence is known as the project completion time.

PATH IN A PROJECT

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A continuous sequence, consisting of nodes and activities alternatively, beginning with the

start event and stopping at the end event of a network is called a path in the network.

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CRITICAL PATH AND CRTICAL ACTIVITIES

Consider all the paths in a project, beginning with the start event and stopping at the end

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event. For each path, calculate the time of execution, by adding the time for the individual

activities in that path.

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The path with the largest time is called the critical path and the activities along this

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path are called the critical activities or bottleneck activities. The activities are called critical

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because they cannot be delayed. However, a non-critical activity may be delayed to a certain

extent. Any delay in a critical activity will delay the completion of the whole project.

However, a certain permissible delay in a non ?critical activity will not delay the completion

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of the whole project. It shall be noted that delay in a non-critical activity beyond a limit

would certainly delay the completion the whole project. Sometimes, there may be several

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critical paths for a project. A project manager shall pay special attention to critical activities.

Problem 1:

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The following details are available regarding a project:

Activity

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Predecessor

Duration (Weeks)

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Activity

A

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-

3

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B

A

5

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C

A

--- Content provided by⁠ FirstRanker.com ---

7

D

B

--- Content provided by⁠ FirstRanker.com ---

10

E

--- Content provided by⁠ FirstRanker.com ---

C

5

F

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D,E

4

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Determine the critical path, the critical activities and the project completion time.

Solution:

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First let us construct the network diagram for the given project. We mark the time estimates

along the arrows representing the activities. We obtain the following diagram:

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Start event B

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3 D End event

5 10
A

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1

2

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3 F

5

6

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C 4
7 E

--- Content provided by FirstRanker.com ---

4 5

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Consider the paths, beginning with the start node and stopping with the end node. There are

two such paths for the given project. They are as follows:

Path I

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MBA-H2040 Quantitative Techniques
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A B D F

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1

2

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3

5

--- Content provided by FirstRanker.com ---

6

3 5 10 4

with a time of 3 + 5 + 10 + 4 = 22 weeks.

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Path II

A C E F

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1

2

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4

5

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6

3 7 5 4

with a time of 3 + 7 + 5 + 4 = 19 weeks.

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Compare the times for the two paths. Maximum of {22,19} = 22. We see that path I has the
maximum time of 22 weeks. Therefore, path I is the critical path. The critical activities are A,
B, D and F. The project completion time is 22 weeks.

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We notice that C and E are non- critical activities.
Time for path I - Time for path II = 22- 19 = 3 weeks.

Therefore, together the non- critical activities can be delayed upto a maximum of 3

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weeks, without delaying the completion of the whole project.

Problem 2:

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Find out the completion time and the critical activities for the following project:

D

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5

2 20

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A 8 G 8

B E H 11 K 6

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1

3

6

--- Content provided by FirstRanker.com ---

8

10

--- Content provided by‌ FirstRanker.com ---

10 16 I 14 L 5

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C 7 J

9

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F

7 10

4

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25

Solution:

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In all, we identify 4 paths, beginning with the start node of 1 and terminating at the end node

of 10. They are as follows:

Path I

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A D G K

1

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2

5

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8

10

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MBA-H2040 Quantitative Techniques
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8 20 8 6

Time for the path = 8 + 20 + 8 + 6 = 42 units of time.

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Path II

B E H K

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1

3

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6

8

--- Content provided by FirstRanker.com ---

10

10 16 11 6

Time for the path = 10 + 16 + 11 + 6 = 43 units of time.

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Path III

B E I L

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1

3

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6

9

--- Content provided by⁠ FirstRanker.com ---

10

10 16 14 5

Time for the path = 10 + 16 + 14 + 5 = 45 units of time.

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Path IV

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C F J L

1

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4

7

9

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10

7 25 10 5

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Time for the path = 7 + 25 + 10 + 5 = 47 units of time.

Compare the times for the four paths. Maximum of {42, 43, 45, 47} = 47. We see that the

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following path has the maximum time and so it is the critical path:

C F J L

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1

4

7

--- Content provided by‍ FirstRanker.com ---

9

10

--- Content provided by‍ FirstRanker.com ---

7 25 10 5

The critical activities are C, F, J and L. The non-critical activities are A, B, D, E, G, H, I and

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K. The project completion time is 47 units of time.

Problem 3:

Draw the network diagram and determine the critical path for the following project:

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Activity

Time estimate (Weeks)

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1- 2

5

1- 3

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1- 4

--- Content provided by⁠ FirstRanker.com ---

3

2 -5

--- Content provided by FirstRanker.com ---

5

3 -6

7

--- Content provided by‌ FirstRanker.com ---

3 -7

10

--- Content provided by‌ FirstRanker.com ---

4 -7

4

5 -8

--- Content provided by FirstRanker.com ---

2

6 -8

--- Content provided by‌ FirstRanker.com ---

5

7 -9

6

--- Content provided by FirstRanker.com ---

8 -9

4

--- Content provided by FirstRanker.com ---

Solution: We have the following network diagram for the project:

D

--- Content provided by⁠ FirstRanker.com ---

5

2 5

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2 H
A
5

--- Content provided by‍ FirstRanker.com ---

1 B E

6 I

8 K

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3

6 7 5 4

--- Content provided by FirstRanker.com ---

9

3 C F 10 J

--- Content provided by FirstRanker.com ---

6

7

--- Content provided by FirstRanker.com ---

G

4

4

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Solution:

We assert that there are 4 paths, beginning with the start node of 1 and terminating at the end

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node of 9. They are as follows:

Path I

--- Content provided by⁠ FirstRanker.com ---

A D H K

1

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2

5

--- Content provided by⁠ FirstRanker.com ---

8

9

5 5 2 4

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Time for the path = 5 + 5 + 2 + 4 = 16 weeks.

Path II

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B E I K

1

--- Content provided by FirstRanker.com ---

3

6

8

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219

MBA-H2040 Quantitative Techniques
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--- Content provided by FirstRanker.com ---

6 7 5 4

Time for the path = 6 + 7 + 5 + 4 = 22 weeks.

Path III

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B F J

1

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3

7

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9

6 10 6

Time for the path = 6 + 10 + 6 = 16 weeks.

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Path IV

C G J

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1

4

--- Content provided by‍ FirstRanker.com ---

7

9

3 4 6

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Time for the path = 3 + 4 + 6 = 13 weeks.

Compare the times for the four paths. Maximum of {16, 22, 16, 13} = 22. We see that the

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following path has the maximum time and so it is the critical path:

B E I K

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1

3

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6

8

9

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6 7 5 4
The critical activities are B, E, I and K. The non-critical activities are A, C, D, F, G, H and J.

The project completion time is 22 weeks.

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QUESTIONS:

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1. Explain the terms: critical path, critical activities.

2. The following are the time estimates and the precedence relationships of the activities

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in a project network:

Activity

IMMEDIATE

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time estimate

Predecessor

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(weeks)

Activity

A

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-

4

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B

-

7

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C

-

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3

D

A

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6

E

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B

4

F

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B

7

--- Content provided by FirstRanker.com ---

G

C

6

--- Content provided by FirstRanker.com ---

H

E

--- Content provided by FirstRanker.com ---

10

I

D

--- Content provided by‌ FirstRanker.com ---

3

J

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F, G

4

K

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H, I

2

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Draw the project network diagram. Determine the critical path and the project completion
time.

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MBA-H2040 Quantitative Techniques
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LESSON 5

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PERT

LESSON OUTLINE

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The concept of PERT

Estimates of the time of an activity

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Determination of critical path

Probability estimates

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LEARNING OBJECTIVES

After reading this lesson you should be able to

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- understand the importance of PERT
- locate the critical path
- determine the project completion time
- find out the probability of completion of a project before a stipulated time

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INTRODUCTION

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Programme Evaluation and Review Technique (PERT) is a tool that would help a project

manager in project planning and control. It would enable him in continuously monitoring a

project and taking corrective measures wherever necessary. This technique involves

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statistical methods.

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ASSUMPTIONS FOR PERT

Note that in CPM, the assumption is that precise time estimate is available for each activity in

a project. However, one finds most of the times that this is not practically possible.

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In PERT, we assume that it is not possible to have precise time estimate for each

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activity and instead, probabilistic estimates of time alone are possible. A multiple time

estimate approach is followed here. In probabilistic time estimate, the following 3 types of

estimate are possible:

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1. Pessimistic time estimate ( t )

p

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2. Optimistic time estimate ( t )

o

3. Most likely time estimate ( t )

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m

The optimistic estimate of time is based on the assumption that an activity will not involve

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any difficulty during execution and it can be completed within a short period. On the other

hand, a pessimistic estimate is made on the assumption that there would be unexpected

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MBA-H2040 Quantitative Techniques
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problems during the execution of an activity and hence it would consume more time. The

most likely time estimate is made in between the optimistic and the pessimistic estimates of

time. Thus the three estimates of time have the relationship

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t t t .

o

--- Content provided by⁠ FirstRanker.com ---

m

p

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Practically speaking, neither the pessimistic nor the optimistic estimate may hold in

reality and it is the most likely time estimate that is expected to prevail in almost all cases.

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Therefore, it is preferable to give more weight to the most likely time estimate.

We give a weight of 4 to most likely time estimate and a weight of 1 each to the

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pessimistic and optimistic time estimates. We arrive at a time estimate ( t ) as the weighted

e

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average of these estimates as follows:

t 4 t t

o

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m

p

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t

e

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6

Since we have taken 6 units ( 1 for t , 4 for t and 1 for t ), we divide the sum by 6. With

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p

m

o

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this time estimate, we can determine the project completion time as applicable for CPM.

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Since PERT involves the average of three estimates of time for each activity, this

method is very practical and the results from PERT will be have a reasonable amount of

reliability.

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MEASURE OF CERTAINTY

The 3 estimates of time are such that

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t t t .

o

m

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p

Therefore the range for the time estimate is t t .

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p

o

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The time taken by an activity in a project network follows a distribution with a

standard deviation of one sixth of the range, approximately.

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t t

i.e., The standard deviation =

p

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--- Content provided by⁠ FirstRanker.com ---

6

2

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t t

and the variance = 2

--- Content provided by‌ FirstRanker.com ---

p

o

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The certainty of the time estimate of an activity can be analysed with the help of the

variance. The greater the variance, the more uncertainty in the time estimate of an activity.

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Problem 1:

Two experts A and B examined an activity and arrived at the following time estimates.

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Expert

Time Estimate

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MBA-H2040 Quantitative Techniques
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--- Content provided by FirstRanker.com ---

t

t

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t

o

m

--- Content provided by FirstRanker.com ---

p

A

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4

6

8

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B

4

--- Content provided by FirstRanker.com ---

7

10

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Determine which expert is more certain about his estimates of time:

Solution:

--- Content provided by‌ FirstRanker.com ---

2

t t

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Variance ( 2

) in time estimates = p o

--- Content provided by FirstRanker.com ---

6

2

--- Content provided by FirstRanker.com ---

8 4

4

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In the case of expert A, the variance =

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6

9

--- Content provided by FirstRanker.com ---

2

10 4

As regards expert B, the variance =

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

6

So, the variance is less in the case of A. Hence, it is concluded that the expert A is more

certain about his estimates of time.

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Determination of Project Completion Time in PERT

Problem 2:

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Find out the time required to complete the following project and the critical activities:

Activity

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Predecessor

Optimistic time

Most likely time

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Pessimistic time

Activity

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estimate (to days)

estimate (tm days)

estimate (tp days)

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A

-

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2

4

6

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B

A

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3

6

9

--- Content provided by FirstRanker.com ---

C

A

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8

10

12

--- Content provided by FirstRanker.com ---

D

B

--- Content provided by FirstRanker.com ---

9

12

15

--- Content provided by‌ FirstRanker.com ---

E

C

--- Content provided by‍ FirstRanker.com ---

8

9

10

--- Content provided by‌ FirstRanker.com ---

F

D, E

--- Content provided by‌ FirstRanker.com ---

16

21

26

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G

D, E

--- Content provided by‌ FirstRanker.com ---

19

22

25

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H

F

--- Content provided by⁠ FirstRanker.com ---

2

5

8

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I

G

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1

3

5

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Solution:

From the three time estimates t , t and t , calculate t for each activity. We obtain the following table:

--- Content provided by FirstRanker.com ---

p

m

--- Content provided by‌ FirstRanker.com ---

o

e

--- Content provided by FirstRanker.com ---

Activity

Optimistic

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4 x Most likely

Pessimistic

to+ 4tm+ tp

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Time estimate

time estimate

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time estimate

time estimate

t 4 t t

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(t

o

--- Content provided by‌ FirstRanker.com ---

m

p

o)

--- Content provided by‌ FirstRanker.com ---

(tp)

t

--- Content provided by‌ FirstRanker.com ---

e

6

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A

2

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16

6

24

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4

B

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3

24

9

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36

6

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C

8

40

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12

60

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10

D

9

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48

15

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72

12

E

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8

36

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10

54

9

--- Content provided by FirstRanker.com ---

F

16

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84

26

126

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MBA-H2040 Quantitative Techniques
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G

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19

88

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25

132

22

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H

2

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20

8

30

--- Content provided by‌ FirstRanker.com ---

5

I

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1

12

5

--- Content provided by FirstRanker.com ---

18

3

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Using the single time estimates of the activities, we get the following network diagram for the project.

B

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3 D F H 6

6 12 21 5
A

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4

1

2

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C 10 E G

5 I

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8

9 22 3

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4

Consider the paths, beginning with the start node and stopping wit

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7 h the end node. There are

four such paths for the given project. They are as follows:

Path I

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A B D F H

1

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2

3

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5

6

8

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4 6 12 21 5
Time for the path: 4+6+12+21+5 = 48 days.

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Path II

A B D G I
1

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2

3

5

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7

8

--- Content provided by FirstRanker.com ---

4 6 12 6 3

6

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Time for the path: 4+6+12+ 6+3 = 31 days.

Path III

A C E F H

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1

2

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4

5

6

--- Content provided by‌ FirstRanker.com ---

8

4 10 9 21 5

--- Content provided by FirstRanker.com ---

3

7

--- Content provided by‌ FirstRanker.com ---

Time for the path: 4+10+9+ 21+5 = 49 days.

Path IV

A C E G I

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1

2

4

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5

7

--- Content provided by FirstRanker.com ---

8

4 10 9 6 3

6

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Time for the path: 4+10+9+ 6+3 = 32 days.

Compare the times for the four paths.

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Maximum of {48, 31, 49, 32} = 49.
We see that Path III has the maximum time.
Therefore the critical path is Path III. i.e., 1 2 4 5 6 8.
The critical activities are A, C, E, F and H.
The non-critical activities are B, D, G and I.

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Project time (Also called project length) = 49 days.

Problem 3:

Find out the time, variance and standard deviation of the project with the following time estimates in weeks:

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MBA-H2040 Quantitative Techniques
for Managers

--- Content provided by‌ FirstRanker.com ---

Activity

Optimistic time

Most likely time

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Pessimistic time

estimate (to)

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estimate (tm)

estimate (tp)

1-2

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3

6

--- Content provided by‍ FirstRanker.com ---

9

1-6

2

--- Content provided by FirstRanker.com ---

5

8

--- Content provided by⁠ FirstRanker.com ---

2-3

6

12

--- Content provided by‌ FirstRanker.com ---

18

2-4

--- Content provided by FirstRanker.com ---

4

5

6

--- Content provided by⁠ FirstRanker.com ---

3-5

8

--- Content provided by FirstRanker.com ---

11

14

4-5

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3

7

--- Content provided by‌ FirstRanker.com ---

11

6-7

3

--- Content provided by FirstRanker.com ---

9

15

--- Content provided by‌ FirstRanker.com ---

5-8

2

4

--- Content provided by FirstRanker.com ---

6

7-8

--- Content provided by‌ FirstRanker.com ---

8

16

18

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Solution:

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From the three time estimates t , t and t , calculate t for each activity. We obtain the following table:

p

m

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o

e

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Activity

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Optimistic

4 x Most likely Pessimistic

to+ 4tm+ tp

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Time estimate

time estimate

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time estimate time estimate

t 4 t t

(t

--- Content provided by‍ FirstRanker.com ---

o

m

--- Content provided by FirstRanker.com ---

p

o)

(tp)

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e

6

1-2

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3

24

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9

36

6

--- Content provided by FirstRanker.com ---

1-6

2

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20

8

30

--- Content provided by‌ FirstRanker.com ---

5

2-3

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6

48

18

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72

12

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2-4

4

20

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6

30

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5

3-5

8

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44

14

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66

11

4-5

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3

28

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11

42

7

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6-7

3

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36

15

54

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9

5-8

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2

16

6

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24

4

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7-8

8

64

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18

90

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15

With the single time estimates of the activities, we get the following network diagram for the project.

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C

3 F

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12 11

2

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D 5 G I

5

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A 6 7
4

4

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1 5 B H

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E 15
9

Consider the paths, beginn

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6 ing with the start node and stopping with the end node. There are three such paths for

7

the given project. They are as follows:

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Path I

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A C F I
1

2

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3

5

8

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6 12 11 4
Time for the path: 6+12+11+4 = 33 weeks.

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Path II

A D G I
1

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2

4

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5

8

6 5 7

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3 4

Time for the path: 6+5+7+ 4= 22 weeks.

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Path III

B E H

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6

7

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1 5 9 15

8

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3

Time for the path: 5+9+15 = 29 weeks.

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Compare the times for the three paths.
Maximum of {33, 22, 29} = 33.
It is noticed that Path I has the maximum time.
Therefore the critical path is Path I. i.e., 1 2 3 5 8

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The critical activities are A, C, F and I.
The non-critical activities are B, D, G and H.
Project time = 33 weeks.

Calculation of Standard Deviation and Variance for the Critical Activities:

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Critical

Optimistic

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Most likely Pessimistic

Range

Standard

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Variance

Activity

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time

time

time

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(tp - to)

deviation =

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2

t t

estimate

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estimate

estimate

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t t

2

p

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p

o

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--- Content provided by‌ FirstRanker.com ---

o)

(tm)

(tp)

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6

6

A: 12

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3

6

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9

6

1

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1

C: 23

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6

12

18

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12

2

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4

F: 35

8

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11

14

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6

1

1

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I: 58

2

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4

6

4

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2/3

4/9

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Variance of project time (Also called Variance of project length) =
Sum of the variances for the critical activities = 1+4+1+ 4/9 = 58/9 Weeks.
Standard deviation of project time = Variance = 58/9 = 2.54 weeks.

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Problem 4
A project consists of seven activities with the following time estimates. Find the probability that the project will
be completed in 30 weeks or less.

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Activity

Predecessor

Optimistic time

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Most likely time

Pessimistic time

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Activity

estimate (to days)

estimate (tm days)

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estimate (tp days)

A

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-

2

5

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8

B

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A

2

3

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4

C

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A

6

8

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10

D

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A

2

4

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6

E

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B

2

6

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10

F

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C

6

7

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8

G

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D, E, F

6

8

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10

Solution:

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227

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From the three time estimates t , t and t , calculate t for each activity. The results are furnished in the

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p

m

o

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e

following table:

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Activity

Optimistic

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4 x Most

Pessimistic time

to+ 4tm+ tp

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Time estimate

time estimate

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likely time

estimate (tp)

t 4 t t

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(t

o

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m

p

o)

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estimate

t

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e

6

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A

2

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20

8

30

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5

B

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2

12

4

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18

3

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C

6

32

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10

48

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8

D

2

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16

6

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24

4

E

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2

24

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10

36

6

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F

6

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28

8

42

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7

G

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6

32

10

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48

8

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With the single time estimates of the activities, the following network diagram is constructed for the project.

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B 3 6 E

C F

4

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8 7
A D G
5 4 8
1

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2

5

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6

Consider the paths, beginning with the start node and stopping with the end node. There are three such paths for
the given project. They are as follows:

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Path I

A B E G

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1

3

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2

5

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6

5 3 6

4 8

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8

Time for the path: 5+3+6+8 = 22 weeks.

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Path II

A C F G
1

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2

4

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5

6

5 8

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4 7 8

8

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Time for the path: 5+8+7+ 8 = 28 weeks.

Path III

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A D G
1

5

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2

6

5 4 8

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4

Time for the path: 5+4+8 = 17 weeks.

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Compare the times for the three paths.
Maximum of {22, 28, 17} = 28.
It is noticed that Path II has the maximum time.

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228
MBA-H2040 Quantitative Techniques
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Therefore the critical path is Path II. i.e., 1 2 4 5 6.
The critical activities are A, C, F and G.
The non-critical activities are B, D and E.
Project time = 28 weeks.

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Calculation of Standard Deviation and Variance for the Critical Activities:

Critical

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Optimistic

Most likely

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Pessimistic

Range

Standard

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Variance

Activity

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time

time

time estimate

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(tp -to)

deviation =

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2

t t

estimate

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estimate

(t

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2

p

o

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p)

t t

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p

o

--- Content provided by FirstRanker.com ---

o)

(tm)

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6

A: 12

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2

5

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8

6

1

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1

C: 24

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6

8

10

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2

4

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9

4

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F: 45

6

7

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8

1

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9

2

G: 56

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6

8

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10

2

4

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4

3

9

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Standard deviation of the critical path = 2 = 1.414

The standard normal variate is given by the formula

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Given value of t Expected value of t in the critical path

Z

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SD for the critical path

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30 28

So we get Z

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= 1.414

1.414

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We refer to the Normal Probability Distribution Table.
Corresponding to Z = 1.414, we obtain the value of 0.4207
We get 0.5 + 0.4207 = 0. 9207
Therefore the required probability is 0.92
i.e., There is 92% chance that the project will be completed before 30 weeks. In other words, the chance that it

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will be delayed beyond 30 weeks is 8%

QUESTIONS:

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1. Explain how time of an activity is estimated in PERT.
2. Explain the measure of certainty in PERT.
3. The estimates of time in weeks of the activities of a project are as follows:

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Activity

Predecessor

Optimistic

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Most likely

Pessimistic

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Activity

estimate of time

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estimate of time

estimate of time

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A

-

2

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4

6

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B

A

8

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11

20

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C

A

10

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15

20

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D

B

12

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18

24

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E

C

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8

13

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24

F

C

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4

7

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16

G

D,F

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14

18

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28

H

E

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10

12

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14

I

G,H

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7

10

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19

Determine the critical activities and the project completion time.

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4. Draw the network diagram for the following project. Determine the time, variance and standard deviation of
the project.:

Activity

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Predecessor

Optimistic

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Most likely

Pessimistic

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Activity

estimate of time

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estimate of time

estimate of time

A

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-

12

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14

22

B

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-

16

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17

24

C

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A

14

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15

16

D

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A

13

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18

23

E

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B

16

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18

20

F

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D,E

13

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14

21

G

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C,F

6

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8

10

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5. Consider the following project with the estimates of time in weeks:

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Activity

Predecessor

Optimistic

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Most likely

Pessimistic

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Activity

estimate of time

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estimate of time

estimate of time

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A

-

2

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4

6

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B

-

3

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5

7

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C

A

5

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6

13

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D

A

4

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8

12

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E

B,C

5

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6

13

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F

D,E

6

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8

14

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Find the probability that the project will be completed in 27 weeks.

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231

MBA-H2040 Quantitative Techniques
for Managers

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NORMAL DISTRIBUTION TABLE

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Area Under Standard Normal Distribution

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0.00

0.01

0.02

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0.03

0.04

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0.05

0.06

0.07

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0.08

0.09

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0.0

0.0000 0.0040 0.0080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359

0.1

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0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753

0.2

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0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141

0.3

0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517

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0.4

0.1554 0.1591 0.1628 0.1664 0.1700 0.1736 0.1772 0.1808 0.1844 0.1879

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0.5

0.1915 0.1950 0.1985 0.2019 0.2054 0.2088 0.2123 0.2157 0.2190 0.2224

0.6

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0.2257 0.2291 0.2324 0.2357 0.2389 0.2422 0.2454 0.2486 0.2517 0.2549

0.7

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0.2580 0.2611 0.2642 0.2673 0.2704 0.2734 0.2764 0.2794 0.2823 0.2852

0.8

0.2881 0.2910 0.2939 0.2967 0.2995 0.3023 0.3051 0.3078 0.3106 0.3133

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0.9

0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389

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1.0

0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621

1.1

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0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830

1.2

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0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015

1.3

0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177

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1.4

0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319

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1.5

0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441

1.6

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0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545

1.7

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0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633

1.8

0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706

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1.9

0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767

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2.0

0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817

2.1

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0.4821 0.4826 0.4830 0.4834 0.4838 0.4842 0.4846 0.4850 0.4854 0.4857

2.2

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0.4861 0.4864 0.4868 0.4871 0.4875 0.4878 0.4881 0.4884 0.4887 0.4890

2.3

0.4893 0.4896 0.4898 0.4901 0.4904 0.4906 0.4909 0.4911 0.4913 0.4916

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2.4

0.4918 0.4920 0.4922 0.4925 0.4927 0.4929 0.4931 0.4932 0.4934 0.4936

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2.5

0.4938 0.4940 0.4941 0.4943 0.4945 0.4946 0.4948 0.4949 0.4951 0.4952

2.6

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0.4953 0.4955 0.4956 0.4957 0.4959 0.4960 0.4961 0.4962 0.4963 0.4964

2.7

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0.4965 0.4966 0.4967 0.4968 0.4969 0.4970 0.4971 0.4972 0.4973 0.4974

2.8

0.4974 0.4975 0.4976 0.4977 0.4977 0.4978 0.4979 0.4979 0.4980 0.4981

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2.9

0.4981 0.4982 0.4982 0.4983 0.4984 0.4984 0.4985 0.4985 0.4986 0.4986

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3.0

0.4987 0.4987 0.4987 0.4988 0.4988 0.4989 0.4989 0.4989 0.4990 0.4990

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LESSON 6

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EARLIEST AND LATEST TIMES

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LESSON OUTLINE

The concepts of earliest and latest times

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The concept of slack

Numerical problems

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LEARNING OBJECTIVES

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After reading this lesson you should be able to

-

understand the concepts of earliest and latest times

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- understand the concept of slack

- calculate the earliest and latest times

--- Content provided by FirstRanker.com ---

-

find out the slacks

-

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identify the critical activities

-

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carry out numerical problems

INTRODUCTION

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A project manager has the responsibility to see that a project is completed by the stipulated date, without delay.

Attention is focused on this aspect in what follows.

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Key concepts

Certain key concepts are introduced below.

EARLIEST TIMES OF AN ACTIVITY

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We can consider (i) Earliest Start Time of an activity and (ii) Earliest Finish Time of an activity.

Earliest Start Time of an activity is the earliest possible time of starting that activity on

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the condition that all the other activities preceding to it were began at the earliest possible

times.

Earliest Finish Time of an activity is the earliest possible time of completing that activity. It is given by

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the formula.

The Earliest Finish Time of an activity = The Earliest Start Time of the activity + The estimated

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duration to carry out that activity.

LATEST TIMES OF AN ACTIVITY

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We can consider (i) Latest Finish Time of an activity and (ii) Latest Start Time of an activity.

Latest Finish Time of an activity is the latest possible time of completing that activity

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on the condition that all the other activities succeeding it are carried out as per the plan of the

management and without delaying the project beyond the stipulated time.

Latest Start Time of an activity is the latest possible time of beginning that activity. It is given by the

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formula

Latest Start Time of an activity = The Latest Finish Time of the activity - The estimated
duration to carry out that activity.

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233

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MBA-H2040 Quantitative Techniques
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TOTAL FLOAT OF AN ACTIVITY

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Float seeks to measure how much delay is acceptable. It sets up a control limit for delay.

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The total float of an activity is the time by which that activity can be delayed without delaying the

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whole project. It is given by the formula

Total Float of an Activity = Latest Finish Time of the activity - Earliest Finish Time of that activity.

It is also given by the formula

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Total Float of an Activity = Latest Start Time of the activity - Earliest Start Time of that
activity.

Since a delay in a critical activity will delay the execution of the whole project, the total

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float of a critical activity must be zero.

EXPECTED TIMES OF AN EVENT

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An event occurs at a point of time. We can consider (i) Earliest Expected Time of Occurrence of an event and

(ii) Latest Allowable Time of Occurrence an event.

The Earliest Expected Time of Occurrence of an event is the earliest possible time of

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expecting that event to happen on the condition that all the preceding activities have been

completed.

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The Latest Allowable Time of Occurrence of an event is the latest possible time of

expecting that event to happen without delaying the project beyond the stipulated time.

PROCUDURE TO FIND THE EARLIEST EXPECTED TIME OF AN EVENT

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Step 1. Take the Earliest Expected Time of Occurrence of the Start Event as zero.

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Step 2. For an event other than the Start Event, find out all paths in the network which
connect the Start node with the node representing the event under consideration.

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Step 3. In the "Forward Pass" (i.e., movement in the network from left to right), find out
the sum of the time durations of the activities in each path identified in Step 2.

Step 4. The path with the longest time in Step 3 gives the Earliest Expected Time of
Occurrence of the event

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Working Rule for finding the earliest expected time of an event:

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For an event under consideration, locate all the predecessor events and identify their earliest

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expected times. With the earliest expected time of each event, add the time duration of the

activity connecting that event to the event under consideration. The maximum among all these

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values gives the Earliest Expected Time of Occurrence of the event.

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PROCUDURE TO FIND THE LATEST ALLOWABLE TIME OF AN EVENT

We consider the "Backward Pass" (i.e., movement in the network from right to left).

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The latest allowable time of occurrence of the End Node must be the time of completion

of the project. Therefore it shall be equal to the time of the critical path of the project.

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Step 1. Identify the latest allowable time of occurrence of the End Node.

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Step 2. For an event other than the End Event, find out all paths in the network which
connect the End node with the node representing the event under consideration.

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Step 3. In the "Backward Pass" (i.e., movement in the network from right to left),
subtract the time durations of the activities along each such path.

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Step 4. The Latest Allowable Time of Occurrence of the event is determined by the path
with the longest time in Step 3. In other words, the smallest value of time obtained in
Step 3 gives the Latest Allowable Time of Occurrence of the event.

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Working Rule for finding the latest allowable time of an event:

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For an event under consideration, locate all the successor events and identify their latest

allowable times. From the latest allowable time of each successor event, subtract the time

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duration of the activity that begins with the event under consideration. The minimum among

all these values gives the Latest Allowable Time of Occurrence of the event.

SLACK OF AN EVENT

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The allowable time gap for the occurrence of an event is known as the slack of that event. It is given by the

formula

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Slack of an event = Latest Allowable Time of Occurrence of the event - Earliest Expected

Time of Occurrence of that event.

SLACK OF AN ACTIVITY

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The slack of an activity is the float of the activity.
Problem 1:

The following details are available regarding a project:

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Activity

Predecessor

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Duration (Weeks)

Activity

A

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-

12

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MBA-H2040 Quantitative Techniques

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for Managers

B

A

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7

C

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A

11

D

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A

8

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E

A

6

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F

B

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10

G

C

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9

H

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D, F

14

I

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E, G

13

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J

H, I

16

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Determine the earliest and latest times, the total float for each activity, the critical activities and the project
completion time.

Solution:

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With the given data, we construct the following network diagram for the project.

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3 F

10

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B 7 H
D 14

5

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A 8 J

12 E 16

1

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2

7

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8

6 I

C 11 13

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G

6

9

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Consider the paths, beginning

4 with the start node and stopping with the end node. There are

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four such paths for the given project. They are as follows:

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Path I

A B F H J

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1

2

3

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5

7

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1

12 7 10 14 16

Time of the path = 12 + 7 + 10 + 14 + 16 = 59 weeks.

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Path II

A D H J

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1

2

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5

7

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8

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12 8 14 16

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Time of the path = 12 + 8 + 14 + 16 = 50 weeks.

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Path III

A E I J

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1

2

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6

7

8

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12 6 13 16

Time of the path = 12 + 6 + 13 + 16 = 47 weeks.

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Path IV

A C G I J

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1

2

4

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6

7

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8

12 11 9 13 16

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Time of the path = 12 + 11 + 9 + 13 + 16 = 61 weeks.

Compare the times for the four paths. Maximum of {51, 50, 47, 61} = 61. We see that the maximum time of a
path is 61 weeks.

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Forward pass:

Calculation of Earliest Expected Time of Occurrence of Events

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Node Earliest Time of Occurrence of Node
1

0

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2

Time for Node 1 + Time for Activity A = 0 + 12 = 12

3

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Time for Node 2 + Time for Activity B = 12 + 7 = 19

4

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Time for Node 2 + Time for Activity C = 12 + 11 = 23

5

Max {Time for Node 2 + Time for Activity D,

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Time for Node 3 + Time for Activity F}
= Max {12 + 8, 19 + 10} = Max {20, 29} = 29

6

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Max {Time for Node 2 + Time for Activity E,
Time for Node 4 + Time for Activity G}
= Max {12 + 6, 23 + 9} = Max {18, 32} = 32

7

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Max {Time for Node 5 + Time for Activity H,
Time for Node 6 + Time for Activity I}
= Max {29 + 14, 32 + 13} = Max {43, 45} = 45

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8

Time for Node 7 + Time for Activity J = 45 + 16 = 61

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Using the above values, we obtain the Earliest Start Times of the activities as follows:

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Activity

Earliest Start Time

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(Weeks)

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A

0

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B

12

C

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12

D

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12

E

12

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F

19

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G

23

H

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29

I

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32

J

45

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Backward pass:

Calculation of Latest Allowable Time of Occurrence of Events

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Node Latest Allowable Time of Occurrence of Node
8

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Maximum time of a path in the network = 61

7

Time for Node 8 - Time for Activity J = 61 -16 = 45

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6

Time for Node 7 - Time for Activity I = 45 -13 = 32

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5

Time for Node 7 - Time for Activity H = 45 -14 = 31

4

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Time for Node 6 - Time for Activity G = 32 - 9 = 23

3

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Time for Node 5 - Time for Activity F = 31- 10 = 21

2

Min {Time for Node 3 - Time for Activity B,

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Time for Node 4 - Time for Activity C,
Time for Node 5 - Time for Activity D,
Time for Node 6 - Time for Activity E}
= Min {21 - 7, 23 - 11, 31 - 8, 32 - 6}
= Min {14, 12, 23, 26} = 12

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1

Time for Node 2 - Time for Activity A = 12- 12 = 0

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Using the above values, we obtain the Latest Finish Times of the activities as follows:

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Activity

Latest Finish Time

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(Weeks)

J

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61

I

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45

H

45

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G

32

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F

31

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E

32

D

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31

C

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23

B

21

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A

12

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Calculation of Total Float for each activity:

Activity

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Duration

Earliest Start Earliest

Latest

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Latest

Total Float = Latest

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(Weeks)

Time

Finish Time

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Start Time Finish

Finish Time - Earliest

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Time

Finish Time

A

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12

0

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12

0

12

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0

B

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7

12

19

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14

21

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2

C

11

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12

23

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12

23

0

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D

8

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12

20

23

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31

11

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E

6

12

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18

26

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32

14

F

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10

19

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29

21

31

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2

G

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9

23

32

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23

32

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0

H

14

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29

43

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31

45

2

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I

13

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32

45

32

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45

0

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J

16

45

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61

45

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61

0

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The activities with total float = 0 are A, C, G, I and J. They are the critical activities.
Project completion time = 61 weeks.

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Problem 2:

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The following are the details of the activities in a project:

Activity

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Predecessor

Duration (Weeks)

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Activity

A

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-

15

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B

A

17

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C

A

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21

D

B

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19

E

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B

22

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MBA-H2040 Quantitative Techniques
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F

C, D

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18

G

E, F

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15

Calculate the earliest and latest times, the total float for each activity and the project completion time.

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Solution:

The following network diagram is obtained for the given project.

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E

3

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22
B
A 17 D 19 G

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1 15

2 15

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5

6

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C 21 F 18

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4

Consider the paths, beginning with the start node and stopping with the end node. There are

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three such paths for the given project. They are as follows:

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Path I

A B E G

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1

2

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3

5

6

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15 17 22 15
Time of the path = 15 + 17 + 22 + 15 = 69 weeks.

Path II

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A B D F G

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1

2

3

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4

5

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6

15 17 19 18 15

Time of the path = 15 + 17 + 19 + 18 + 15 = 84 weeks.

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Path III

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A C F G

1

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2

4

5

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6

15 21 18 15

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Time of the path = 15 + 21 + 18 + 15 = 69 weeks.

Compare the times for the three paths. Maximum of {69, 84, 69} = 84. We see that the maximum time of a path

is 84 weeks.

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for Managers

Forward pass:

Calculation of Earliest Time of Occurrence of Events

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Node

Earliest Time of Occurrence of Node

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1

0

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2

Time for Node 1 + Time for Activity A = 0 + 15 = 15

3

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Time for Node 2 + Time for Activity B = 15 + 17 = 32

4

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Max {Time for Node 2 + Time for Activity C,
Time for Node 3 + Time for Activity D}
= Max {15 + 21, 32 + 19} = Max {36, 51} = 51

5

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Max {Time for Node 3 + Time for Activity E,
Time for Node 4 + Time for Activity F}
= Max {32 + 22, 51 + 18} = Max {54, 69} = 69

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6

Time for Node 5 + Time for Activity G = 69 + 15 = 84

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Calculation of Earliest Time for Activities

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Activity

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Earliest Start Time

(Weeks)

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A

0

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B

15

C

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15

D

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32

E

32

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F

51

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G

69

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Backward pass:
Calculation of the Latest Allowable Time of Occurrence of Events

Node

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Latest Allowable Time of Occurrence of Node

6

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Maximum time of a path in the network = 84

5

Time for Node 6 - Time for Activity G = 84 -15 = 69

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4

Time for Node 5 - Time for Activity F = 69 - 18 = 51

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3

Min {Time for Node 4 - Time for Activity D,
Time for Node 5 - Time for Activity E}
= Min {51 - 19, 69 - 22} = Min {32, 47} = 32

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2

Min {Time for Node 3 - Time for Activity B,
Time for Node 4 - Time for Activity C}

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= Min {32 - 17, 51 - 21} = Min {15, 30} = 15

1

Time for Node 2 - Time for Activity A = 15 - 15 = 0

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Calculation of the Latest Finish Times of the activities

Activity

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Latest Finish Time (Weeks)

G

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84

241

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MBA-H2040 Quantitative Techniques
for Managers

F

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69

E

--- Content provided by FirstRanker.com ---

69

D

51

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C

51

--- Content provided by FirstRanker.com ---

B

32

A

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Calculation of Total Float for each activity:

Activity

Duration

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Earliest Start Earliest

Latest

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Latest

Total Float = Latest

(Weeks)

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Time

Finish Time

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Start Time Finish

Finish Time - Earliest

Time

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Finish Time

A

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15

0

15

--- Content provided by‌ FirstRanker.com ---

0

15

--- Content provided by⁠ FirstRanker.com ---

0

B

17

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15

32

--- Content provided by FirstRanker.com ---

15

32

0

--- Content provided by FirstRanker.com ---

C

21

--- Content provided by‌ FirstRanker.com ---

15

36

30

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51

15

--- Content provided by⁠ FirstRanker.com ---

D

19

32

--- Content provided by⁠ FirstRanker.com ---

51

32

--- Content provided by‍ FirstRanker.com ---

51

0

E

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22

32

--- Content provided by FirstRanker.com ---

54

47

69

--- Content provided by⁠ FirstRanker.com ---

15

F

--- Content provided by‌ FirstRanker.com ---

18

51

69

--- Content provided by‍ FirstRanker.com ---

51

69

--- Content provided by FirstRanker.com ---

0

G

15

--- Content provided by⁠ FirstRanker.com ---

69

84

--- Content provided by FirstRanker.com ---

69

84

0

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The activities with total float = 0 are A, B, D, F and G. They are the critical activities.
Project completion time = 84 weeks.

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Problem 3:

Consider a project with the following details:

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Name of

Predecessor

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Duration

Activity

Activity

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(Weeks)

A

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-

8

B

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A

13

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C

A

9

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D

A

--- Content provided by‌ FirstRanker.com ---

12

E

B

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14

F

--- Content provided by‌ FirstRanker.com ---

B

8

G

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D

7

--- Content provided by FirstRanker.com ---

H

C, F, G

12

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I

C, F, G

--- Content provided by FirstRanker.com ---

9

J

E, H

--- Content provided by FirstRanker.com ---

10

K

--- Content provided by FirstRanker.com ---

I, J

7

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Determine the earliest and latest times, the total float for each activity, the critical activities, the slacks of the
events and the project completion time.

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Solution:

The following network diagram is got for the given project:

E

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3

6

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14
B 13 H 12
8 J 10
F

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A C I K
9 9 7
8

1

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2

5

--- Content provided by⁠ FirstRanker.com ---

7

8

D 12 G 7

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--- Content provided by‌ FirstRanker.com ---

4

Path I

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A B E J K

1

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2

3

6

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7

8

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8 13 14 10 7

Time of the path = 8 + 13 + 14 + 10 + 7 = 52 weeks.

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Path II

A B F H J K

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1

2

3

--- Content provided by FirstRanker.com ---

5

6

--- Content provided by‌ FirstRanker.com ---

7

8

8 13 8 12 10 7

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Time of the path = 8 + 13 + 8 + 12 + 10 + 7 = 58 weeks.

Path III

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A B F I K

1

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2

3

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5

7

8

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8 13 8 9 7

Time of the path = 8 + 13 + 8 + 9 + 7 = 45 weeks.
Path IV

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A C H J K

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1

2

5

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6

7

--- Content provided by⁠ FirstRanker.com ---

8

8 9 12 10

5 7

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Time of the path = 8 + 9 + 12 + 10 + 7 = 46 weeks.

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Path V

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A C I K

1

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2

5

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7

8

8 9 9 7

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5

6

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Time of the path = 8 + 9 + 9 + 7 = 33 weeks.

Path VI

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A D G H J K
1

2

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4

5

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6

7

8

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8 12 7 12 10 7
Time of the path = 8 + 12 + 7 + 12 + 10 + 7 = 56 weeks.

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Path VII

A D G I K

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1

2

4

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5

7

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8

8 12 7 9 7

Time of the path = 8 + 12 + 7 + 9 + 7 = 43 weeks.

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Compare the times for the three paths. Maximum of {52, 58, 45, 46, 33, 56, 43} = 58.
We see that the maximum time of a path is 58 weeks.

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Forward pass:

Calculation of Earliest Time of Occurrence of Events

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Node Earliest Time of Occurrence of Node
1

0

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2

Time for Node 1 + Time for Activity A = 0 + 8 = 8

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3

Time for Node 2 + Time for Activity B = 8 + 13 = 21

4

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Time for Node 2 + Time for Activity D = 8+ 12 = 20

5

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Max {Time for Node 2 + Time for Activity C,
Time for Node 3 + Time for Activity F,
Time for Node 4 + Time for Activity G}
= Max { 8 + 9, 21 + 8 , 20 + 7 } = Max {17, 29, 27} = 29

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6

Max {Time for Node 3 + Time for Activity E,
Time for Node 5 + Time for Activity H}
= Max {21 + 14 , 29 + 12} = Max {35, 41} = 41

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7

Max {Time for Node 5 + Time for Activity I,
Time for Node 6 + Time for Activity J}

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= Max {29 + 9, 41 + 10} = Max {38, 51} = 51

8

Time for Node 7 + Time for Activity J = 51+ 7 = 58

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Earliest Start Times of the activities

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Activity

Earliest Start Time

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(Weeks)

A

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0

B

8

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C

8

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D

8

E

--- Content provided by⁠ FirstRanker.com ---

21

F

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21

G

20

--- Content provided by FirstRanker.com ---

H

29

--- Content provided by FirstRanker.com ---

I

29

J

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41

K

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Backward pass:

Calculation of Latest Allowable Time of Occurrence of Events

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Node Latest Allowable Time of Occurrence of Node
8

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Maximum time of a path in the network = 58

7

Time for Node 8 - Time for Activity K = 58 -7 = 51

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6

Time for Node 7 - Time for Activity J = 51 -10 = 41

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5

Min {Time for Node 6 - Time for Activity H,

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Time for Node 7 - Time for Activity I}
= Min {41 - 12, 51 - 9} = Min {29, 42} = 29

4

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Time for Node 5 - Time for Activity G = 29 - 7 = 22

3

Min {Time for Node 5 - Time for Activity F,

--- Content provided by‍ FirstRanker.com ---

Time for Node 6 - Time for Activity E}
= Min {29 - 8, 41 - 14} = Min {21, 27} = 21

2

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Min {Time for Node 3 - Time for Activity B,
Time for Node 4 - Time for Activity D,
Time for Node 5 - Time for Activity C}
= Min {21 - 13, 22 - 12, 29 - 9}
= Min {8, 10, 20} = 8

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1

Time for Node 2 - Time for Activity A = 8 - 8 = 0

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Latest Finish Times of the activities

Activity

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Latest Finish Time

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(Weeks)

K

58

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J

51

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I

51

H

--- Content provided by‍ FirstRanker.com ---

41

G

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29

F

29

--- Content provided by FirstRanker.com ---

E

41

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D

22

C

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29

B

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21

A

8

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Calculation of Total Float for each activity:

Activity

Duration

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Earliest Start Earliest

Latest

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Latest

Total Float = Latest

(Weeks)

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Time

Finish Time

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Start Time Finish

Finish Time - Earliest

Time

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Finish Time

A

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8

0

8

--- Content provided by FirstRanker.com ---

0

8

--- Content provided by‍ FirstRanker.com ---

0

B

13

--- Content provided by FirstRanker.com ---

8

21

--- Content provided by‌ FirstRanker.com ---

8

21

0

--- Content provided by‍ FirstRanker.com ---

C

9

--- Content provided by⁠ FirstRanker.com ---

8

17

20

--- Content provided by‍ FirstRanker.com ---

29

12

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D

12

8

--- Content provided by‍ FirstRanker.com ---

20

10

--- Content provided by‍ FirstRanker.com ---

22

2

E

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14

21

--- Content provided by‍ FirstRanker.com ---

35

27

41

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6

F

--- Content provided by FirstRanker.com ---

8

21

29

--- Content provided by FirstRanker.com ---

21

29

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0

246

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MBA-H2040 Quantitative Techniques
for Managers

G

--- Content provided by FirstRanker.com ---

7

20

27

--- Content provided by FirstRanker.com ---

22

29

--- Content provided by‍ FirstRanker.com ---

2

H

12

--- Content provided by⁠ FirstRanker.com ---

29

41

--- Content provided by‌ FirstRanker.com ---

29

41

0

--- Content provided by‌ FirstRanker.com ---

I

9

--- Content provided by‍ FirstRanker.com ---

29

38

42

--- Content provided by FirstRanker.com ---

51

13

--- Content provided by‍ FirstRanker.com ---

J

10

41

--- Content provided by FirstRanker.com ---

51

41

--- Content provided by‍ FirstRanker.com ---

51

0

K

--- Content provided by FirstRanker.com ---

7

51

--- Content provided by⁠ FirstRanker.com ---

58

51

58

--- Content provided by‍ FirstRanker.com ---

0

The activities with total float = 0 are A, B, F, H, J and K. They are the critical activities.

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Project completion time = 58 weeks.

Calculation of slacks of the events

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Slack of an event = Latest Allowable Time of Occurrence of the event - Earliest Expected
Time of Occurrence of that event.

Event

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Earliest Expected Time

Latest Allowable Time

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Slack of the

(Node)

of Occurrence of Event

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of Occurrence of Event

Event

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1

0

0

--- Content provided by‌ FirstRanker.com ---

0

2

--- Content provided by FirstRanker.com ---

8

8

0

--- Content provided by⁠ FirstRanker.com ---

3

21

--- Content provided by‍ FirstRanker.com ---

21

0

4

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20

22

--- Content provided by‌ FirstRanker.com ---

2

5

29

--- Content provided by FirstRanker.com ---

29

0

--- Content provided by FirstRanker.com ---

6

41

41

--- Content provided by‍ FirstRanker.com ---

0

7

--- Content provided by‍ FirstRanker.com ---

51

51

0

--- Content provided by‌ FirstRanker.com ---

8

58

--- Content provided by⁠ FirstRanker.com ---

58

0

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Interpretation:

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On the basis of the slacks of the events, it is concluded that the occurrence of event 4 may be delayed upto a

maximum period of 2 weeks while no other event cannot be delayed.

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QUESTIONS

1. Explain the terms: The earliest and latest times of the activities of a project.

2. Explain the procedure to find the earliest expected time of an event.

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3. Explain the procedure to find the latest allowable time of an event.

4. What is meant by the slack of an activity? How will you determine it?

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5. Consider the project with the following details:

activity

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Duration (weeks)

12

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1

23

3

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247

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MBA-H2040 Quantitative Techniques
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24

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7

34

5

--- Content provided by FirstRanker.com ---

35

8

--- Content provided by‍ FirstRanker.com ---

45

4

56

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

Determine the earliest and the latest times of the activities. Calculate the total float for

each activity and the slacks of the events.

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248
MBA-H2040 Quantitative Techniques
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LESSON 7

CRASHING OF A PROJECT

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LESSON OUTLINE

The idea of crashing of a project

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The criterion of selection of an activity for crashing

Numerical problems

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LEARNING OBJECTIVES

After reading this lesson you should be able to

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- understand the concept of crashing of a project
- choose an activity for crashing

- work out numerical problems

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THE MEANING OF CRASHING:

The process of shortening the time to complete a project is called crashing and is usually achieved by putting

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into service additional labour or machines to one activity or more activities. Crashing involves more costs. A

project manager would like to speed up a project by spending as minimum extra cost as possible. Project

crashing seeks to minimize the extra cost for completion of a project before the stipulated time.

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STEPS IN PROJECT CRASHING:

Assumption: It is assumed that there is a linear relationship between time and cost.

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Let us consider project crashing by the critical path method. The following four-step

procedure is adopted.

Step 1: Find the critical path with the normal times and normal costs for the activities and

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identify the critical activities.

Step 2: Find out the crash cost per unit time for each activity in the network. This is

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calculated by means of the following formula.

Crash cos t

Crash cos t Normal cos t

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Time period

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Normal time Crash time

249

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MBA-H2040 Quantitative Techniques
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Activity Cost

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Crash time & Cost

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Crash Cost

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Normal Cost Normal time & Cost

Activity Time

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Crash Time Normal Time

Step 3: Select an activity for crashing. The criteria for the selection is as follows:

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Select the activity on the critical path with the smallest crash cost per unit time. Crash this

activity to the maximum units of time as may be permissible by the given data.

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Crashing an activity requires extra amount to be spent. However, even if the company

is prepared to spend extra money, the activity time cannot be reduced beyond a certain limit in

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view of several other factors.

In step 1, we have to note that reducing the time of on activity along the critical path

alone will reduce the completion time of a project. Because of this reason, we select an

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activity along the critical path for crashing.

In step 3, we have to consider the following question:

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If we want to reduce the project completion time by one unit, which critical activity

will involve the least additional cost?

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On the basis of the least additional cost, a critical activity is chosen for crashing. If

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there is a tie between two critical activities, the tie can be resolved arbitrarily.

Step 4: After crashing an activity, find out which is the critical path with the changed

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conditions. Sometimes, a reduction in the time of an activity in the critical path may cause a

non-critical path to become critical. If the critical path with which we started is still the

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longest path, then go to Step 3. Otherwise, determine the new critical path and then go to

Step 3.

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Problem 1: A project has activities with the following normal and crash times and cost:

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250
MBA-H2040 Quantitative Techniques
for Managers

Activity

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Predecessor

Normal Time

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Crash Time

Normal Cost Crash Cost

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Activity

(Weeks)

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(Weeks) (Rs.)

(Rs.)

A

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-

4

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3

8,000

9,000

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B

A

--- Content provided by‌ FirstRanker.com ---

5

3

16,000

--- Content provided by‌ FirstRanker.com ---

20,000

C

--- Content provided by⁠ FirstRanker.com ---

A

4

3

--- Content provided by FirstRanker.com ---

12,000

13,000

--- Content provided by‌ FirstRanker.com ---

D

B

6

--- Content provided by FirstRanker.com ---

5

34,000

--- Content provided by‍ FirstRanker.com ---

35,000

E

C

--- Content provided by FirstRanker.com ---

6

4

--- Content provided by FirstRanker.com ---

42,000

44,000

F

--- Content provided by FirstRanker.com ---

D

5

--- Content provided by FirstRanker.com ---

4

16,000

16,500

--- Content provided by FirstRanker.com ---

G

E

--- Content provided by‍ FirstRanker.com ---

7

4

66,000

--- Content provided by⁠ FirstRanker.com ---

72,000

H

--- Content provided by‍ FirstRanker.com ---

G

4

3

--- Content provided by FirstRanker.com ---

2,000

5,000

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Determine a crashing scheme for the above project so that the total project time is reduced by 3 weeks.

Solution:

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We have the following network diagram for the given project with normal costs:

E G
C 6

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3 7

5 H

--- Content provided by FirstRanker.com ---

7

A 4

4 4 4 3

--- Content provided by‍ FirstRanker.com ---

4

2

--- Content provided by⁠ FirstRanker.com ---

1

5

--- Content provided by‌ FirstRanker.com ---

B

8

D F

--- Content provided by‌ FirstRanker.com ---

5

5
6

--- Content provided by FirstRanker.com ---

4

6

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

Beginning from the Start Node and terminating with the End Node, there are two paths for the network as
detailed below:

--- Content provided by FirstRanker.com ---

Path I:

A B D F
1

--- Content provided by FirstRanker.com ---

2

5

--- Content provided by‍ FirstRanker.com ---

7

8

4 5 6 5

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The time for the path = 4 + 5 + 6 + 5 = 20 weeks.

Path II:

--- Content provided by FirstRanker.com ---

A C E G H
1

2

--- Content provided by⁠ FirstRanker.com ---

3

5

7

--- Content provided by FirstRanker.com ---

8

4 4 6 7 4

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The time for the path = 4 + 4 + 6 + 7 + 4 = 25 weeks.

Maximum of {20, 25} = 25.

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MBA-H2040 Quantitative Techniques

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for Managers

Therefore Path II is the critical path and the critical activities are A, C, E, G and H. The non-critical activities are
B, D and F.

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Given that the normal time of activity A is 4 weeks while its crash time is 3 weeks. Hence the time of

this activity can be reduced by one week if the management is prepared to spend an additional amount. However,
the time cannot be reduced by more than one week even if the management may be prepared to spend more

--- Content provided by‌ FirstRanker.com ---

money. The normal cost of this activity is Rs. 8,000 whereas the crash cost is Rs. 9,000. From this, we see that
crashing of activity A by one week will cost the management an extra amount of Rs. 1,000. In a similar fashion,
we can work out the crash cost per unit time for the other activities also. The results are provided in the
following table.

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Activity

Normal

--- Content provided by FirstRanker.com ---

Crash

Normal

--- Content provided by FirstRanker.com ---

Crash Cost

Crash cost

Normal

--- Content provided by FirstRanker.com ---

Crash Cost

--- Content provided by‌ FirstRanker.com ---

Time

Time Cost

--- Content provided by FirstRanker.com ---

-

Time -

--- Content provided by‍ FirstRanker.com ---

per unit

Normal

Crash

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time

Cost

--- Content provided by‌ FirstRanker.com ---

Time

A

4

--- Content provided by‍ FirstRanker.com ---

3

8,000

--- Content provided by FirstRanker.com ---

9,000

1,000

1

--- Content provided by‌ FirstRanker.com ---

1,000

B

--- Content provided by‌ FirstRanker.com ---

5

3

16,000

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20,000

4,000

--- Content provided by⁠ FirstRanker.com ---

2

2,000

C

--- Content provided by FirstRanker.com ---

4

3

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12,000

13,000

1,000

--- Content provided by‍ FirstRanker.com ---

1

1,000

--- Content provided by FirstRanker.com ---

D

6

5

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34,000

35,000

--- Content provided by‍ FirstRanker.com ---

1,000

1

1,000

--- Content provided by FirstRanker.com ---

E

6

--- Content provided by‌ FirstRanker.com ---

4

42,000

44,000

--- Content provided by FirstRanker.com ---

2,000

2

--- Content provided by‍ FirstRanker.com ---

1,000

F

5

--- Content provided by FirstRanker.com ---

4

16,000

--- Content provided by‌ FirstRanker.com ---

16,500

500

1

--- Content provided by‌ FirstRanker.com ---

500

G

--- Content provided by‌ FirstRanker.com ---

7

4

66,000

--- Content provided by FirstRanker.com ---

72,000

6,000

--- Content provided by FirstRanker.com ---

1

6,000

H

--- Content provided by‍ FirstRanker.com ---

4

3

--- Content provided by‍ FirstRanker.com ---

2,000

5,000

3,000

--- Content provided by FirstRanker.com ---

1

3,000

--- Content provided by‍ FirstRanker.com ---

A non-critical activity can be delayed without delaying the execution of the whole project. But, if a

critical activity is delayed, it will delay the whole project. Because of this reason, we have to select a critical

--- Content provided by‌ FirstRanker.com ---

activity for crashing. Here we have to choose one of the activities A, C, E, G and H The crash cost per unit time

works out as follows:

--- Content provided by FirstRanker.com ---

Rs. 1,000 for A; Rs. 1,000 for C; Rs. 1,000 for E; Rs. 6,000 for G; Rs. 3,000 for H.

The maximum among them is Rs. 1,000. So we have to choose an activity with Rs.1,000 as the crash cost

--- Content provided by‍ FirstRanker.com ---

per unit time. However, there is a tie among A, C and E. The tie can be resolved arbitrarily. Let us select A for

crashing. We reduce the time of A by one week by spending an extra amount of Rs. 1,000.

After this step, we have the following network with the revised times for the activities:

--- Content provided by FirstRanker.com ---

E G
C 6

--- Content provided by FirstRanker.com ---

3 7

5 H

7

--- Content provided by‍ FirstRanker.com ---

A 4

4 4 4 3

--- Content provided by FirstRanker.com ---

3

2

--- Content provided by FirstRanker.com ---

1

5

B

--- Content provided by⁠ FirstRanker.com ---

8

D F

--- Content provided by‌ FirstRanker.com ---

5

5
6

--- Content provided by⁠ FirstRanker.com ---

4

6

--- Content provided by⁠ FirstRanker.com ---

4

The revised time for Path I = 3 + 5 + 6 + 5 = 19 weeks.
The time for Path II = 3 + 4 + 6 + 7 + 4 = 24 weeks.

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Maximum of {19, 24} = 24.

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252
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Therefore Path II is the critical path and the critical activities are A, C, E, G and H. However, the time for A

--- Content provided by⁠ FirstRanker.com ---

cannot be reduced further. Therefore, we have to consider C, E, G and H for crashing. Among them, C and E

have the least crash cost per unit time. The tie between C and E can be resolved arbitrarily. Suppose we reduce

--- Content provided by‍ FirstRanker.com ---

the time of C by one week with an extra cost of Rs. 1,000.

After this step, we have the following network with the revised times for the activities:

--- Content provided by‌ FirstRanker.com ---

253

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--- Content provided by FirstRanker.com ---

E G
C 6

--- Content provided by FirstRanker.com ---

3 7

5 H

7

--- Content provided by⁠ FirstRanker.com ---

A 3

4 4 4 3

--- Content provided by‍ FirstRanker.com ---

3

2

--- Content provided by FirstRanker.com ---

1

5

B

--- Content provided by‌ FirstRanker.com ---

8

D F

--- Content provided by⁠ FirstRanker.com ---

5

5
6

--- Content provided by‍ FirstRanker.com ---

4

6

--- Content provided by FirstRanker.com ---

4

The time for Path I = 3 + 5 + 6 + 5 = 19 weeks.
The time for Path II = 3 + 3 + 6 + 7 + 4 = 23 weeks.

--- Content provided by FirstRanker.com ---

Maximum of {19, 23} = 23.
Therefore Path II is the critical path and the critical activities are A, C, E, G and H. Now the time for A or C

cannot be reduced further. Therefore, we have to consider E, G and H for crashing. Among them, E has the least

--- Content provided by‍ FirstRanker.com ---

crash cost per unit time. Hence we reduce the time of E by one week with an extra cost of Rs. 1,000.

By the given condition, we have to reduce the project time by 3 weeks. Since this has been accomplished, we
stop with this step.

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Result: We have arrived at the following crashing scheme for the given project:

Reduce the time of A, C and E by one week each.
Project time after crashing is 22 weeks.
Extra amount required = 1,000 + 1,000 + 1,000 = Rs. 3,000.

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Problem 2:

The management of a company is interested in crashing of the following project by spending an additional

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amount not exceeding Rs. 2,000. Suggest how this can be accomplished.

Activity

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Predecessor

Normal Time

Crash Time

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Normal Cost Crash Cost

Activity

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(Weeks)

(Weeks) (Rs.)

(Rs.)

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A

-

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7

6

15,000

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18,000

B

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A

12

9

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11,000

14,000

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C

A

22

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21

18,500

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19,000

D

B

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11

10

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8,000

9,000

E

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C, D

6

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5

4,000

4,500

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Solution:

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We have the following network diagram for the given project with normal costs:

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3

B D 11
12

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A C E

1

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2

4

5

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7 22 6

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There are two paths for this project as detailed below:

Path I:

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A B D E

1 7 2 12 11

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3 6 4

5

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The time for the path = 7 + 12 + 11 + 6 = 36 weeks.

Path II:

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A C E

1

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4

2

5

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7 22 6

The time for the path = 7 + 22 + 6 = 35 weeks.

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Maximum of {36, 35} = 36.

Therefore Path I is the critical path and the critical activities are A, B, D and E. The non-critical activity is C.

The crash cost per unit time for the activities in the project are provided in the following table.

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Activity

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Normal

Crash

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Normal

Crash Cost

Crash cost

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Normal

Crash Cost

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Time

Time Cost

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Time -

per unit

Normal

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Crash

time

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Cost

Time

A

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7

6

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15,000

18,000

3,000

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1

3,000

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B

12

9

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11,000

14,000

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3,000

3

1,000

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C

22

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21

18,500

19,000

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500

1

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500

D

11

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10

8,000

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9,000

1,000

1

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1,000

E

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6

5

4,000

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4,500

500

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1

500

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We have to choose one of the activities A, B, D and E for crashing. The crash cost per unit time is as

follows:

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Rs. 3,000 for A; Rs. 1,000 for B; Rs. 1,000 for D; Rs. 500 for E.

The least among them is Rs. 500. So we have to choose the activity E for crashing. We reduce the time of E by

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one week by spending an extra amount of Rs. 500.

After this step, we have the following network with the revised times for the activities:

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B D

3 11

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12
A C E

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1

2

4

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5

7 22 5

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The revised time for Path I = 7 + 12 + 11 + 5 = 35 weeks.

The time for Path II = 7 + 22 + 5 = 34 weeks.

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Maximum of {35, 34} = 35.

Therefore Path I is the critical path and the critical activities are A, B, D and E. The non-critical activity is C.

The time of E cannot be reduced further. So we cannot select it for crashing. Next B and have the smallest crash

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cost per unit time. Let us select B for crashing. Let us reduce the time of E by one week at an extra cost of Rs.

1,000.

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After this step, we have the following network with the revised times for the activities:

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3

B D 11
11

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A C E

1

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2

4

5

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7 22 5

The revised time for Path I = 7 + 11 + 11 + 5 = 34 weeks.

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for Managers

The time for Path II = 7 + 22 + 5 = 34 weeks.

Maximum of {34, 34} = 34.

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Since both paths have equal times, both are critical paths. So, we can choose an activity for crashing from either

of them depending on the least crash cost per unit time. In path I, the activities are A, B, D and E. In path II, the

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activities are A, C and E.

The crash cost per unit time is the least for activity C. So we select C for crashing. Reduce the time of C by one

week at an extra cost of Rs. 500.

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By the given condition, the extra amount cannot exceed Rs. 2,000. Since this state has been met, we stop with
this step.

Result: The following crashing scheme is suggested for the given project:

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Reduce the time of E, B and C by one week each.

Project time after crashing is 33 weeks.

Extra amount required = 500 + 1,000 + 500 = Rs. 2,000.

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Problem 3:

The manager of a company wants to apply crashing for the following project by spending an additional amount

not exceeding Rs. 2,000. Offer your suggestion to the manager.

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Activity

Predecessor

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Normal Time

Crash Time

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Normal Cost Crash Cost

Activity

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(Weeks)

(Weeks) (Rs.)

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(Rs.)

A

-

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20

19

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8,000

10,000

B

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-

15

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14

16,000

19,000

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C

A

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22

20

13,000

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14,000

D

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A

17

15

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7,500

9,000

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E

B

19

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18

4,000

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5,000

F

C

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28

27

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3,000

4,000

G

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D, E

25

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24

12,000

13,000

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Solution:
We have the following network diagram for the given project with normal costs:

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C

3

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5

A 22 28
20 F
17

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1

D
15

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7

B E G 25

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19

2

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4

There are three paths for this project as detailed below:

Path I:

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A C F

2

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4

1 20 22 28

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6

The time for the path = 20 + 22 + 28= 70 weeks.

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Path II:

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A D G

1

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2

5

6

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20 17 25

The time for the path = 20 + 17 + 25= 62 weeks.

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Path III:

B E G

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1

3

5

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6

15 19 25

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The time for the path = 15+19 +25 = 69 weeks.
Maximum of {70, 62, 69} = 70.
Therefore Path I is the critical path and the critical activities are A, C and F. The non-critical activities are B, D,
E and G.
The crash cost per unit time for the activities in the project are provided in the following table

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Activity

Normal

Crash

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Normal

Crash Cost

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Crash cost

Normal

Crash Cost

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Time

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Time Cost

-

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Time -

per unit

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Normal

Crash

time

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Cost

Time

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A

20

19

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8,000

10,000

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2,000

1

2,000

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B

15

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14

16,000

19,000

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3,000

1

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3,000

C

22

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20

13,000

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14,000

1,000

2

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500

D

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17

15

7,500

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9,000

1,500

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2

750

E

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19

18

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4,000

5,000

1,000

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1

1,000

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F

28

27

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3,000

4,000

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1,000

1

1,000

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G

25

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24

12,000

13,000

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1,000

1

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1,000

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We have to choose one of the activities A, C and F for crashing. The crash cost per unit time is as

follows:

Rs. 2,000 for A; Rs. 500 for C; Rs. 1,000 for F.

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The least among them is Rs. 500. So we have to choose the activity C for crashing. We reduce the time of C by
one week by spending an extra amount of Rs. 500.

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After this step, we have the following network with the revised times for the activities:

C

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3

5

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A 21 28
20 F
17

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1

D
15

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7

B E G 25

19

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2

4

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The revised time for Path I = 20 + 21 + 28= 69 weeks.

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The time for Path II = 20 + 17 + 25= 62 weeks.

The time for Path III = 15+19 +25 = 69 weeks.
Maximum of {69, 62, 69} = 69.

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Since paths I and III have equal times, both are critical paths. So, we can choose an activity for crashing from

either of them depending on the least crash cost per unit time.

In path I, the activities are A, C and F. In path III, the activities are B, E and G.

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The crash cost per unit time is the least for activity C. So we select C for crashing. Reduce the time of C by one

week at an extra cost of Rs. 500.

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After this step, we have the following network with the revised times for the activities:

C

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3

5

A 20 28

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20 F
17

1

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D
15

7

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B E G 25

19

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2

4

The revised time for Path I = 20 + 20 + 28= 68 weeks.

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The time for Path II = 20 + 17 + 25= 62 weeks.

The time for Path III = 15+19 +25 = 69 weeks.
Maximum of {68, 62, 69} = 69.

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Therefore path III is the critical activities. Hence we have to select an activity from Path III for crashing. We see

that the crash cost per unit time is as follows:

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Rs. 3,000 for B; Rs. 1,000 for E; Rs. 1,000 for G.

The least among them is Rs. 1,000. So we can select either E or G for crashing. Let us select E for crashing. We

reduce the time of E by one week by spending an extra amount of Rs. 1,000.

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By the given condition, the extra amount cannot exceed Rs. 2,000. Since this condition has been reached, we

stop with this step.

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Result: The following crashing scheme is suggested for the given project:

Reduce the time of C by 2 weeks and that of E by one week.

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Project time after crashing is 67 weeks.

Extra amount required = 2 x 500 + 1,000 = Rs. 2,000.

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QUESTIONS

1. Explain the concept of crashing of a project.
2. Explain the criterion for selection of an activity for crashing.

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261

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UNIT IV

GAME THEORY & GOAL PROGRAMMING

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LESSON 1 BASIC CONCEPTS IN GAME THEORY

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LESSON OUTLINE

Introduction to the theory of games
The definition of a game

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Competitive game

Managerial applications of the theory of games
Key concepts in the theory of games

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Types of games

LEARNING OBJECTIVES

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After reading this lesson you should be able to

- understand the concept of a game

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- grasp the assumptions in the theory of games

- appreciate the managerial applications of the theory of games
- understand the key concepts in the theory of games

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- distinguish between different types of games

Introduction to game theory

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Game theory seeks to analyse competing situations which arise out of conflicts of interest.

Abraham Maslow's hierarchical model of human needs lays emphasis on fulfilling the basic

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needs such as food, water, clothes, shelter, air, safety and security. There is conflict of interest

between animals and plants in the consumption of natural resources. Animals compete among

themselves for securing food. Man competes with animals to earn his food. A man also

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competes with another man. In the past, nations waged wars to expand the territory of their

rule. In the present day world, business organizations compete with each other in getting the

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market share. The conflicts of interests of human beings are not confined to the basic needs

alone. Again considering Abraham Maslow's model of human needs, one can realize that

conflicts also arise due to the higher levels of human needs such as love, affection, affiliation,

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recognition, status, dominance, power, esteem, ego, self-respect, etc. Sometimes one

witnesses clashes of ideas of intellectuals also. Every intelligent and rational participant in a

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conflict wants to be a winner but not all participants can be the winners at a time. The

situations of conflict gave birth to Darwin's theory of the `survival of the fittest'. Nowadays

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MBA-H2040 Quantitative Techniques
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the concepts of conciliation, co-existence, co-operation, coalition and consensus are gaining

ground. Game theory is another tool to examine situations of conflict so as to identify the

courses of action to be followed and to take appropriate decisions in the long run. Thus this

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theory assumes importance from managerial perspectives. The pioneering work on the theory

of games was done by von Neumann and Morgenstern through their publication entitled `The

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Theory of Games and Economic Behaviour' and subsequently the subject was developed by

several experts. This theory can offer valuable guidelines to a manager in `strategic

management' which can be used in the decision making process for merger, take-over, joint

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venture, etc. The results obtained by the application of this theory can serve as an early

warning to the top level management in meeting the threats from the competing business

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organizations and for the conversion of the internal weaknesses and external threats into

opportunities and strengths, thereby achieving the goal of maximization of profits. While this

theory does not describe any procedure to play a game, it will enable a participant to select the

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appropriate strategies to be followed in the pursuit of his goals. The situation of failure in a

game would activate a participant in the analysis of the relevance of the existing strategies and

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lead him to identify better, novel strategies for the future occasions.

Definitions of game theory

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There are several definitions of game theory. A few standard definitions are presented below.

In the perception of Robert Mockler, "Game theory is a mathematical technique

helpful in making decisions in situations of conflicts, where the success of one part depends at

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the expense of others, and where the individual decision maker is not in complete control of

the factors influencing the outcome".

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The definition given by William G. Nelson runs as follows: "Game theory, more

properly the theory of games of strategy, is a mathematical method of analyzing a conflict.

The alternative is not between this decision or that decision, but between this strategy or that

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strategy to be used against the conflicting interest".

In the opinion of Matrin Shubik, "Game theory is a method of the study of decision

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making in situation of conflict. It deals with human processes in which the individual

decision-unit is not in complete control of other decision-units entering into the environment".

According to von Neumann and Morgenstern, "The `Game' is simply the totality of

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the rules which describe it. Every particular instance at which the game is played ? in a

particular way ? from beginning to end is a `play'. The game consists of a sequence of

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moves, and the play of a sequence of choices".

263

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MBA-H2040 Quantitative Techniques
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J.C.C McKinsey points out a valid distinction between two words, namely `game' and

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`play'. According to him, "game refers to a particular realization of the rules".

In the words of O.T. Bartos, "The theory of games can be used for `prescribing' how

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an intelligent person should go about resolving social conflicts, ranging all the way from open

warfare between nations to disagreements between husband and wife".

Martin K Starr gave the following definition: "Management models in the competitive

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sphere are usually termed game models. By studying game theory, we can obtain substantial

information into management's role under competitive conditions, even though much of the

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game theory is neither directly operational nor implementable".

According to Edwin Mansfield, "A game is a competitive situation where two or more

persons pursue their own interests and no person can dictate the outcome. Each player, an

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entity with the same interests, make his own decisions. A player can be an individual or a

group".

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Assumptions for a Competitive Game

Game theory helps in finding out the best course of action for a firm in view of the

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anticipated countermoves from the competing organizations. A competitive situation is a

competitive game if the following properties hold:

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1. The number of competitors is finite, say N.

2. A finite set of possible courses of action is available to each of the N competitors.

3. A play of the game results when each competitor selects a course of action from the

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set of courses available to him. In game theory we make an important assumption

that al the players select their courses of action simultaneously. As a result, no

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competitor will be in a position to know the choices of his competitors.

4. The outcome of a play consists of the particular courses of action chosen by the

individual players. Each outcome leads to a set of payments, one to each player,

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which may be either positive, or negative, or zero.

Managerial Applications of the Theory of Games

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The techniques of game theory can be effectively applied to various managerial

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problems as detailed below:

1) Analysis of the market strategies of a business organization in the long run.

2) Evaluation of the responses of the consumers to a new product.

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3) Resolving the conflict between two groups in a business organization.

4) Decision making on the techniques to increase market share.

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5) Material procurement process.

6) Decision making for transportation problem.

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7) Evaluation of the distribution system.

8) Evaluation of the location of the facilities.

9) Examination of new business ventures and

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10) Competitive economic environment.

Key concepts in the Theory of Games

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Several of the key concepts used in the theory of games are described below:

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Players:

The competitors or decision makers in a game are called the players of the game.

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Strategies:

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The alternative courses of action available to a player are referred to as his strategies.

Pay off:

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The outcome of playing a game is called the pay off to the concerned player.

Optimal Strategy:

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A strategy by which a player can achieve the best pay off is called the optimal strategy for

him.

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Zero-sum game:

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A game in which the total payoffs to all the players at the end of the game is zero is referred

to as a zero-sum game.

Non-zero sum game:

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Games with "less than complete conflict of interest" are called non-zero sum games. The

problems faced by a large number of business organizations come under this category. In

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such games, the gain of one player in terms of his success need not be completely at the

expense of the other player.

Payoff matrix:

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The tabular display of the payoffs to players under various alternatives is called the payoff

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matrix of the game.

Pure strategy:

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If the game is such that each player can identify one and only one strategy as the optimal

strategy in each play of the game, then that strategy is referred to as the best strategy for that

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player and the game is referred to as a game of pure strategy or a pure game.

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Mixed strategy:

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If there is no one specific strategy as the `best strategy' for any player in a game, then the

game is referred to as a game of mixed strategy or a mixed game. In such a game, each player

has to choose different alternative courses of action from time to time.

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N-person game:

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A game in which N-players take part is called an N-person game.

Maximin-Minimax Principle :

The maximum of the minimum gains is called the maximin value of the game and the

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corresponding strategy is called the maximin strategy. Similarly the minimum of the

maximum losses is called the minimax value of the game and the corresponding strategy is

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called the minimax strategy. If both the values are equal, then that would guarantee the best

of the worst results.

Negotiable or cooperative game:

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If the game is such that the players are taken to cooperate on any or every action which may

increase the payoff of either player, then we call it a negotiable or cooperative game.

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Non-negotiable or non-cooperative game:

If the players are not permitted for coalition then we refer to the game as a non-negotiable or

non-cooperative game.

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Saddle point:

A saddle point of a game is that place in the payoff matrix where the maximum of the row

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minima is equal to the minimum of the column maxima. The payoff at the saddle point is

called the value of the game and the corresponding strategies are called the pure strategies.

Dominance:

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One of the strategies of either player may be inferior to at least one of the remaining ones.

The superior strategies are said to dominate the inferior ones.

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Types of Games:

There are several classifications of a game. The classification may be based on various

factors such as the number of participants, the gain or loss to each participant, the number of

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strategies available to each participant, etc. Some of the important types of games are

enumerated below.

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Two person games and n-person games:

In two person games, there are exactly two players and each competitor will have a finite

number of strategies. If the number of players in a game exceeds two, then we refer to the

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game as n-person game.

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Zero sum game and non-zero sum game:

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If the sum of the payments to all the players in a game is zero for every possible outcome of

the game, then we refer to the game as a zero sum game. If the sum of the payoffs from any

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play of the game is either positive or negative but not zero, then the game is called a non-zero

sum game

Games of perfect information and games of imperfect information:

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A game of perfect information is the one in which each player can find out the strategy that

would be followed by his opponent. On the other hand, a game of imperfect information is the

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one in which no player can know in advance what strategy would be adopted by the

competitor and a player has to proceed in his game with his guess works only.

Games with finite number of moves / players and games with unlimited number of

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moves:

A game with a finite number of moves is the one in which the number of moves for each

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player is limited before the start of the play. On the other hand, if the game can be continued

over an extended period of time and the number of moves for any player has no restriction,

then we call it a game with unlimited number of moves.

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Constant-sum games:

If the sum of the game is not zero but the sum of the payoffs to both players in each case is

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constant, then we call it a constant sum game. It is possible to reduce such a game to a zero-

sum game.

2x2 two person game and 2xn and mx2 games:

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When the number of players in a game is two and each player has exactly two strategies, the

game is referred to as 2x2 two person game.

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A game in which the first player has precisely two strategies and the second player has

three or more strategies is called an 2xn game.

A game in which the first player has three or more strategies and the second player has

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exactly two strategies is called an mx2 game.

3x3 and large games:

When the number of players in a game is two and each player has exactly three strategies, we

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call it a 3x3 two person game.

Two-person zero sum games are said to be larger if each of the two players has 3 or

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more choices.

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The examination of 3x3 and larger games is involves difficulties. For such games, the

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technique of linear programming can be used as a method of solution to identify the optimum

strategies for the two players.

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Non-constant games :

Consider a game with two players. If the sum of the payoffs to the two players is not constant

in all the plays of the game, then we call it a non-constant game.

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Such games are divided into negotiable or cooperative games and non-negotiable or

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non-cooperative games.

QUESTIONS

1. Explain the concept of a game.

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2. Define a game.

3. State the assumptions for a competitive game.

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4. State the managerial applications of the theory of games.
5. Explain the following terms: strategy, pay-off matrix, saddle point, pure strategy and

mixed strategy.

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6. Explain the following terms: two person game, two person zero sum game, value of a

game, 2xn game and mx2 game.

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for Managers

LESSON 2

TWO-PERSON ZERO SUM GAMES

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LESSON OUTLINE

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The concept of a two-person zero sum game

The assumptions for a two-person zero sum game
Minimax and Maximin principles

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LEARNING OBJECTIVES

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After reading this lesson you should be able to

- understand the concept of a two-person zero sum game
- have an idea of the assumptions for a two-person zero sum game
- understand Minimax and Maximin principles

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- solve a two-person zero sum game
- interpret the results from the payoff matrix of a two-person zero sum game

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Definition of two-person zero sum game

A game with only two players, say player A and player B, is called a two-person zero sum

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game if the gain of the player A is equal to the loss of the player B, so that the total sum is

zero.

Payoff matrix:

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When players select their particular strategies, the payoffs (gains or losses) can be represented

in the form of a payoff matrix.

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Since the game is zero sum, the gain of one player is equal to the loss of other and

vice-versa. Suppose A has m strategies and B has n strategies. Consider the following payoff

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matrix.

Player B's strategies

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B

B

B

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1

2

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n

A a

a

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a

1

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11

12

1n

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Player A's strategies

A

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a

a

a

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1

21

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22

2n

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Am a

a

a

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1

m

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m2

mn

Player A wishes to gain as large a payoff a as possible while player B will do his best to

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ij

reach as small a value a as possible where the gain to player B and loss to player A be (-

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ij

a ).

ij

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Assumptions for two-person zero sum game:

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For building any model, certain reasonable assumptions are quite necessary. Some

assumptions for building a model of two-person zero sum game are listed below.

a) Each player has available to him a finite number of possible courses of action.

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Sometimes the set of courses of action may be the same for each player. Or, certain

courses of action may be available to both players while each player may have certain

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specific courses of action which are not available to the other player.

b) Player A attempts to maximize gains to himself. Player B tries to minimize losses to

himself.

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c) The decisions of both players are made individually prior to the play with no

communication between them.

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d) The decisions are made and announced simultaneously so that neither player has an

advantage resulting from direct knowledge of the other player's decision.

e) Both players know the possible payoffs of themselves and their opponents.

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Minimax and Maximin Principles

The selection of an optimal strategy by each player without the knowledge of the competitor's

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strategy is the basic problem of playing games.

The objective of game theory is to know how these players must select their respective

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strategies, so that they may optimize their payoffs. Such a criterion of decision making is

referred to as minimax-maximin principle. This principle in games of pure strategies leads to

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the best possible selection of a strategy for both players.

For example, if player A chooses his ith strategy, then he gains at least the payoff min

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a , which is minimum of the ith row elements in the payoff matrix. Since his objective is to

ij

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maximize his payoff, he can choose strategy i so as to make his payoff as large as possible.

i.e., a payoff which is not less than max min a .

ij

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1im

1 jn

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Similarly player B can choose jth column elements so as to make his loss not greater than

min max a .

ij

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1 jn 1im

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If the maximin value for a player is equal to the minimax value for another player, i.e.

max min a V min max a

ij

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ij

1im

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1 jn

1 jn

1im

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then the game is said to have a saddle point (equilibrium point) and the corresponding

strategies are called optimal strategies. If there are two or more saddle points, they must be

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equal.

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The amount of payoff, i.e., V at an equilibrium point is known as the value of the

game.

The optimal strategies can be identified by the players in the long run.

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Fair game:

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The game is said to be fair if the value of the game V = 0.

Problem 1:

Solve the game with the following pay-off matrix.

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Player B

Strategies

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I

II

III

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IV

V

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1

2

5

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3

6

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7

Player A Strategies 2

4

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6

8

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1

6

3

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8

2

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3

5

4

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4 15 14

18

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12

20

Solution:

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First consider the minimum of each row.

Row

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Minimum Value

1

-3

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2

-1

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3

2

4

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12

Maximum of {-3, -1, 2, 12} = 12

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Next consider the maximum of each column.

Column

Maximum Value

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1

15

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2

14

3

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18

4

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12

5

20

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Minimum of {15, 14, 18, 12, 20}= 12

We see that the maximum of row minima = the minimum of the column maxima. So the

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game has a saddle point. The common value is 12. Therefore the value V of the game = 12.

Interpretation:

In the long run, the following best strategies will be identified by the two players:

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The best strategy for player A is strategy 4.

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The best strategy for player B is strategy IV.

The game is favourable to player A.

Problem 2:

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Solve the game with the following pay-off matrix

Player Y

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Strategies

I

II

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III

IV

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V

1 9 12

7

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14

26

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Player X Strategies 2 25 35 20

28 30

3 7

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6

8

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3

2

4 8

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11 13

2

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1

Solution:

First consider the minimum of each row.

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Row

Minimum Value

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1

7

2

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20

3

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-8

4

-2

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Maximum of {7, 20, ?8, -2} = 20

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Next consider the maximum of each column.

Column

Maximum Value

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1

25

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2

35

3

--- Content provided by FirstRanker.com ---

20

4

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28

5

30

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Minimum of {25, 35, 20, 28, 30}= 20

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It is observed that the maximum of row minima and the minimum of the column

maxima are equal. Hence the given the game has a saddle point. The common value is 20.

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This indicates that the value V of the game is 20.

Interpretation.

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The best strategy for player X is strategy 2.

The best strategy for player Y is strategy III.

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The game is favourable to player A.

Problem 3:

Solve the following game:

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Player B

Strategies

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I

II

III

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IV

1 1 6

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8

4

Player A Strategies 2 3 7

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2 8

3 5

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5 1

0

4 3 4

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5

7

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Solution

First consider the minimum of each row.

Row

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Minimum Value

1

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-6

2

-8

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3

-5

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4

-4

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Maximum of {-6, -8, -5, -4} = -4

Next consider the maximum of each column.

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Column

Maximum Value

1

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5

2

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-4

3

8

--- Content provided by FirstRanker.com ---

4

7

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Minimum of {5, -4, 8, 7}= - 4

Since the max {row minima} = min {column maxima}, the game under consideration has a

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saddle point. The common value is ?4. Hence the value of the game is ?4.

Interpretation.

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The best strategy for player A is strategy 4.

The best strategy for player B is strategy II.

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Since the value of the game is negative, it is concluded that the game is favourable to

player B.

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QUESTIONS

1. What is meant by a two-person zero sum game? Explain.

2. State the assumptions for a two-person zero sum game.

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3. Explain Minimax and Maximin principles.

4. How will you interpret the results from the payoff matrix of a two-person zero sum

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game? Explain.

5. What is a fair game? Explain.

6. Solve the game with the following pay-off matrix.

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Player B

Strategies

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I

II

III

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IV

V

--- Content provided by‍ FirstRanker.com ---

1

7

5

--- Content provided by FirstRanker.com ---

2

3

--- Content provided by‌ FirstRanker.com ---

9

Player A Strategies 2 10

8

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7

4

--- Content provided by⁠ FirstRanker.com ---

5

3

9

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12

0

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2

1

4 11

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2 1

3

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4

Answer: Best strategy for A: 2

Best strategy for B: IV

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V = 4

The game is favourable to player A

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7. Solve the game with the following pay-off matrix.

Player B

Strategies

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I

II

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III

IV

V

--- Content provided by‍ FirstRanker.com ---

1

2

--- Content provided by‍ FirstRanker.com ---

3

8

7

--- Content provided by FirstRanker.com ---

0

Player A Strategies 2

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1

7 5 2

3

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3

4

--- Content provided by⁠ FirstRanker.com ---

2

3

5

--- Content provided by⁠ FirstRanker.com ---

1

4

--- Content provided by‌ FirstRanker.com ---

6

4

5

--- Content provided by FirstRanker.com ---

4

7

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Answer: Best strategy for A: 3

Best strategy for B: II

V = -2

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The game is favourable to player B

8. Solve the game with the following pay-off matrix.

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Player B

6

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4

Player A

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7 5

Answer: Best strategy for A: 2

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Best strategy for B: II

V = 5

The game is favourable to player A

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9. Solve the following game and interpret the result.

Player B

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Strategies

I

II

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III

IV

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1 3

7

1

--- Content provided by FirstRanker.com ---

3

Player A Strategies 2 1

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2

3

1

--- Content provided by FirstRanker.com ---

3 0

4

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2

6

4 2

--- Content provided by FirstRanker.com ---

1

5

--- Content provided by‌ FirstRanker.com ---

1

Answer: Best strategy for A: 3

Best strategy for B: I

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V = 0

The value V = 0 indicates that the game is a fair one.

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10. Solve the following game:

Player B

Strategies

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I

II

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III

1 1

8

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2

Player A Strategies 2 3

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5

6

--- Content provided by FirstRanker.com ---

3 2

2

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--- Content provided by‍ FirstRanker.com ---

Answer: Best strategy for A: 2

Best strategy for B: I

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V = 3

The game is favourable to player A

11. Solve the game

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Player B

--- Content provided by FirstRanker.com ---

I

II

III

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IV

1 4

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1

2

0

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Player A

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2 3

5

9

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2

3 2

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8

0

11

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Answer : V = -1

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12. Solve the game

Player Y

I

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II

III

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IV

V

1 4

--- Content provided by FirstRanker.com ---

0

1

--- Content provided by FirstRanker.com ---

7

1

2 0

--- Content provided by‌ FirstRanker.com ---

3

5 7

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5

Player X

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3 3

2

--- Content provided by‍ FirstRanker.com ---

3

4

3

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4 6

4

--- Content provided by FirstRanker.com ---

1

0

5

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5 0

0

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6

0

0

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Answer : V = 2

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13. Solve the game

Player B

I

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II

III

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IV

V

1 9

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3

4

--- Content provided by FirstRanker.com ---

4

2

2 8

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6

8

--- Content provided by⁠ FirstRanker.com ---

5 12

Player A

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3 10 7 19 18 14

4 8

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6

8 11

6

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5 3 5 16 10

8

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Answer : V = 7

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14. Solve the game

Player Y

17 10 12

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5

4

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8

2

5

--- Content provided by FirstRanker.com ---

6

7

--- Content provided by FirstRanker.com ---

6

9

7

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6

9

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2

3

1

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Player X

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10 11 14

8 13

8

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20 18 17 10 15 17

12 11 15

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9

5 11

Answer : V = 10

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15. Solve the game

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Player B

12 14

8

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7

4

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9

2 13

6

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7

9

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8

13

6

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8

6

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3

1

Player A

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9 10

8

9

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6

20 18 17 11 14 16

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8 12 16

9

6 13

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Answer : V = 11

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16. Examine whether the following game is fair.

Player Y

6

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4

3

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2

Player X 3

5

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0

8

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7

2

6

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5

Answer : V = 0. Therefore, it is a fair game.

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MBA-H2040 Quantitative Techniques
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LESSON 3

GAMES WITH NO SADDLE POINT

LESSON OUTLINE

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The concept of a 2x2 game with no saddle point

The method of solution

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LEARNING OBJECTIVES

After reading this lesson you should be able to

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- understand the concept of a 2x2 game with no saddle point
- know the method of solution of a 2x2 game without saddle point
- solve a game with a given payoff matrix
- interpret the results obtained from the payoff matrix

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2 x 2 zero-sum game

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When each one of the first player A and the second player B has exactly two strategies,

we have a 2 x 2 game.

Motivating point

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First let us consider an illustrative example.

Problem 1:

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Examine whether the following 2 x 2 game has a saddle point

Player B

3 5

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Player A

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4

2

Solution:

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First consider the minimum of each row.

Row

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Minimum Value

1

3

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2

2

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Maximum of {3, 2} = 3

Next consider the maximum of each column.

Column

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Maximum Value

1

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4

2

5

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Minimum of {4, 5}= 4

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We see that max {row minima} and min {column maxima} are not equal. Hence the

game has no saddle point.

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Method of solution of a 2x2 zero-sum game without saddle point

Suppose that a 2x2 game has no saddle point. Suppose the game has the following pay-off

matrix.

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Player B

Strategy

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a

b

Player A Strategy

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d

Since this game has no saddle point, the following condition shall hold:

Max{Min{a, }

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b , Min{c, d}} Min{Max{a, }

c , Max{b, d}}

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In this case, the game is called a mixed game. No strategy of Player A can be called the

best strategy for him. Therefore A has to use both of his strategies. Similarly no strategy

of Player B can be called the best strategy for him and he has to use both of his

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strategies.

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Let p be the probability that Player A will use his first strategy. Then the

probability that Player A will use his second strategy is 1-p.

If Player B follows his first strategy

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Expected value of the pay-off to Player A

Expected value of the pay-off to Player A

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Expected value of the pay-off to Player A

{

} {

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}

arising from his first strategy

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arising from his second strategy

ap (

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c 1 )

p

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(1)

In the above equation, note that the expected value is got as the product of the corresponding

values of the pay-off and the probability.

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If Player B follows his second strategy

Expected value of the bp d(1 p)

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(2)

pay-off to Player A

If the expected values in equations (1) and (2) are different, Player B will prefer the minimum

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of the two expected values that he has to give to player A. Thus B will have a pure strategy.

This contradicts our assumption that the game is a mixed one. Therefore the expected values

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of the pay-offs to Player A in equations (1) and (2) should be equal. Thus we have the

condition

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MBA-H2040 Quantitative Techniques
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ap c(1 p)

bp d (1 p)

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ap bp

(1 p)[d c]

p(a b)

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(d c) p(d c)

p(a b) p(d c)

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d c

p(a b d c)

d c

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d c

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p

(a d ) (b c)

a d b c d c

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1 p

(a d ) (b c)

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a b

(a d ) (b c)

The number of times A

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The number of times A

d c

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a b

{

}:{

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}

:

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will use first strategy

will use second strategy

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(a d ) (b c) (a d ) (b c)

The expected pay-off to Player A

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ap c(1 p)
c p(a c)

(d c)(a c)

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c (ad)(bc)

c(a d) (b c

) (d c)(a c)

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(a d ) (b c)

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2

2

ac cd bc c ad cd ac c )

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(a d ) (b c)

ad bc

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(ad)(bc)

Therefore, the value V of the game is

ad bc

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(a d ) (b c)

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To find the number of times that B will use his first strategy and second strategy:

Let the probability that B will use his first strategy be r. Then the probability that B will use

his second strategy is 1-r.

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When A use his first strategy

The expected value of loss to Player B with his first strategy = ar

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The expected value of loss to Player B with his second strategy = b(1-r)

Therefore the expected value of loss to B = ar + b(1-r)

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(3)

When A use his second strategy

The expected value of loss to Player B with his first strategy = cr

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MBA-H2040 Quantitative Techniques

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for Managers

The expected value of loss to Player B with his second strategy = d(1-r)

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Therefore the expected value of loss to B = cr + d(1-r)

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(4)

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If the two expected values are different then it results in a pure game, which is a contradiction.

Therefore the expected values of loss to Player B in equations (3) and (4) should be equal.

Hence we have the condition

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ar b(1 r) cr d (1 r)

ar b br cr d dr

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ar br cr dr d b

r(a b c d ) d b

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d b

r a bc d

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d b

(ad)(bc)

Problem 2:

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Solve the following game

Y

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2 5

X

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4 1

Solution:

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First consider the row minima.

Row

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Minimum Value

1

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2

2

1

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Maximum of {2, 1} = 2

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Next consider the maximum of each column.

Column

Maximum Value

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1

4

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2

5

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Minimum of {4, 5}= 4

We see that

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MBA-H2040 Quantitative Techniques

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for Managers

Max {row minima} min {column maxima}

So the game has no saddle point. Therefore it is a mixed game.

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We have a = 2, b = 5, c = 4 and d = 1.

Let p be the probability that player X will use his first strategy. We have

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d c

p (a d) (b c)

1 4

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(21)(54)

3

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3 9

3

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6

1

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2

1

1

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The probability that player X will use his second strategy is 1-p = 1-

=

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.

2

2

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ad bc

2 20

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18

Value of the game V =

3 .

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(a d ) (b c)

3 9

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6

Let r be the probability that Player Y will use his first strategy. Then the probability that Y

will use his second strategy is (1-r). We have

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d b

r (a d)(b c)

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1 5

(21)(54)

4

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--- Content provided by FirstRanker.com ---

4

6
2

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3

2

1

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1 r 1

3

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3

Interpretation.

1

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1

p : (1-p) =

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:

2

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2

Therefore, out of 2 trials, player X will use his first strategy once and his second strategy

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once.

282

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MBA-H2040 Quantitative Techniques
for Managers

2

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1

r : (1-r) =

:

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3

3

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Therefore, out of 3 trials, player Y will use his first strategy twice and his second strategy

once.

QUESTIONS

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1. What is a 2x2 game with no saddle point? Explain.

2. Explain the method of solution of a 2x2 game without saddle point.

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3. Solve the following game

Y

1

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2 4

X

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3 7

1

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1

Answer: p = , r =

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, V = 6

3

4

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4. Solve the following game

Y

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5

4

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9

3

4

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1

Answer: p =

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, r = , V = -1

7

3

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5. Solve the following game

Y

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10 4

X

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6

8

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1

1

Answer: p =

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, r =

, V = 7

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4

2

6. Solve the following game

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Y

20

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8

X

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2 10

1

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1

Answer: p =

, r =

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, V = 9

2

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12

7. Solve the following game

Y

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283

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MBA-H2040 Quantitative Techniques
for Managers

10

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2

X

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1

5

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1

1

Answer: p = , r =

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, V = 4

3

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4

8. Solve the following game

Y

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12

6

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X

6

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9

1

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1

Answer: p = , r = , V = 8

3

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3

9. Solve the following game

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Y

10

8

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8

10

1

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1

Answer: p =

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, r =

, V = 9

2

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2

10. Solve the following game

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Y

16

4

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4

8

1

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1

Answer: p =

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, r =

, V = 7

4

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4

11. Solve the following game

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Y

11

5

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--- Content provided by FirstRanker.com ---

7

9

1

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7

Answer: p =

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, r =

, V = - 2

2

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16

12. Solve the following game Y

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9

3

X

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7

1

5

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Answer: p =

, r =

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, V = - 2

2

12

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LESSON 4

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THE PRINCIPLE OF DOMINANCE

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LESSON OUTLINE

The principle of dominance

Dividing a game into sub games

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LEARNING OBJECTIVES

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After reading this lesson you should be able to

- understand the principle of dominance
-

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solve a game using the principle of dominance

- solve a game by dividing a game into sub games

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The principle of dominance

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In the previous lesson, we have discussed the method of solution of a game without a saddle

point. While solving a game without a saddle point, one comes across the phenomenon of the

dominance of a row over another row or a column over another column in the pay-off matrix

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of the game. Such a situation is discussed in the sequel.

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In a given pay-off matrix A, we say that the ith row dominates the kth row if

a a for all j = 1,2,...,n

ij

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kj

and

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a a for at least one j.

ij

kj

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In such a situation player A will never use the strategy corresponding to kth row,

because he will gain less for choosing such a strategy.

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Similarly, we say the pth column in the matrix dominates the qth column if

a a for all i = 1,2,...,m

ip

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iq

and

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a a for at least one i.

ip

iq

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In this case, the player B will loose more by choosing the strategy for the qth column than by

choosing the strategy for the pth column. So he will never use the strategy corresponding to

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the qth column. When dominance of a row ( or a column) in the pay-off matrix occurs, we can

delete a row (or a column) from that matrix and arrive at a reduced matrix. This principle of

dominance can be used in the determination of the solution for a given game.

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285

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MBA-H2040 Quantitative Techniques
for Managers

Let us consider an illustrative example involving the phenomenon of dominance in a game.

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Problem 1:

Solve the game with the following pay-off matrix:

Player B

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I

II

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III

IV

1 4

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2

3

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6

Player A

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2 3

4

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7

5

3 6

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3

5

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4

Solution:

First consider the minimum of each row.

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Row

Minimum Value

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1

2

2

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3

3

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3

Maximum of {2, 3, 3} = 3

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Next consider the maximum of each column.

Column

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Maximum Value

1

6

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2

4

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3

7

4

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Minimum of {6, 4, 7, 6}= 4

The following condition holds:

Max {row minima} min {column maxima}

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Therefore we see that there is no saddle point for the game under consideration.

Compare columns II and III.

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Column II

Column III

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2

3

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4

7

3

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We see that each element in column III is greater than the corresponding element in column

II. The choice is for player B. Since column II dominates column III, player B will discard

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his strategy 3.

Now we have the reduced game

I

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II

IV

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1 4

2

6

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2 3

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4

5

3 6

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3

4

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For this matrix again, there is no saddle point. Column II dominates column IV. The choice

is for player B. So player B will give up his strategy 4

The game reduces to the following:

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I

II

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1 4 2

2 3

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4

3 6 3

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This matrix has no saddle point.

The third row dominates the first row. The choice is for player A. He will give up his

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strategy 1 and retain strategy 3. The game reduces to the following:

3 4

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6 3

a b

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Again, there is no saddle point. We have a 2x2 matrix. Take this matrix as

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c d

Then we have a = 3, b = 4, c = 6 and d = 3. Use the formulae for p, 1-p, r, 1-r and V.

d c

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p (a d) (b c)

3 6

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(33)(64)

3

610

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4

3

4

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3

1

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1 p 1

4

4

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MBA-H2040 Quantitative Techniques
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d b

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r (a d)(b c)

3 4

(33)(64)

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1

610

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1

4

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1

4

1

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3

1 r 1

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4

4

The value of the game

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ad bc

V (a d)(b c)

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3x3 4x6

4

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15

4

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15

4

3 1

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1 3

Thus, X =

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, , 0, 0

and Y =

, , 0,0

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are the optimal strategies.

4 4

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4 4

Method of convex linear combination

A strategy, say s, can also be dominated if it is inferior to a convex linear combination of

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several other pure strategies. In this case if the domination is strict, then the strategy s can be

deleted. If strategy s dominates the convex linear combination of some other pure strategies,

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then one of the pure strategies involved in the combination may be deleted. The domination

will be decided as per the above rules. Let us consider an example to illustrate this case.

Problem 2:

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Solve the game with the following pay-off matrix for firm A:

Firm B

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B

B

B

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B

B

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1

2

3

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4

5

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A 4

8

2

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5

6

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1

A

4

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0

6

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8

5

Firm A 2

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A 2

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6

4

4

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2

3

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A

4

3

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5

6

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3

4

A 4 1

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5 7

3

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5

288

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MBA-H2040 Quantitative Techniques
for Managers

Solution:

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First consider the minimum of each row.

Row

Minimum Value

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1

-2

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2

0

3

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-6

4

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-3

5

-1

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Maximum of {-2, 0, -6, -3, -1} = 0

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Next consider the maximum of each column.

Column

Maximum Value

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1

4

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2

8

3

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6

4

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8

5

6

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Minimum of { 4, 8, 6, 8, 6}= 4

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Hence,

Maximum of {row minima} minimum of {column maxima}.

So we see that there is no saddle point. Compare the second row with the fifth row. Each

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element in the second row exceeds the corresponding element in the fifth row. Therefore, A

2

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dominates A . The choice is for firm A. It will retain strategy A and give up strategy A .

5

2

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5

Therefore the game reduces to the following.

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B

B

B

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B

B

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1

2

3

--- Content provided by FirstRanker.com ---

4

5

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A 4

8

2 5

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6

1

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A

4

0

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6 8

5

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2

A 2

6 4 4

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2

3

--- Content provided by⁠ FirstRanker.com ---

A 4

3

5 6

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3

4

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Compare the second and fourth rows. We see that A dominates A . So, firm A will retain

2

4

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the strategy A and give up the strategy A . Thus the game reduces to the following:

2

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4

289

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MBA-H2040 Quantitative Techniques
for Managers

B

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B

B

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B

B

1

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2

3

--- Content provided by‌ FirstRanker.com ---

4

5

A 4

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8

2

--- Content provided by‌ FirstRanker.com ---

5 6

1

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A

4

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0

6

8

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5

2

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A 2

6

4

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4 2

3

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Compare the first and fifth columns. It is observed that B1 dominates B5. The choice is for

firm B. It will retain the strategy B and give up the strategy B . Thus the game reduces to the

1

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5

following

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B

B

B

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B

1

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2

3

4

--- Content provided by FirstRanker.com ---

A 4

8

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2 5

1

--- Content provided by‍ FirstRanker.com ---

A

4

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0

6 8

2

--- Content provided by‌ FirstRanker.com ---

A 2

6 4 4

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3

Compare the first and fourth columns. We notice that B1 dominates B4. So firm B will discard

the strategy B and retain the strategy B . Thus the game reduces to the following:

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4

1

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B

B

B

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1

2

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3

A 4

8

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2

1

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A

4

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0

6

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2

A 2

6

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4

3

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For this reduced game, we check that there is no saddle point.

Now none of the pure strategies of firms A and B is inferior to any of their other

strategies. But, we observe that convex linear combination of the strategies B and B

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2

3

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dominates B , i.e. the averages of payoffs due to strategies B and B ,

1

2

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3

8 2 0 6 6

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4

,

,

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3,3,

5

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2

2

2

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dominate B . Thus B may be omitted from consideration. So we have the reduced matrix

1

--- Content provided by FirstRanker.com ---

1

B

B

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2

3

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A 8

2

1

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

0

6

2

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A 6

4

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3

Here, the average of the pay-offs due to strategies A and A of firm A, i.e.

1

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2

8 0 2

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6

,

4,

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2 dominates the pay-off due to A . So we get a new reduced 2x2 pay-

2

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2

3

off matrix.

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290
MBA-H2040 Quantitative Techniques
for Managers

Firm B's strategy

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B

B

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2

3

Firm A's strategy A 8

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--- Content provided by FirstRanker.com ---

1

A 0

6

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2

We have a = 8, b = -2, c = 0 and d = 6.

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d c

p (a d) (b c)

6 0

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(68)(20)

6

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16

3

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8

3

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5

1 p 1

8

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8

d b

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r (a d)(b c)

6 (2)

16

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16

1

2

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1

1

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1 r 1

2

2

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Value of the game:

ad bc

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V (a d)(b c)

6 8

x 0x(2)

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48

3

16

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So the optimal strategies are

3 5

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1 1

A = , , 0, 0, 0 and B = 0, , , 0, 0 .

8 8

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2 2

The value of the game = 3. Thus the game is favourable to firm A.

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291

MBA-H2040 Quantitative Techniques
for Managers

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Problem 3:

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For the game with the following pay-off matrix, determine the saddle point

Player B

I

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II

III

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IV

1 2 1

0

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Player A

2

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1

0

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3

2

3 3

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2

1

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4

Solution:

Column II

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Column III

1

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1

0

0 1

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2 0

3

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3 0

3 2

1

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1 2

The choice is with the player B. He has to choose between strategies II and III. He will lose

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more in strategy III than in strategy II, irrespective of what strategy is followed by A. So he

will drop strategy III and retain strategy II. Now the given game reduces to the following

game.

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I

II

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IV

1 2

1

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--- Content provided by‌ FirstRanker.com ---

2

1

0

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2

3 3

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2

4

Consider the rows and columns of this matrix.

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Row minimum:

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I Row

:

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-3

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II Row

:

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Maximum of {-3, 0, -3} = 0

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III Row

:

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-3

Column maximum:

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I Column

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:

2

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II Column

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:

0

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Minimum of {2, 0, 4} = 0

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III Column

:

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4

We see that

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Maximum of row minimum = Minimum of column maximum = 0.

So, a saddle point exists for the given game and the value of the game is 0.

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292
MBA-H2040 Quantitative Techniques
for Managers

Interpretation:

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No player gains and no player loses. i.e., The game is not favourable to any player. i.e. It is a

fair game.

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Problem 4:

Solve the game

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Player B

4 8 6

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Player A 6

2 10

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4 5 7

Solution:

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First consider the minimum of each row.

Row

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Minimum

1

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4

2

2

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3

4

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Maximum of {4, 2, 4} = 4

Next, consider the maximum of each column.

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Column

Maximum

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1

6

2

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8

3

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10

Minimum of {6, 8, 10} = 6

Since Maximum of { Row Minima} and Minimum of { Column Maxima } are different, it

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follows that the given game has no saddle point.

Denote the strategies of player A by A , A , A . Denote the strategies of player B by B , B , B .

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1

2

3

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1

2

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3

Compare the first and third columns of the given matrix.

B

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B

1

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3

4

6

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6

10

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7

7

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The pay-offs in B are greater than or equal to the corresponding pay-offs in B . The

3

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1

player B has to make a choice between his strategies 1 and 3. He will lose more if he follows

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293

MBA-H2040 Quantitative Techniques
for Managers

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strategy 3 rather than strategy 1. Therefore he will give up strategy 3 and retain strategy 1.

Consequently, the given game is transformed into the following game:

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B

B

1

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2

A 4

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8

1

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A 6

2

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2

A 4

5

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3

Compare the first and third rows of the above matrix.

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B

B

1

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2

A 4

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8

1

A 4

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5

3

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The pay-offs in A are greater than or equal to the corresponding pay-offs in A . The player

1

3

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A has to make a choice between his strategies 1 and 3. He will gain more if he follows

strategy 1 rather than strategy 3. Therefore he will retain strategy 1 and give up strategy 3.

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Now the given game is transformed into the following game.

B

B

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1

2

--- Content provided by FirstRanker.com ---

A 4

8

1

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A 6

2

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2

It is a 2x2 game. Consider the row minima.

Row

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Minimum

1

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4

2

2

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Maximum of {4, 2} = 4

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Next, consider the maximum of each column.

Column

Maximum

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1

6

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2

8

Minimum of {6, 8} = 6

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Maximum {row minima} and Minimum {column maxima } are not equal

Therefore, the reduced game has no saddle point. So, it is a mixed game

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a b 4 8

Take

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. We have a = 4, b = 8, c = 6 and d = 2.

c d 6 2

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The probability that player A will use his first strategy is p. This is calculated as

294

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MBA-H2040 Quantitative Techniques
for Managers

d c

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p (a d) (b c)

2 6

(42)(86)

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4

614

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4 1

8 2

The probability that player B will use his first strategy is r. This is calculated as

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d b

r (a d)(b c)

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2 8

8

--- Content provided by FirstRanker.com ---

6

8

--- Content provided by FirstRanker.com ---

3

4

Value of the game is V. This is calculated as

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ad bc

V (a d)(b c)

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4x2 8x6

8

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8 48

8

--- Content provided by FirstRanker.com ---

40

5

8

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Interpretation

Out of 3 trials, player A will use strategy 1 once and strategy 2 once. Out of 4 trials, player B

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will use strategy 1 thrice and strategy 2 once. The game is favourable to player A.

Problem 5: Dividing a game into sub-games

Solve the game with the following pay-off matrix.

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Player B

1

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2

3

I 4

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6

3

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Player A

II 3

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3

4

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III 2

3

4

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Solution:

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First, consider the row mimima.

295

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MBA-H2040 Quantitative Techniques
for Managers

Row

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Minimum

1

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-4

2

-3

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3

-3

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Maximum of {-4, -3, -3} = -3

Next, consider the column maxima.

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Column

Maximum

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1

2

2

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6

3

--- Content provided by FirstRanker.com ---

4

Minimum of {2, 6, 4} = 2

We see that Maximum of { row minima} Minimum of { column maxima}.

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So the game has no saddle point. Hence it is a mixed game. Compare the first and third

columns.

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I Column

III Column

4

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3

4 3

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3

4

3 4

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2

4

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2 4

We assert that Player B will retain the first strategy and give up the third strategy. We get the

following reduced matrix.

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4

6

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3

3

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2

3

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We check that it is a game with no saddle point.

Sub games

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Let us consider the 2x2 sub games. They are:

4 6 4

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6 3

3

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--- Content provided by FirstRanker.com ---

3

3 2 3 2 3

First, take the sub game

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4 6

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3

3

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296
MBA-H2040 Quantitative Techniques
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--- Content provided by FirstRanker.com ---

Compare the first and second columns. We see that 4 6 and 3 3 . Therefore, the

4

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game reduces to . Since 4 3, it further reduces to ?3.

3

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Next, consider the sub game

4

6

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2 3

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We see that it is a game with no saddle point. Take a = -4, b = 6, c = 2, d = -3. Then the

value of the game is

ad bc

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V (a d)(b c)

(4)(3) (6)(2)

--- Content provided by‍ FirstRanker.com ---

(4 3) (6 2)

0

--- Content provided by‍ FirstRanker.com ---

3

3

--- Content provided by FirstRanker.com ---

Next, take the sub game

. In this case we have a = -3, b = 3, c = 2 and d = -3. The

2 3

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value of the game is obtained as

ad bc

--- Content provided by‍ FirstRanker.com ---

V (a d)(b c)

(3)( 3

) (3)(2)

--- Content provided by‌ FirstRanker.com ---

(3 3) (3 2)

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9 6

3

--- Content provided by‌ FirstRanker.com ---

6

5

--- Content provided by‌ FirstRanker.com ---

11

Let us tabulate the results as follows:

Sub game

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Value

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4 6

3

--- Content provided by‍ FirstRanker.com ---

3

-3

--- Content provided by FirstRanker.com ---

4

6

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

2 3

3

--- Content provided by‌ FirstRanker.com ---

3

2 3

-

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

The value of 0 will be preferred by the player A. For this value, the first and third

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strategies of A correspond while the first and second strategies of the player B correspond to

the value 0 of the game. So it is a fair game.

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297

MBA-H2040 Quantitative Techniques

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for Managers

QUESTIONS

1. Explain the principle of dominance in the theory of games.

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2. Explain how a game can be solved through sub games.

3. Solve the following game by the principle of dominance:

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Player B

Strategies

I

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II

III

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IV

1 8

10

--- Content provided by FirstRanker.com ---

9

14

--- Content provided by FirstRanker.com ---

Player A Strategies 2 10

11

8

--- Content provided by FirstRanker.com ---

12

3 13

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12

14

13

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Answer: V = 12

4. Solve the game by the principle of dominance:

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1 7 2

6

2 7

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5 2 6

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Answer: V = 4

5. Solve the game with the following pay-off matrix

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6 3 1 0

3

--- Content provided by FirstRanker.com ---

3 2 4 2 1

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3

2

--- Content provided by FirstRanker.com ---

11

Answer : p

, r

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, V

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5

5

5

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6. Solve the game

8

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7

6

1

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2

12 10 12

--- Content provided by‍ FirstRanker.com ---

0

4

--- Content provided by‍ FirstRanker.com ---

1

4

--- Content provided by⁠ FirstRanker.com ---

6

8 14 16

4

--- Content provided by‍ FirstRanker.com ---

7

70

--- Content provided by‌ FirstRanker.com ---

Answer : p

, r

, V

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9

9

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298
MBA-H2040 Quantitative Techniques
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LESSON 5

GRAPHICAL SOLUTION OF A 2x2 GAME WITH NO SADDLE POINT

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LESSON OUTLINE

The principle of graphical solution

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Numerical example

LEARNING OBJECTIVES

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After reading this lesson you should be able to

-

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understand the principle of graphical solution

-

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derive the equations involving probability and expected value

- solve numerical problems

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Example: Consider the game with the following pay-off matrix.

Player B

2 5

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Player A

--- Content provided by FirstRanker.com ---

4 1

First consider the row minima.

Row

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Minimum

1

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2

2

1

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Maximum of {2, 1} = 2.

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Next, consider the column maxima.

Column

Maximum

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1

4

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2

5

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Minimum of {4, 5} = 4.

We see that Maximum { row minima} Minimum { column maxima }

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So, the game has no saddle point. It is a mixed game.

Equations involving probability and expected value:

Let p be the probability that player A will use his first strategy.

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Then the probability that A will use his second strategy is 1-p.

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MBA-H2040 Quantitative Techniques
for Managers

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Let E be the expected value of pay-off to player A.

When B uses his first strategy

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The expected value of pay-off to player A is given by

E 2 p 4(1 p)

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2 p 4 4 p

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(1)

4 2 p

When B uses his second strategy

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The expected value of pay-off to player A is given by

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E 5 p 1(1 p)

5 p 1 p

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(2)

4 p 1

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MBA-H2040 Quantitative Techniques for Managers

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Consider equations (1) and (2). For plotting the two equations on a graph sheet, get some points on them

as follows:

E = -2p+4

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p

0

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1

0.5

E

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4

2

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3

E = 4p+1

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p

0

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1

0.5

E

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1

5

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3

Graphical solution:

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Procedure:

Take probability and expected value along two rectangular axes in a graph sheet. Draw two straight

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lines given by the two equations (1) and (2). Determine the point of intersection of the two straight lines

in the graph. This will give the common solution of the two equations (1) and (2). Thus we would obtain

the value of the game.

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Represent the two equations by the two straight lines AB and CD on the graph sheet. Take the

point of intersection of AB and CD as T. For this point, we have p = 0.5 and E = 3. Therefore, the

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value V of the game is 3.

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MBA-H2040 Quantitative Techniques for Managers

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E=4P+1
D

A
4

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T
3

2 C B
E=-2P+4

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1
P

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

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Problem 1:

Solve the following game by graphical method.

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Player B

18

2

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Player A

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6

4

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Solution:

First consider the row minima.

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Row

Minimum

1

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- 18

2

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- 4

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MBA-H2040 Quantitative Techniques for Managers

Maximum of {-18, - 4} = - 4.

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Next, consider the column maxima.

Column

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Maximum

1

6

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2

2

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Minimum of {6, 2} = 2.

We see that Maximum { row minima} Minimum { column maxima }

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So, the game has no saddle point. It is a mixed game.

Let p be the probability that player A will use his first strategy.

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Then the probability that A will use his second strategy is 1-p.

When B uses his first strategy

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The expected value of pay-off to player A is given by

E 18

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p 6 (1 p)

18

p 6 6 p

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(I)

24

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p 6

When B uses his second strategy

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The expected value of pay-off to player A is given by

E 2 p 4 (1 p)

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2 p 4 4 p (II)
6 p 4

Consider equations (I) and (II). For plotting the two equations on a graph sheet, get some points on them

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as follows:

E = -24 p + 6

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p

0

1

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0.5

E

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6

-18 -6

E = 6p-4

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p

0

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1

0.5

E

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-4

2

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-1

Graphical solution:

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Take probability and expected value along two rectangular axes in a graph sheet. Draw two straight lines

given by the two equations (1) and (2). Determine the point of intersection of the two straight lines in the

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303

MBA-H2040 Quantitative Techniques for Managers

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graph. This will provide the common solution of the two equations (1) and (2). Thus we would get the

value of the game.

Represent the two equations by the two straight lines AB and CD on the graph sheet. Take the

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1

point of intersection of AB and CD as T. For this point, we have p =

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and E = -2. Therefore, the

3

value V of the game is -2.

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8

6

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A
4

E=6P-4
2

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0 D

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.
-2
C

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-4

-6

-8

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E=-24P+6

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MBA-H2040 Quantitative Techniques for Managers
QUESTIONS

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1. Explain the method of graphical solution of a 2x2 game.

2. Obtain the graphical solution of the game

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10

6

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8 12

1

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Answer: p =

, V = 9

2

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3. Graphically solve the game

4

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10

8

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6

1

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Answer: p =

, V = 7

4

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4. Find the graphical solution of the game

12

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12

2

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6

1

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3

Answer: p =

, V =

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2

5. Obtain the graphical solution of the game

10

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8 12

1

Answer: p =

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, V = 9

2

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6. Graphically solve the game

3

5

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1

3

7

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Answer: p =

, V =

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4

2

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MBA-H2040 Quantitative Techniques for Managers

LESSON 6

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2 x n ZERO-SUM GAMES

LESSON OUTLINE

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A 2 x n zero-sum game

Method of solution

Sub game approach and graphical method

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Numerical example

LEARNING OBJECTIVES

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After reading this lesson you should be able to

- understand the concept of a 2 x n zero-sum game
- solve numerical problems

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The concept of a 2 x n zero-sum game

When the first player A has exactly two strategies and the second player B has n (where n is three

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or more) strategies, there results a 2 x n game. It is also called a rectangular game. Since A has

two strategies only, he cannot try to give up any one of them. However, since B has many

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strategies, he can make out some choice among them. He can retain some of the advantageous

strategies and discard some disadvantageous strategies. The intention of B is to give as minimum

payoff to A as possible. In other words, B will always try to minimize the loss to himself.

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Therefore, if some strategies are available to B by which he can minimize the payoff to A, then B

will retain such strategies and give such strategies by which the payoff will be very high to A.

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Approaches for 2 x n zero-sum game

There are two approaches for such games: (1) Sub game approach and (2) Graphical approach.

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Sub game approach

The given 2 x n game is divided into 2 x 2 sub games. For this purpose, consider all possible 2 x 2 sub

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matrices of the payoff matrix of the given game. Solve each sub game and have a list of the values of

each sub game. Since B can make out a choice of his strategies, he will discard such of those sub games

which result in more payoff to A. On the basis of this consideration, in the long run, he will retain two

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strategies only and give up the other strategies.

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Problem

Solve the following game

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MBA-H2040 Quantitative Techniques for Managers
Player B

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8

2

6

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9

Player A

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3 5 10 2

Solution:

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Let us consider all possible 2x2 sub games of the given game. We have the following sub games:

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8

2

1.

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5

8

6

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3 10

8

9

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3 2

2

6

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5 10

2

9

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5 2

6

9

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10 2

Let E be the expected value of the pay off to player A. Let p be the probability that player A will use his

first strategy. Then the probability that he will use his second strategy is 1-p. We form the equations for

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E in all the sub games as follows:

Sub game (1)

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Equation 1: E 8 p 3(1 p) 5 p 3

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Equation 2: E 2

p 5(1 p) 7

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p 5

Sub game (2)

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Equation 1: E 8 p 3(1 p) 5 p 3

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Equation 2: E 6

p 10(1 p) 1

6 p 10

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Sub game (3)

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Equation 1: E 8 p 3(1 p) 5 p 3

Equation 2: E 9 p 2(1 p) 7 p 2

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Sub game (4)

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Equation 1: E 2

p 5(1 p) 7

p 5

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Equation 2: E 6

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p 10(1 p) 1

6 p 10

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MBA-H2040 Quantitative Techniques for Managers
Sub game (5)

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Equation 1: E 2

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p 5(1 p) 7

p 5

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Equation 2: E 9 p 2(1 p) 7 p 2

Sub game (6)

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Equation 1: E 6

p 10(1 p) 1

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6 p 10

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Equation 2: E 9 p 2(1 p) 7 p 2

Solve the equations for each sub game. Let us tabulate the results for the various sub games. We have

the following:

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Sub game

p

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Expected value E

1

1

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6

6

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2

1

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3

3

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3

1

11

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2

2

4

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5

10

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9

5

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3

7

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2

6

8

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102

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23

23

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Interpretation:

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Since player A has only 2 strategies, he cannot make any choice on the strategies. On the other hand,

player B has 4 strategies. Therefore he can retain any 2 strategies and give up the other 2 strategies.

This he will do in such a way that the pay-off to player A is at the minimum. The pay-off to A is the

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2

6

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minimum in the case of sub game 4. i.e., the sub game with the matrix

.

5 10

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Therefore, in the long run, player B will retain his strategies 2 and 3 and give up his strategies 1

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5

and 4. In that case, the probability that A will use his first strategy is p =

and the probability that he

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9

4

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will use his second strategy is 1-p =

. i.e., Out of a total of 9 trials, he will use his first strategy five

9

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MBA-H2040 Quantitative Techniques for Managers

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10

times and the second strategy four times. The value of the game is

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. The positive sign of V shows

9

that the game is favourable to player A.

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GRAPHICAL SOLUTION:

Now we consider the graphical method of solution to the given game.

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Draw two vertical lines MN and RS. Note that they are parallel to each other. Draw UV

perpendicular to MN as well as RS. Take U as the origin on the line MN. Take V as the origin on the

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line RS.

Mark units on MN and RS with equal scale. The units on the two lines MN and RS are taken as

the payoff numbers. The payoffs in the first row of the given matrix are taken along the line MN while

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the payoffs in the second row are taken along the line RS.

We have to plot the following points: (8, 3), (-2, 5), (-6, 10), (9, 2). The points 8, -2, -6, 9 are

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marked on MN. The points 3, 5, 10, 2 are marked on RS.

Join a point on MN with the corresponding point on RS by a straight line. For example, join the

point 8 on MN with the point 3 on RS. We have 4 such straight lines. They represent the 4 moves of the

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second player. They intersect in 6 points. Take the lowermost point of intersection of the straight lines. It

is called the Maximin point. With the help of this point, identify the optimal strategies for the second

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player. This point corresponds to the points ?2 and ?6 on MN and 5 and 10 on RS. They correspond to

2

6

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the sub game with the matrix

.

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5 10

The points ?2 and ?6 on MN correspond to the second and third strategies of the second player.

Therefore, the graphical method implies that, in the long run, the second player will retain his strategies

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2 and 3 and give up his strategies 1 and 4.

We graphically solve the sub game with the above matrix. We have to solve the two equations E

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= -7 p + 5 and E = - 16 p + 10. Represent the two equations by two straight lines AB and CD on the

5

graph sheet. Take the point of intersection of AB and CD as T. For this point, we have p =

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and E =

9

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10

10

. Therefore, the value V of the game is

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. We see that the probability that first player will use his

9

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9

5

4

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first strategy is p = and the probability that he will use his second strategy is 1-p =

.

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9

9

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M R

10 10

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MBA-H2040 Quantitative Techniques for Managers

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9 9

8 8

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7
7
6

5 6

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4 5

3
4

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2
3

1
2

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1

Maximin point
U 0 0 V

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-1 -1

-2 -2

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-3 -3

N S

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E

10 C

9

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8

7

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6
A
5

4

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3

2
T

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1
P

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

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B
D

310

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MBA-H2040 Quantitative Techniques for Managers
E=-7P+5
E=-16P+10

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E = - 7p+5 E = - 16p+10

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p

0

1

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0.5

p

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0

1

0.5

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E

5

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- 2 1.5

E 10

- 6

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QUESTIONS

1. Explain a 2 x n zero-sum game.

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2. Describe the method of solution of a 2 x n zero-sum game.
3. Solve the following game:

Player B

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10

2 6

Player A

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1 5 8

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1

Answer: p = , V = 4

3

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LESSON 7

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m x 2 ZERO-SUM GAMES

LESSON OUTLINE

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An m x 2 zero-sum game

Method of solution

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Sub game approach and graphical method
Numerical example

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LEARNING OBJECTIVES

After reading this lesson you should be able to

--- Content provided by⁠ FirstRanker.com ---

- understand the concept of an m x 2 zero-sum game
-

solve numerical problems

--- Content provided by FirstRanker.com ---

The concept of an m x 2 zero-sum game

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When the second player B has exactly two strategies and the first player A has m (where m is

three or more) strategies, there results an m x 2 game. It is also called a rectangular game. Since B

has two strategies only, he will find it difficult to discard any one of them. However, since A has

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311

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MBA-H2040 Quantitative Techniques for Managers
more strategies, he will be in a position to make out some choice among them. He can retain some

of the most advantageous strategies and give up some other strategies. The motive of A is to get as

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maximum payoff as possible. Therefore, if some strategies are available to A by which he can get

more payoff to himself, then he will retain such strategies and discard some other strategies which

result in relatively less payoff.

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Approaches for m x 2 zero-sum game

There are two approaches for such games: (1) Sub game approach and (2) Graphical approach.

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Sub game approach

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The given m x 2 game is divided into 2 x 2 sub games. For this purpose, consider all possible 2 x 2 sub

matrices of the payoff matrix of the given game. Solve each sub game and have a list of the values of

each sub game. Since A can make out a choice of his strategies, he will be interested in such of those

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sub games which result in more payoff to himself. On the basis of this consideration, in the long run, he

will retain two strategies only and give up the other strategies.

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Problem

Solve the following game:

Player B

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Strategies

I

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II

1

5

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8

Player A Strategies

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2

2

10

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12

4

4

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6

5

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Solution:

Let us consider all possible 2x2 sub games of the given game. We have the following sub games:

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5

8

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7.

2

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10

5

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8

8.

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12

4

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5

8

9.

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5

2

10

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10.

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12

4

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312
MBA-H2040 Quantitative Techniques for Managers

2

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10

11.

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6

5

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12

4

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12.

6

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5

Let E be the expected value of the payoff to player A. i.e., the loss to player B. Let r be the probability

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that player B will use his first strategy. Then the probability that he will use his second strategy is 1-r.

We form the equations for E in all the sub games as follows:

Sub game (1)

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Equation 1: E 5r 8(1 r) 3r 8

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Equation 2: E 2

r 10(1 r) 1

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2r 10

Sub game (2)

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Equation 1: E 5r 8(1 r) 3

r 8

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Equation 2: E 12r 4(1 r) 8r 4

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Sub game (3)

Equation 1: E 5r 8(1 r) 3

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r 8

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Equation 2: E 6r 5(1 r) r 5

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Sub game (4)

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Equation 1: E 2

r 10(1 r) 1

2r 10

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Equation 2: E 12r 4(1 r) 8r 4

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Sub game (5)

Equation 1: E 2

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r 10(1 r) 1

2r 10

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Equation 2: E 6r 5(1 r) r 5

Sub game (6)

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Equation 1: E 12r 4(1 r) 8r 4

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Equation 2: E 6r 5(1 r) r 5

Solve the equations for each 2x2 sub game. Let us tabulate the results for the various sub games. We

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have the following:

Sub game

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R

Expected value E

1

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2

22

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313

MBA-H2040 Quantitative Techniques for Managers

2

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4

76

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11

3

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3

23

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--- Content provided by FirstRanker.com ---

4

4

3

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--- Content provided by‌ FirstRanker.com ---

10

5

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5

5

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--- Content provided by FirstRanker.com ---

13

13

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6

1

36

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7

7

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Interpretation:

Since player B has only 2 strategies, he cannot make any choice on his strategies. On the other

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hand, player A has 4 strategies and so he can retain any 2 strategies and give up the other 2 strategies.

Since the choice is with A, he will try to maximize the payoff to himself. The pay-off to A is the

5

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8

maximum in the case of sub game 1. i.e., the sub game with the matrix

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.

2

10

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Therefore, player A will retain his strategies 1 and 2 and discard his strategies 3 and 4, in the

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2

long run. In that case, the probability that B will use his first strategy is r =

and the probability that

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9

7

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he will use his second strategy is 1-r =

. i.e., Out of a total of 9 trials, he will use his first strategy two

9

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times and the second strategy seven times.

22

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The value of the game is

. The positive sign of V shows that the game is favourable to player A.

3

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GRAPHICAL SOLUTION:

Now we consider the graphical method of solution to the given game.

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Draw two vertical lines MN and RS. Note that they are parallel to each other. Draw UV
perpendicular to MN as well as RS. Take U as the origin on the line MN. Take V as the origin on the
line RS.

Mark units on MN and RS with equal scale. The units on the two lines MN and RS are taken as the

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payoff numbers. The payoffs in the first row of the given matrix are taken along the line MN while
the payoffs in the second row are taken along the line RS.

We have to plot the following points: (5, 8), (-2, 10), (12, 4), (6, 5).The points 5, -2, 12, 6 are marked
on MN. The points 8, 10, 4, 5 are marked on RS.

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314
MBA-H2040 Quantitative Techniques for Managers

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Join a point on MN with the corresponding point on RS by a straight line. For example, join the

point 5 on MN with the point 8 on RS. We have 4 such straight lines. They represent the 4 moves of the

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first player. They intersect in 6 points. Take the uppermost point of intersection of the straight lines. It is

called the Minimax point. With the help of this point, identify the optimal strategies for the first player.

This point corresponds to the points 5 and -2 on MN and 8 and 10 on RS. They correspond to the sub

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5

8

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game with the matrix

. The points 5 and -2 on MN correspond to the first and second

2

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10

strategies of the first player. Therefore, the graphical method implies that the first player will retain his

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strategies 1 and 2 and give up his strategies 3 and 4, in the long run.

We graphically solve the sub game with the above matrix. We have to solve the two equations E

= - 3 r + 8 and E = - 12 r + 10. Represent the two equations by two straight lines AB and CD on the

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2

graph sheet. Take the point of intersection of AB and CD as T. For this point, we have r =

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and E =

9

22

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22

. Therefore, the value V of the game is

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. We see that the probability that the second player will

3

3

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2

7

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use his first strategy is r =

and the probability that he will use his second strategy is 1-r =

.

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9

9

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315

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MBA-H2040 Quantitative Techniques for Managers
M R

12 12

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11 11

10 10

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9 9

8 minimax 8

7 point 7

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6 6

5 5

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4 4

3 3

2 2

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1 1

U 0 0 V

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-1 -1

-2 -2

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-3 -3

-4 -4

-5 -5

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-6 -6

-7 -7

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-8 -8

-9 -9

-10 -10

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N S

316

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MBA-H2040 Quantitative Techniques for Managers

--- Content provided by‍ FirstRanker.com ---

E
10

9 C

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8
A T
7
6

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5

4 B
E= -3r+8

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3

2

1

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r

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

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D
E= -12r+10

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E = - 3r+8 E = - 12r+10

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p

0

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1

0.5

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p

0

1

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0.5

E

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8

5

6.5

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E

10

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- 2

4

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317

MBA-H2040 Quantitative Techniques for Managers
QUESTIONS

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1.

What is an m x 2 zero-sum game? Explain.

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2.

How will you solve an m x 2 zero-sum game? Explain.

3.

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Solve the following game:

Player B

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Strategies

I

II

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1

20

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8

Player A Strategies

2

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5

2

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3

8

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12

1

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Answer: r =

, V = 11

4

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318
MBA-H2040 Quantitative Techniques for Managers

LESSON 8

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LINEAR PROGRAMMING APPROACH TO GAME THEORY

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LESSON OUTLINE

4.

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How to solve a game with LPP?

5.

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Formulation of LPP

6.

Solution by simplex method

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LEARNING OBJECTIVES

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After reading this lesson you should be able to

- understand the transformation of a game into LPP

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- solve a game by simplex method

Introduction

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When there is neither saddle point nor dominance in a problem of game theory and the payoff matrix is

of order 3x3 or higher, the probability and graphical methods cannot be employed. In such a case, linear

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programming approach may be followed to solve the game.

Linear programming technique:

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A general approach to solve a game by linear programming technique is presented below. Consider the

following m n game:

Player B

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Y

Y

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Y

1

2

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n

X a

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a

a

1

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11

12

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1n

Player A X

a

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a

a

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2

21

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22

2n

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X a

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a

a

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m

1

m

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m 2

mn

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It is required to determine the optimal strategy for A = X , X ,...X

and B = Y ,Y ,...Y . First we

1

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2

n

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1

2

m

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shall determine the optimal strategies of player B.

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If player A adopts strategy X , then the expected value of loss to B is

1

a Y a Y ... a Y V ,

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11 1

12 2

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1n n

where V is the value of game. If A adopts strategy X , then the expected value of loss to B is

2

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319

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MBA-H2040 Quantitative Techniques for Managers

a Y a Y ... a Y V

21 1

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22 2

2n n

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and so on. Also we have

Y Y ... Y 1

1

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2

n

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and

Y 0 for all j.

j

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Without loss of generality, we can assume that V > 0. Divide each of the above relation by V and let

Y

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'

j

Y

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.

j

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V

Then we have

Yj

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1

'

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Y

j

V

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V

From this we obtain

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'

a Y a Y ' ... a Y ' 1,

11

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1

12

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2

1n

n

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a Y ' a Y ' ... a Y ' 1,

21

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1

22

2

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2n

n

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a Y ' a Y ' ... a Y ' 1

m1

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1

m2

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2

mn

n

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and

1

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'

Y Y ' ... Y '

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1

2

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n

V

with '

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Y

0 for all j.

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j

The objective of player B is to minimise the loss to himself . Thus the problem is to minimize V, or

1

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equivalently to maximise

. Therefore, the objective of player B is to maximise the value of

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V

'

Y Y ' ... Y ' subject to the m linear constraints provided above.

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1

2

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n

Statement of the problem:

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Maximise: '

Y Y ' ... Y ' , subject to

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1

2

n

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'

a Y a Y ' ... a Y ' 1,

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11

1

12

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2

1n

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n

a Y ' a Y ' ... a Y ' 1,

21

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1

22

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2

2n

n

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a Y ' a Y ' ... a Y ' 1

--- Content provided by FirstRanker.com ---

m1

1

m2

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2

mn

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n

'

Y , Y ' ,...,Y ' 0.

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1

2

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n

320

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MBA-H2040 Quantitative Techniques for Managers
We can use simplex method to solve the above problem. For this purpose, we have to introduce non-

negative slack variables s , s ,..., s to each of the inequalities. So the problem can be restated as

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1

2

m

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follows:

Restatement of the problem:

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Maximise: '

Y Y ' ... Y ' 0s 0s ... 0s subject to

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1

2

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n

1

2

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m

'

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a Y a Y ' ... a Y ' s 1,

11

1

--- Content provided by FirstRanker.com ---

12

2

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1n

n

1

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a Y ' a Y ' ... a Y ' s 1,

21

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1

22

2

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2n

n

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2

a Y ' a Y ' ... a Y ' s 1

--- Content provided by‍ FirstRanker.com ---

m1

1

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m2

2

mn

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n

m

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with Y Y ' V for all j and s 0, s 0,..., s 0 .

j

j

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1

2

--- Content provided by‌ FirstRanker.com ---

m

Thus we get the optimal strategy for player B to be (Y ,Y ,...,Y ).

1

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2

n

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In a similar manner we can determine the optimal strategy for player A.

Application:

We illustrate the method for a 2X2 zero sum game.

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Problem 1:

Solve the following game by simplex method for LPP:

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Player B

3 6

Player A

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5 2

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Solution :

Row minima :

I row

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: 3

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II row

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: 2

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Maximum of {3,2} = 3

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Column maxima:

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I column

: 5

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II column

: 6

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Minimum of {5,6} = 5

So, Maximum of {Row minima} Minimum of {Column maxima}.

Therefore the given game has no saddle point. It is a mixed game. Let us convert the given game into a

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LPP.

Problem formulation:

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321

MBA-H2040 Quantitative Techniques for Managers

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Let V denote the value of the game. Let the probability that the player B will use his first strategy be r

and second strategy be s. Let V denote the value of the game.

When A follows his first strategy:

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The expected payoff to A (i.e., the expected loss to B) = 3 r + 6 s.

This pay-off cannot exceed V. So we have

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3 r + 6 s V

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(1)

When A follows his second strategy:

The expected pay-off to A (i.e., expected loss to B) = 5 r + 2 s.

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This cannot exceed V. Hence we obtain the condition

5 r + 2 s V

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(2)

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From (1) and (2) we have

r

s

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3

6 1

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V

V

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r

s

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and 5

2 1

V

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V

r

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s

Substitute

x,

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y .

V

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V

Then we have

3x 6 y 1

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and 5x 2 y

1

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where r and s are connected by the relation

r s 1.

r

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s

1

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i.e.,

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V

V

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V

1

i.e., x y

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--- Content provided by‍ FirstRanker.com ---

1

B will try to minimise V. i.e., He will try to maximise

. Thus we have the following LPP.

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V

1

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Maximize

x y ,

V

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subject to the restrictions

3x 6 y 1,

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5x 2 y 1,

x 0, y 0

Solution of LPP:

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322
MBA-H2040 Quantitative Techniques for Managers

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Introduce two slack variables s , s . Then the problem is transformed into the

1

2

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following one:

1

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Maximize

x y 0.s 0.s

1

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2

V

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subject to the constraints

3x 6 y 1.s 0.s 1,

1

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2

5x 2 y 0.s 1.s 1,

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1

2

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x 0, y 0, s 0, s 0

1

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2

Let us note that the above equations can be written in the form of a single matrix equation as

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A X = B

x

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3 6 1

0

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y

1

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where A =

, X = , B = .

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5

2 0 1

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s

1

1

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--- Content provided by‍ FirstRanker.com ---

2

The entries in B are referred to as the b ? values. Initially, the basic variables are s , s . We have the

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1

2

following simplex tableau:

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--- Content provided by FirstRanker.com ---

y

s

s

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1

2

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b ? value

s - row

1

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3

6

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1

0

1

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s - row

2

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5

2

0

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1

1

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Objective

-1

-1

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0

0

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0

function row

Consider the negative elements in the objective function row. They are ?1, -1. The absolute values are

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1, 1. There is a tie between these coefficients. To resolve the tie, we select the variable x. We take the

new basic variable as x. Consider the ratio of b-value to x-value. We have the following ratios:

--- Content provided by‌ FirstRanker.com ---

1

s - row

:

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1

3

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1

s - row

:

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2

5

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1 1

1

Minimum of {

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, } = .

3 5

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5

Hence select s as the leaving variable. Thus the pivotal element is 5. We obtain the following tableau

2

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at the end of Iteration No. 1.

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323

MBA-H2040 Quantitative Techniques for Managers

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x

y

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s

s

1

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2

b ? value

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s - row

24

3

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2

1

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0

1

--- Content provided by FirstRanker.com ---

5

5

5

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x - row

2

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1

1

1

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--- Content provided by FirstRanker.com ---

5

5

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Objective

3

1

--- Content provided by FirstRanker.com ---

1

0

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

function row

5

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5

5

--- Content provided by FirstRanker.com ---

3

Now, the negative element in the objective function row is

--- Content provided by⁠ FirstRanker.com ---

. This corresponds to y. We take the

5

new basic variable as y. Consider the ratio of b-value to y-value. We have the following ratios:

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

5

1

s - row

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

1

24

12

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5

1

--- Content provided by‍ FirstRanker.com ---

5

1

--- Content provided by FirstRanker.com ---

x - row

:

--- Content provided by‍ FirstRanker.com ---

2

2

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

1 1

1

Minimum of

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

12

2 12

24

--- Content provided by⁠ FirstRanker.com ---

Hence select s as the leaving variable. The pivotal element is

. We get the following tableau at the

--- Content provided by FirstRanker.com ---

1

5

end of Iteration No. 2.

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

x

y

s

--- Content provided by FirstRanker.com ---

s

1

--- Content provided by FirstRanker.com ---

2

b ? value

y - row

--- Content provided by⁠ FirstRanker.com ---

5

1

--- Content provided by⁠ FirstRanker.com ---

1

0

1

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

24

8

12

--- Content provided by⁠ FirstRanker.com ---

x - row

1

--- Content provided by FirstRanker.com ---

1

1

1

--- Content provided by FirstRanker.com ---

0 -

--- Content provided by FirstRanker.com ---

4

6

--- Content provided by FirstRanker.com ---

Objective

1

1

--- Content provided by FirstRanker.com ---

1

0

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

function row

--- Content provided by FirstRanker.com ---

8

8

4

--- Content provided by‌ FirstRanker.com ---

Since both x and y have been made basic variables, we have reached the stopping condition.

--- Content provided by‌ FirstRanker.com ---

324
MBA-H2040 Quantitative Techniques for Managers

--- Content provided by FirstRanker.com ---

1

1

1

--- Content provided by FirstRanker.com ---

The optimum value of

is

. This is provided by x =

--- Content provided by FirstRanker.com ---

and y =

. Thus the optimum

--- Content provided by FirstRanker.com ---

V

4

6

--- Content provided by FirstRanker.com ---

12

r

--- Content provided by‍ FirstRanker.com ---

s

4

2

--- Content provided by⁠ FirstRanker.com ---

value of the game is obtained as V = 4. Using the relations

x,

--- Content provided by‌ FirstRanker.com ---

y , we obtain r and

V

V

--- Content provided by FirstRanker.com ---

6

3

--- Content provided by FirstRanker.com ---

4

1

s

--- Content provided by‌ FirstRanker.com ---

.

12

--- Content provided by‍ FirstRanker.com ---

3

Problem 2:

Solve the following game:

--- Content provided by FirstRanker.com ---

Player B

2 5

--- Content provided by FirstRanker.com ---

Player A

4 1

--- Content provided by‌ FirstRanker.com ---

Solution:

The game has no saddle point. It is a mixed game. Let the probability that B will use his first strategy

--- Content provided by‍ FirstRanker.com ---

be r. Let the probability that B will use his second strategy be s. Let V be the value of the game.

When A follows his first strategy:

--- Content provided by FirstRanker.com ---

The expected payoff to A (i.e., the expected loss to B) = 2 r +5 s.

The pay-off to A cannot exceed V. So we have

--- Content provided by⁠ FirstRanker.com ---

2 r + 5 s V

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

(I)

When A follows his second strategy:

--- Content provided by‍ FirstRanker.com ---

The expected pay-off to A (i.e., expected loss to B) = 4 r + s.

The pay-off to A cannot exceed V. Hence we obtain the condition

--- Content provided by FirstRanker.com ---

4 r + s V

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

(II)

From (I) and (II) we have

--- Content provided by‌ FirstRanker.com ---

r

s

--- Content provided by‌ FirstRanker.com ---

2

5 1

V

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

r

s

and 4

--- Content provided by⁠ FirstRanker.com ---

1

V

--- Content provided by‍ FirstRanker.com ---

V

Substitute

r

--- Content provided by FirstRanker.com ---

s

x and

--- Content provided by‍ FirstRanker.com ---

.

y

V

--- Content provided by‍ FirstRanker.com ---

V

Thus we have

--- Content provided by FirstRanker.com ---

2x 5 y 1

and 4x y

1

--- Content provided by‍ FirstRanker.com ---

where r and s are connected by the relation

r s 1.

--- Content provided by⁠ FirstRanker.com ---

325

MBA-H2040 Quantitative Techniques for Managers

--- Content provided by FirstRanker.com ---

r

s

--- Content provided by‍ FirstRanker.com ---

1

i.e.,

--- Content provided by FirstRanker.com ---

V

V

1

--- Content provided by FirstRanker.com ---

i.e., x y

--- Content provided by FirstRanker.com ---

V

1

The objective of B is to minimise V. i.e., He will try to maximise

--- Content provided by‍ FirstRanker.com ---

.

V

--- Content provided by‍ FirstRanker.com ---

Thus we are led to the following linear programming problem:

1

Maximize

--- Content provided by FirstRanker.com ---

= x + y

V

--- Content provided by⁠ FirstRanker.com ---

subject to the constraints

2x 5y 1,

4x y 1,

--- Content provided by FirstRanker.com ---

x 0, y 0.

To solve this linear programming problem, we use simplex method as detailed below.

--- Content provided by‍ FirstRanker.com ---

Introduce two slack variables s , s . Then the problem is transformed into the following one:

1

2

--- Content provided by‍ FirstRanker.com ---

1

Maximize

--- Content provided by FirstRanker.com ---

x y 0.s 0.s

1

2

--- Content provided by FirstRanker.com ---

V

subject to the constraints

--- Content provided by FirstRanker.com ---

2x 5 y 1.s 0.s 1,

1

2

--- Content provided by FirstRanker.com ---

4x y 0.s 1.s 1,

--- Content provided by FirstRanker.com ---

1

2

x 0, y 0, s 0, s 0

--- Content provided by‍ FirstRanker.com ---

1

2

--- Content provided by FirstRanker.com ---

We have the following simplex tableau:

x

--- Content provided by‍ FirstRanker.com ---

y

s

--- Content provided by‍ FirstRanker.com ---

s

b ? value

1

--- Content provided by‍ FirstRanker.com ---

2

s - row

--- Content provided by FirstRanker.com ---

2

5

1

--- Content provided by FirstRanker.com ---

0

1

--- Content provided by‍ FirstRanker.com ---

1

s - row

2

--- Content provided by‌ FirstRanker.com ---

4

1

--- Content provided by‍ FirstRanker.com ---

0

1

1

--- Content provided by‍ FirstRanker.com ---

Objective

-1

--- Content provided by FirstRanker.com ---

-1

0

0

--- Content provided by‍ FirstRanker.com ---

0

function row

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

new basic variable as x. Consider the ratio of b-value to x-value. We have the following ratios:

1

s - row

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

1

2

--- Content provided by FirstRanker.com ---

326
MBA-H2040 Quantitative Techniques for Managers

1

--- Content provided by FirstRanker.com ---

s - row :

--- Content provided by FirstRanker.com ---

2

4

1 1

--- Content provided by⁠ FirstRanker.com ---

1

Minimum of {

--- Content provided by⁠ FirstRanker.com ---

,

} =

--- Content provided by FirstRanker.com ---

2 4

4

--- Content provided by⁠ FirstRanker.com ---

Hence select s as the leaving variable. Thus the pivotal element is 4. We obtain the following tableau

2

at the end of Iteration No. 1.

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

y

s

s

--- Content provided by⁠ FirstRanker.com ---

1

2

--- Content provided by‌ FirstRanker.com ---

b ? value

s - row

9

--- Content provided by⁠ FirstRanker.com ---

1

1

--- Content provided by⁠ FirstRanker.com ---

1

0

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

2

2

--- Content provided by‍ FirstRanker.com ---

2

x - row

--- Content provided by FirstRanker.com ---

1

1

1

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

4

4

--- Content provided by‍ FirstRanker.com ---

4

Objective

3

--- Content provided by‌ FirstRanker.com ---

1

1

--- Content provided by⁠ FirstRanker.com ---

0

0

--- Content provided by‍ FirstRanker.com ---

function row

--- Content provided by‍ FirstRanker.com ---

4

4

4

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

Now, the negative element in the objective function row is

. This corresponds to y. We take the

4

--- Content provided by‍ FirstRanker.com ---

new basic variable as y. Consider the ratio of b-value to y-value. We have the following ratios:

1

--- Content provided by‍ FirstRanker.com ---

2

1

--- Content provided by FirstRanker.com ---

s - row

:

--- Content provided by‌ FirstRanker.com ---

1

9

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

2

1

--- Content provided by‌ FirstRanker.com ---

x - row

--- Content provided by‍ FirstRanker.com ---

: 4

1

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

4

1 1

Minimum of , 1

--- Content provided by FirstRanker.com ---

9 9

9

--- Content provided by FirstRanker.com ---

Hence select s as the leaving variable. The pivotal element is

. We get the following tableau at the

1

--- Content provided by⁠ FirstRanker.com ---

2

end of Iteration No. 2.

--- Content provided by⁠ FirstRanker.com ---

y

s

--- Content provided by⁠ FirstRanker.com ---

s

b ? value

1

--- Content provided by⁠ FirstRanker.com ---

2

y - row

--- Content provided by⁠ FirstRanker.com ---

2

1

1

--- Content provided by⁠ FirstRanker.com ---

0

1

--- Content provided by⁠ FirstRanker.com ---

9

9

--- Content provided by⁠ FirstRanker.com ---

9

327

--- Content provided by‍ FirstRanker.com ---

MBA-H2040 Quantitative Techniques for Managers

x - row

--- Content provided by‍ FirstRanker.com ---

1

5

2

--- Content provided by FirstRanker.com ---

1

0

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

18

18

--- Content provided by FirstRanker.com ---

9

Objective

1

--- Content provided by‌ FirstRanker.com ---

1

1

--- Content provided by‍ FirstRanker.com ---

0

0

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

function row

6

6

--- Content provided by FirstRanker.com ---

Since both x and y have been made basic variables, we have reached the stopping condition.

1

1

--- Content provided by FirstRanker.com ---

The optimum value of

--- Content provided by‌ FirstRanker.com ---

is .

V

3

--- Content provided by‍ FirstRanker.com ---

2

1

--- Content provided by FirstRanker.com ---

This is provided by x =

and y =

--- Content provided by FirstRanker.com ---

. Thus the optimum value of the game is got as V = 3.

9

--- Content provided by FirstRanker.com ---

9

r

s

--- Content provided by FirstRanker.com ---

6

2

--- Content provided by‍ FirstRanker.com ---

3

1

Using the relations

--- Content provided by⁠ FirstRanker.com ---

,

x

--- Content provided by FirstRanker.com ---

y , we obtain r and s .

V

V

--- Content provided by FirstRanker.com ---

9

3

--- Content provided by⁠ FirstRanker.com ---

9

3

--- Content provided by‌ FirstRanker.com ---

Problem 3:

Solve the following game by simplex method for LPP:

--- Content provided by FirstRanker.com ---

Player B

48

2

--- Content provided by‍ FirstRanker.com ---

Player A

--- Content provided by⁠ FirstRanker.com ---

6

4

Solution :

--- Content provided by FirstRanker.com ---

Row minima :

I row

--- Content provided by‍ FirstRanker.com ---

: -48

--- Content provided by‌ FirstRanker.com ---

II row

--- Content provided by‍ FirstRanker.com ---

: -4

--- Content provided by⁠ FirstRanker.com ---

Maximum of {-48, -4} = -4

--- Content provided by FirstRanker.com ---

Column maxima:

I column

: 6

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

II column

: 2

--- Content provided by FirstRanker.com ---

Minimum of (6, 2} = 2

So, Maximum of {Row minima} Minimum of {Column maxima}.

--- Content provided by FirstRanker.com ---

Therefore the given game has no saddle point. It is a mixed game. Let us convert the given game into a

LPP.

--- Content provided by⁠ FirstRanker.com ---

Problem formulation:

Let V denote the value of the game. Let the probability that the player B will use his first strategy be r

and second strategy be s. Let V denote the value of the game.

--- Content provided by‌ FirstRanker.com ---

When A follows his first strategy:

The expected payoff to A (i.e., the expected loss to B) = - 48 r + 2 s.

--- Content provided by FirstRanker.com ---

This pay-off cannot exceed V. So we have

328

--- Content provided by FirstRanker.com ---

MBA-H2040 Quantitative Techniques for Managers

- 48 r + 2 s V

--- Content provided by FirstRanker.com ---

(1)'

When A follows his second strategy:

--- Content provided by FirstRanker.com ---

The expected pay-off to A (i.e., expected loss to B) = 6 r - 4 s.

--- Content provided by FirstRanker.com ---

This cannot exceed V. Hence we obtain the condition

6 r - 4 s V

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

(2)'

From (1)' and (2)' we have

--- Content provided by FirstRanker.com ---

r

s

--- Content provided by FirstRanker.com ---

48 2 1

V

V

--- Content provided by⁠ FirstRanker.com ---

and

--- Content provided by FirstRanker.com ---

r

s

6

--- Content provided by‍ FirstRanker.com ---

4 1

V

--- Content provided by FirstRanker.com ---

V

r

s

--- Content provided by FirstRanker.com ---

Substitute

x,

--- Content provided by⁠ FirstRanker.com ---

y .

V

V

--- Content provided by FirstRanker.com ---

Thus we have

48x 2y 1

--- Content provided by FirstRanker.com ---

and 6x 4 y

1

--- Content provided by FirstRanker.com ---

where r and s are connected by the relation

r s 1.

--- Content provided by FirstRanker.com ---

r

s

1

--- Content provided by‌ FirstRanker.com ---

i.e.,

--- Content provided by FirstRanker.com ---

V

V

--- Content provided by FirstRanker.com ---

V

1

--- Content provided by FirstRanker.com ---

i.e., x y

V

--- Content provided by⁠ FirstRanker.com ---

1

B will try to minimise V. i.e., He will try to maximise

--- Content provided by‌ FirstRanker.com ---

. Thus we have the following LPP.

V

1

--- Content provided by FirstRanker.com ---

Maximize

x y ,

--- Content provided by‍ FirstRanker.com ---

V

subject to the restrictions

48

--- Content provided by⁠ FirstRanker.com ---

x 2y 1,

6x 4 y 1,

--- Content provided by‌ FirstRanker.com ---

x 0, y 0

Solution of LPP:

Introduce two slack variables s , s . Then the problem is transformed into the following one:

--- Content provided by FirstRanker.com ---

1

2

--- Content provided by⁠ FirstRanker.com ---

1

Maximize

x y 0.s 0.s

--- Content provided by FirstRanker.com ---

1

2

--- Content provided by FirstRanker.com ---

V

subject to the constraints

--- Content provided by FirstRanker.com ---

329

MBA-H2040 Quantitative Techniques for Managers

--- Content provided by FirstRanker.com ---

48

x 2y 1.s 0.s 1,

1

--- Content provided by‌ FirstRanker.com ---

2

6x 4 y 0.s 1.s 1,

--- Content provided by‍ FirstRanker.com ---

1

2

x 0, y 0, s 0, s 0

--- Content provided by FirstRanker.com ---

1

2

--- Content provided by‍ FirstRanker.com ---

Initially, the basic variables are s , s . We have the following simplex tableau:

1

2

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

x

y

--- Content provided by‍ FirstRanker.com ---

s

s

--- Content provided by‌ FirstRanker.com ---

1

2

b ? value

--- Content provided by‌ FirstRanker.com ---

s - row

1

--- Content provided by FirstRanker.com ---

-48

2

1

--- Content provided by‌ FirstRanker.com ---

0

1

--- Content provided by‍ FirstRanker.com ---

s - row

6

-4

--- Content provided by‌ FirstRanker.com ---

0

1

--- Content provided by‍ FirstRanker.com ---

1

2

Objective

--- Content provided by⁠ FirstRanker.com ---

-1

-1

--- Content provided by FirstRanker.com ---

0

0

0

--- Content provided by‌ FirstRanker.com ---

function row

--- Content provided by FirstRanker.com ---

Consider the negative elements in the objective function row. They are ?1, -1. The absolute value are 1,

1. There is a tie between these coefficients. To resolve the tie, we select the variable x. We take the

new basic variable as x. Consider the ratio of b-value to x-value. We have the following ratios:

--- Content provided by⁠ FirstRanker.com ---

1

s - row :

--- Content provided by FirstRanker.com ---

1

48

--- Content provided by FirstRanker.com ---

1

s - row:

--- Content provided by‌ FirstRanker.com ---

2

6

--- Content provided by⁠ FirstRanker.com ---

1

1

--- Content provided by FirstRanker.com ---

1

Minimum of {

,

--- Content provided by FirstRanker.com ---

} =

.

--- Content provided by FirstRanker.com ---

48

6

48

--- Content provided by‌ FirstRanker.com ---

Hence select s as the leaving variable. Thus the pivotal element is - 48. We obtain the following

1

--- Content provided by FirstRanker.com ---

tableau at the end of Iteration No. 1.

--- Content provided by‌ FirstRanker.com ---

x

y

--- Content provided by⁠ FirstRanker.com ---

s

s

1

--- Content provided by FirstRanker.com ---

2

b ? value

--- Content provided by FirstRanker.com ---

x - row

1

1

--- Content provided by‍ FirstRanker.com ---

1

1

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

48

48

s - row

--- Content provided by FirstRanker.com ---

15

1

--- Content provided by⁠ FirstRanker.com ---

9

2

0

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

4

8

--- Content provided by FirstRanker.com ---

8

Objective

--- Content provided by‌ FirstRanker.com ---

25

1

1

--- Content provided by‌ FirstRanker.com ---

0

function row

--- Content provided by FirstRanker.com ---

24

48

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

330
MBA-H2040 Quantitative Techniques for Managers

25

--- Content provided by‍ FirstRanker.com ---

Now, the negative element in the objective function row is

. This corresponds to y. We take the

--- Content provided by FirstRanker.com ---

24

new basic variable as y. Consider the ratio of b-value to y-value. We have the following ratios:

1

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

1

x - row

:

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

2

24

--- Content provided by⁠ FirstRanker.com ---

9

82

--- Content provided by FirstRanker.com ---

3

s - row

:

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

2

15

10

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

1

3

3

--- Content provided by⁠ FirstRanker.com ---

Minimum of ,

--- Content provided by‌ FirstRanker.com ---

2 10

10

--- Content provided by FirstRanker.com ---

15

Hence select s as the leaving variable. The pivotal element is

--- Content provided by⁠ FirstRanker.com ---

. We get the following tableau at

2

4

--- Content provided by⁠ FirstRanker.com ---

the end of Iteration No. 2.

--- Content provided by FirstRanker.com ---

x

y

--- Content provided by⁠ FirstRanker.com ---

s

s

--- Content provided by FirstRanker.com ---

1

2

b ? value

--- Content provided by‌ FirstRanker.com ---

x - row

1

--- Content provided by FirstRanker.com ---

1

1

1

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

480

--- Content provided by‍ FirstRanker.com ---

90

30

--- Content provided by⁠ FirstRanker.com ---

y - row

1

4

--- Content provided by‍ FirstRanker.com ---

3

0

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

15

10

Objective

--- Content provided by‌ FirstRanker.com ---

1

5

--- Content provided by⁠ FirstRanker.com ---

1

0

0

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

function row

18

--- Content provided by‍ FirstRanker.com ---

18

3

--- Content provided by FirstRanker.com ---

Since both x and y have been made basic variables, we have reached the stopping condition.

1

--- Content provided by FirstRanker.com ---

1

1

--- Content provided by FirstRanker.com ---

3

The optimum value of

--- Content provided by‌ FirstRanker.com ---

is

. This is provided by x =

--- Content provided by FirstRanker.com ---

and y =

.

V

--- Content provided by⁠ FirstRanker.com ---

3

30

--- Content provided by‌ FirstRanker.com ---

10

r

s

--- Content provided by FirstRanker.com ---

Thus the optimum value of the game is got as V = - 3. Using the relations

x,

--- Content provided by‌ FirstRanker.com ---

y , we obtain

V

V

--- Content provided by FirstRanker.com ---

1

9

--- Content provided by FirstRanker.com ---

r

and s

.

--- Content provided by‌ FirstRanker.com ---

10

10

--- Content provided by‍ FirstRanker.com ---

331

--- Content provided by‌ FirstRanker.com ---

MBA-H2040 Quantitative Techniques for Managers
Problem 4:

Transform the following game into an LPP:

--- Content provided by FirstRanker.com ---

1 8 3

6

--- Content provided by FirstRanker.com ---

4 5

0 1

--- Content provided by⁠ FirstRanker.com ---

2

Solution:

--- Content provided by FirstRanker.com ---

We have to determine the optimal strategy for player B. Using the entries of the given matrix, we obtain

the inequalities

r 8 s 3t V ,

--- Content provided by FirstRanker.com ---

6r 4 s 5t V ,

s 2t V

--- Content provided by‍ FirstRanker.com ---

Dividing by V, we get

r

s

--- Content provided by⁠ FirstRanker.com ---

t

8

--- Content provided by⁠ FirstRanker.com ---

3

1,

V

--- Content provided by‌ FirstRanker.com ---

V

V

--- Content provided by⁠ FirstRanker.com ---

r

s

t

--- Content provided by⁠ FirstRanker.com ---

6

4

--- Content provided by FirstRanker.com ---

5

1,

V

--- Content provided by‍ FirstRanker.com ---

V

V

--- Content provided by‌ FirstRanker.com ---

s

t

2

--- Content provided by FirstRanker.com ---

1

V

--- Content provided by FirstRanker.com ---

V

subject to the condition

r + s + t = V.

--- Content provided by FirstRanker.com ---

Consequently, we have

r

--- Content provided by‌ FirstRanker.com ---

s

t

1

--- Content provided by FirstRanker.com ---

V

V

V

--- Content provided by FirstRanker.com ---

V

Substitute

--- Content provided by FirstRanker.com ---

r

s

t

--- Content provided by FirstRanker.com ---

= x,

= y,

= w.

--- Content provided by FirstRanker.com ---

V

V

--- Content provided by FirstRanker.com ---

V

Then we have the relations

x + 8 y + 3 w 1,

--- Content provided by‌ FirstRanker.com ---

6 x + 4 y + 5 w 1,

y + 2 w 1.

--- Content provided by⁠ FirstRanker.com ---

1

r

s

--- Content provided by FirstRanker.com ---

t

We have to minimise V. i.e, We have to maximise

--- Content provided by FirstRanker.com ---

=

. i.e, We have to maximise x + y +

V

--- Content provided by⁠ FirstRanker.com ---

V

V

--- Content provided by FirstRanker.com ---

V

w.

Thus, the given game is transformed into the following equivalent LPP:

--- Content provided by FirstRanker.com ---

maximise x + y + w

--- Content provided by FirstRanker.com ---

332
MBA-H2040 Quantitative Techniques for Managers
subject to the restrictions

x + 8 y + 3 w 1,

--- Content provided by FirstRanker.com ---

6 x + 4 y + 5 w 1,

y + 2 w 1,

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x 0, y 0, w 0.

QUESTIONS

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1. Explain how a game theory problem can be solved as an LPP.

2. Transform the game

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Y

Y

1

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2

X a

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a

1

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11

12

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X a

a

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2

21

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22

into an LPP.

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3. Using simplex method for LPP, solve the following game:

6 2

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3 5

1

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1

Answer: r

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, s

, V = 4

2

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2

4. Solve the following game with LPP approach:

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10

6

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4 8

1

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3

Answer: r

, s

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, V = 7

4

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MBA-H2040 Quantitative Techniques for Managers

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LESSON 9

GOAL PROGRAMMING FORMULATION

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LESSON OUTLINE

7.

Introduction to goal programming

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8.

Formulation of goal programming problems

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LEARNING OBJECTIVES

After reading this lesson you should be able to

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- understand the importance of goal programming

- formulate goal programming problems

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Introduction

Generally speaking, the objective of a business organization is to maximize profits and to minimize

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expenditure, loss and wastage. However, a company may not always attempt at profit maximization
only. At times, a necessity may arise to pay attention to other objectives also. We describe some
such situations in the sequel.

A manufacturing organization may like to ensure uninterrupted supply of its products even if it

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means additional expenditure for the procurement of raw materials or personal delivery of goods
during truckers' strike, etc. with the objective of assuring the good will of the customers.

A company may be interested in the full utilization of the capacity of the machines and therefore
mechanics may be recruited for attending to break downs of the machines even though the

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occurrence of such break downs may be very rare.

A company, driven by social consciousness, may spend a portion of its profits on the maintenance of
trees, parks, public roads, etc. to ensure the safety of the environment, with the objective earning the
support of the society.

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Another organization may have the objective of establishing brand name by providing high quality
products to the consumers and for this purpose it may introduce rigorous measures of quality checks
even though it may involve an increased expenditure.

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While all the sales persons in a company are formally trained and highly experienced, the
management may still pursue a policy to depute them for periodical training in reputed institutes so
as to maximize their capability, without minding the extra expenditure incurred for their training.

A travel agency may be interested to ensure customer satisfaction of the highest order and as a

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consequence it may come forward to operate bus services even to remote places at the normal rates,
so as to retain the customers in its fold.

A bank may offer services beyond normal working hours or on holidays even if it means payment of
overtime to the staff, in order to adhere to the policy of customer satisfaction on priority basis.

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A business organization may accord priority for the welfare of the employees and so a major part of
the earnings may be apportioned on employee welfare measures.

A garment designer would like to be always known for the latest fashion and hence may spend more

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money on fashion design but sell the products at the normal rates, so as to earn the maximum
reputation.

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MBA-H2040 Quantitative Techniques for Managers

A newspaper may be interested in earning the unique distinction of `Reporter of Remote Rural
Areas' and so it may spend more money on journalists and advanced technology for communication.

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The above typical instances go to show that the top level management of a business organization
may embark upon different goals in addition to profit maximization. Such goals may be necessitated
by external events or through internal discussion. At times, one such goal may be in conflict with
another goal.

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`Goal programming' seeks to deal with the process of decision making in a situation of multiple
goals set forth by a business organization. A management may accord equal priority to different
goals or sometimes a hierarchy of goals may be prescribed on their importance. One has to strive to
achieve the goals in accordance with the priorities specified by the management. Sometimes the

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goals may be classified as higher level goals and lower level goals as perceived by the
management and one would be interested in first achieving the higher order goals and afterwards
considering lower order goals.

Some of the goals that may be preferred by a business organization are : maximum customer

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satisfaction, maximum good will of the customers, maximum utilization of the machine capacity,
maximum reliability of the products, maximum support of the society, maximum utilization of the
work force, maximum welfare of the employees, etc.

Since different goals of an organization are based on different units, the goal programming has a

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multi-dimensional objective function. This is in contrast with a linear programming problem in
which the objective function is uni-dimensional.

Given a goal of an organization, one has to determine the conditions under which there will be
under-achievement and over-achievement of the goal. The ideal situation will be the one with neither

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under-achievement nor over-achievement of the goal.

Formulation of Goal Programming Problems

In the sequel, we consider illustrative situations so as to explain the process of problem formulation

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in goal programming.

Notations

If there is a single goal, we have the following notations:

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Let Du denote the under-achievement of the goal.

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Let Do denote the over-achievement of the goal.

If there are two goals, we have the following notations:

Denote the under-achievement and the over-achievement of one goal by Du1 and Do1

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respectively.

Denote the under-achievement and the over-achievement of another goal by Du2 and Do2
respectively.

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PROBLEM 1:

Alpha company is known for the manufacture of tables and chairs. There is a profit of Rs. 200 per table

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and Rs. 80 per chair. Production of a table requires 5 hours of assembly and 3 hours in finishing. In

order to produce a chair, the requirements are 3 hours of assembly and 2 hours of finishing. The

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company has 105 hours of assembly time and 65 hours of finishing. The company manager is

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MBA-H2040 Quantitative Techniques for Managers
interested to find out the optimal production of tables and chairs so as to have a maximum profit of Rs.

4000. Formulate a goal programming problem for this situation.

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Solution:

The manager is interested not only in the maximization of profit but he has also fixed a target of Rs.

4000 as profit. Thus, the problem involves a single goal of achieving the specified amount of profit.

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Let D denote the under achievement of the target profit and let D be the over achievement.

u

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o

The objective in the given situation is to minimize under achievement. Let Z be the objective

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function. Then the problem is the minimization of Z D .

u

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Formulation of the constraints:

Let the number of tables to be produced be x and let the number of chairs to be produced be Y.

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Profit from x tables = Rs. 200 x

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Profit from y chairs = Rs. 80 y

The total profit =

Profit from x tables and y chairs

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+ under achievement of the profit target

? over achievement of the profit target

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So we have the relationship 200 x + 80 y + D - D = 4000.

u

o

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Assembly time:

To produce x tables, the requirement of assembly time = 5 x hours. To produce y

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chairs, the requirement is 3 y hours. So, the total requirement is 5 x 3 y hours. But the available time

for assembly is 105 hours. Therefore constraint

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5 x + 3 y 105

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must be fulfilled.

Finishing time:

To produce x tables, the requirement of finishing time = 3 x. To produce y chairs, the requirement is 2 y .

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So, the total requirement is 3 x+ 2 y. But the availability is 65 hours. Hence we have the restriction

3x 2 y 65 .

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Non-negativity restrictions:

The number of tables and chairs produced, the under achievement of the profit target and the

over achievement cannot be negative. Thus we have the restrictions

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x 0, y 0, D 0, D 0 .

u

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o

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MBA-H2040 Quantitative Techniques for Managers
Statement of the problem:

Minimize Z D

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u

subject to the constraints

200 x 80 y D D 4000

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u

o

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5 x 3 y 105

3 x 2 y 65

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x 0, y 0, D 0, D 0

u

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o

Problem 2:

Sweet Bakery Ltd. produces two recipes A and B. Both recipes are made of two food stuffs I and II.

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Production of one Kg of A requires 7 units of food stuff I and 4 units of food stuff II whereas for

producing one Kg of B, 4 units of food stuff I and 3 units of food stuff II are required. The company

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has 145 units of food stuff I and 90 units of food stuff II. The profit per Kg of A is Rs. 120 while that of

B is Rs. 90. The manager wants to earn a maximum profit of Rs. 2700 and to fulfil the demand of 12

Kgs of A. Formulate a goal programming problem for this situation.

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Solution:

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The management has two goals.

1. To reach a profit of Rs. 2700

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2. Production of 12 Kgs of recipe A.

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Let D denote the under achievement of the profit target.

up

Let D denote the over achievement of the profit target.

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op

Let D denote the under achievement of the production target for recipe A.

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uA

Let D denote the over achievement of the production target for recipe A.

oA

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The objective in this problem is to minimize the under achievement of the profit target and to

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minimize the under achievement of the production target for recipe A.

Let Z be the objective function. Then the problem is the minimization of

Z D D .

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up

uA

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Constraints

Suppose the company has to produce x kgs of recipe A and y kgs of recipe B in order to achieve the two

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goals.

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MBA-H2040 Quantitative Techniques for Managers
Condition on profit:

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Profit from x kgs of A = 120 x

Profit from y kgs of B = 90 y

The total profit

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=

Profit from x kgs of A + Profit from y kgs of B

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+ under achievement of the profit target

? over achievement of the profit target

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=

120 x 90 y D D

up

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op

Thus we have the restriction

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120x 90 y D D 2700 .

up

op

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Constraint for food stuff I:

7 x 4 y 145

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Constraint for food stuff II:

4 x 3 y 90

Non-negativity restrictions:

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x, y, D , D , D , D 0

up

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op

uA

oA

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Condition on recipe A:

The target production of A =

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optimal production of A

+ under achievement in production target of A

? over achievement of the production target of A.

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Thus we have the condition

x D D

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12

uA

oA

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Statement of the problem:

Minimize Z D D

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up

uA

subject to the constraints

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120 x 90 y D D 2700

up

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op

x D D

12

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uA

oA

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7 x 4 y 145

4 x 3 y 90

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x, y, D , D , D , D 0

up

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op

uA

oA

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QUESTIONS

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1. Explain the necessity of a goal programming.

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MBA-H2040 Quantitative Techniques for Managers

2. Describe some instances of goal programming.

3. Explain the formulation of a goal programming problem.

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MBA-H2040 Quantitative Techniques for Managers

UNIT ? V

Lesson Outline

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Introduction
Terminologies of Queueing System
Empirical Queueing Models
Simulation ? Introduction

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Types of Simulation
Major Steps of Simulation
Replacement and Maintenance Analysis ? Introduction
Types of Maintenance
Types of Replacement Problem

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Determination of Economic life of an Asset

Learning Objectives

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After reading this lesson you should be able to

Understand the nature and scope of Queneing System.

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Queueing models and the solution to queueing model problems.
Importance of Simulation
Need for Replacement and maintenance
Solution to problems involving economic life of an Asset.

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5-1 ? Queueing Theory

5.1.1 Introduction:

A flow of customers from finite or infinite population towards the service facility forms a queue (waiting line) an account of

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lack of capability to serve them all at a time. In the absence of a perfect balance between the service facilities and the

customers, waiting time is required either for the service facilities or for the customers arrival. In general, the queueing

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system consists of one or more queues and one or more servers and operates under a set of procedures. Depending upon the

server status, the incoming customer either waits at the queue or gets the turn to be served. If the server is free at the time of

arrival of a customer, the customer can directly enter into the counter for getting service and then leave the system. In this

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process, over a period of time, the system may experience " Customer waiting" and /or "Server idle time"

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5.1.2 Queueing System:

A queueing system can be completely described by

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(1) the input (arrival pattern)
(2) the service mechanism (service pattern)
(3) The queue discipline and
(4) Customer's behaviour

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5.1.3. The input (arrival pattern)

The input described the way in which the customers arrive and join the system. Generally, customers arrive in a more or less

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random manner which is not possible for prediction. Thus the arrival pattern can be described in terms of probabilities and

consequently the probability distribution for inter-arrival times (the time between two successive arrivals) must be defined.

We deal with those Queueing system in which the customers arrive in poisson process. The mean arrival rate is denoted by

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MBA-H2040 Quantitative Techniques for Managers

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5.1.4 The Service Mechanism:-

This means the arrangement of service facility to serve customers. If there is infinite number of servers, then all the

customers are served instantaneously or arrival and there will be no queue. If the number of servers is finite then the

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customers are served according to a specific order with service time a constant or a random variable. Distribution of service

time follows `Exponential distribution' defined by

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f(t) = e -t , t > 0

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The mean Service rate is E(t) = 1/

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5.1.5 Queueing Discipline:-

It is a rule according to which the customers are selected for service when a queue has been formed. The most common
disciplines are

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1. First come first served ? (FCFS)
2. First in first out ? (FIFO)
3. Last in first out ? (LIFO)
4. Selection for service in random order (SIRO)

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5.1.6 Customer's behaviour

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1. Generally, it is assumed that the customers arrive into the system one by one. But in some cases, customers

may arrive in groups. Such arrival is called Bulk arrival.

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2. If there is more than one queue, the customers from one queue may be tempted to join another queue because of

its smaller size. This behaviour of customers is known as jockeying.

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3. If the queue length appears very large to a customer, he/she may not join the queue. This property is known as

Balking of customers.

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4. Sometimes, a customer who is already in a queue will leave the queue in anticipation of longer waiting line.

This kind of departare is known as reneging.

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5.1.7 List of Variables

The list of variable used in queueing models is give below:

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n - No of customers in the system

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C - No of servers in the system

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Pn (t) ? Probability of having n customers in the system at time t.

Pn - Steady state probability of having customers in the

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system

P0 - Probability of having zero customer in the system

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Lq - Average number of customers waiting in the queue.

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Ls - Average number of customers waiting in the system
(in the queue and in the service counters)
Wq - Average waiting time of customers in the queue.

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Ws - Average waiting time of customers in the system
(in the queue and in the service counters)
- Arrival rate of customers

- Service rate of server

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- Utilization factor of the server

eff - Effective rate of arrival of customers
M - Poisson distribution

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N - Maximum numbers of customers permitted in the system. Also, it denotes the size of the calling source of the
customers.
GD - General discipline for service. This may be first in first ? serve (FIFS), last-in-first serve (LIFS) random order
(Ro) etc.

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5.1.8 Traffic intensity (or utilization factor)

An important measure of a simple queue is its traffic intensity given by

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Traffic intensity = Mean arrival time

=

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(< 1)

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Mean service time

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and the unit of traffic intensity is Erlang

5.1.9 Classification of Queueing models

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Generally, queueing models can be classified into six categories using Kendall's notation with six parameters to define a

model. The parameters of this notation are

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P- Arrival rate distribution ie probability law for the arrival /inter ? arrival time.

Q - Service rate distribution, ie probability law according to

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which the customers are being served.

R - Number of Servers (ie number of service stations)
X - Service discipline

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Y - Maximum number of customers permitted in the system.
Z - Size of the calling source of the customers.

A queuing model with the above parameters is written as
(P/Q/R : X/Y/Z)

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5.1.10 Model 1 : (M/M/1) : (GD/ / ) Model

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In this model

(i)

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the arrival rate follows poisson (M) distribution.

(ii)

Service rate follows poisson distribution (M)

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(iii)

Number of servers is 1

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(iv)

Service discipline is general disciple (ie GD)

(v)

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Maximum number of customers permitted in the system is infinite ()

(vi)

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Size of the calling source is infinite ()

The steady state equations to obtain, Pn the probability of having customers in the system and the values for Ls, Lq, Ws and
Wq are given below.

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n= 0,1,2,---- where = <1

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Ls ? Average number of customers waiting in the system

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(ie waiting in the queue and in the service station)

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P

n

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n =

(1-)

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Ls =

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=

Ls ?

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=

-

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1 -

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MBA-H2040 Quantitative Techniques for Managers

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

- (1 - )

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1 -

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Lq

=

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2

Average

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waiting

time of

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1 -c

u stomers in the system

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(in the que

ue an

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d in the service station)

= Ws

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= Ws

= Ls =

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--- Content provided by FirstRanker.com ---

(1 - )

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=

x

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1

=

1

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1 -

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(1 - )

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(Since = )

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= 1

-

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=

1

-

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Ws = 1

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Wq = Average waiting time of customers in the
queue.

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=

Lq / = [1 / ] [ 2 / [1- ]]

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= 1 / [ 2 / [1- ]]

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Since =

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Wq =

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-

Example 1:

The arrival rate of customers at a banking counter follows a poisson distibution with a mean of 30 per hours. The service rate

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of the counter clerk also follows poisson distribution with mean of 45 per hour.

a) What is the probability of having zero customer in the system ?
b) What is the probability of having 8 customer in the system ?

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c) What is the probability of having 12 customer in the system ?
d) Find Ls, Lq, Ws and Wq

Solution

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Given arrival rate follows poisson distribution with
mean =30

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= 30 per hour

Given service rate follows poisson distribution with

mean = 45

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= 45 Per hour

Utilization factor = /

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= 30/45

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= 2/3

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= 0.67

a) The probability of having zero customer in the system

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= 0 (1- )

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= 1-

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= 1-0.67

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MBA-H2040 Quantitative Techniques for Managers

--- Content provided by‍ FirstRanker.com ---

= 0.33

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b) The probability of having 8 customers in the system

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P8

= 8 (1- )

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= (0.67)8 (1-0.67)

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= 0.0406 x 0.33

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--- Content provided by FirstRanker.com ---

= 0.0134

Probability of having 12 customers in the system is

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P12

--- Content provided by‌ FirstRanker.com ---

= 12 (1- )

--- Content provided by FirstRanker.com ---

= (0.67)12 (1-0.67)

--- Content provided by‌ FirstRanker.com ---

= 0.0082 x 0.33 = 0.002706

Ls

--- Content provided by FirstRanker.com ---

=

0.67

--- Content provided by‍ FirstRanker.com ---

1 -

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1-0.67

=

--- Content provided by‍ FirstRanker.com ---

0.67

= 2.03

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0.33

= 2 customers

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Lq

= 2

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

(0.67)2

=

0.4489

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

1-0.67

--- Content provided by‌ FirstRanker.com ---

0.33

=

--- Content provided by FirstRanker.com ---

1.36

=

1 Customer

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=

1

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=

1

=

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--- Content provided by⁠ FirstRanker.com ---

45-30

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--- Content provided by⁠ FirstRanker.com ---

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=

0.0666 hour

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

=

0.67

--- Content provided by FirstRanker.com ---

=

0.67

-

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--- Content provided by‌ FirstRanker.com ---

45-30

15

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=

0.4467 hour

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Example 2 :

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At one-man barbar shop, customers arrive according to poisson dist with mean arrival rate of 5 per hour

and the hair cutting time was exponentially distributed with an average hair cut taking 10 minutes. It is

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assumed that because of his excellent reputation, customers were always willing to wait. Calculate the

following:

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(i)

Average number of customers in the shop and the average numbers waiting for a haircut.

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(ii)

The percentage of time arrival can walk in straight without having to wait.

(iii)

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The percentage of customers who have to wait before getting into the barber's chair.

Solution:-

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Given mean arrival of customer = 5/60 =1/12
and mean time for server

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=

1/10

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= /

= [1/12] x 10

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=

10 /12

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0.833

(i)

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Average number of customers in the system (numbers in the queue and in the service station)

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

= / 1-

= 0.83 / 1- 0.83

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

= 0.83 / 0.17

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

= 4.88

--- Content provided by FirstRanker.com ---

= 5 Customers

(ii)

The percentage of time arrival can walk straight into barber's chair without waiting is

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Service utilization

= %

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

= / %

--- Content provided by‌ FirstRanker.com ---

= 0.833 x 100

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

=83.3

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345

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MBA-H2040 Quantitative Techniques for Managers

(iii)

The percentage of customers who have to wait before getting into the barber's chair = (1-)%

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--- Content provided by FirstRanker.com ---

(1-0.833)%

=

0.167 x 100

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

=

16.7%

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Example 3 :

Vehicles are passing through a toll gate at the rate of 70 per hour. The average time to pass through the
gate is 45 seconds. The arrival rate and service rate follow poisson distibution. There is a complaint

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that the vehicles wait for a long duration. The authorities are willing to install one more gate to reduce
the average time to pass through the toll gate to 35 seconds if the idle time of the toll gate is less than
9% and the average queue length at the gate is more than 8 vehicle, check whether the installation of the
second gate is justified?

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Solutions:-

Arrival rate of vehicles at the toll gate

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=

70 per hour

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Time taken to pass through the gate =

45 Seconds

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Service rate

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= 1 hours

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--- Content provided by‍ FirstRanker.com ---

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45 seconds

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= 3600/45

= 80

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= 80 Vehicles per hour

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--- Content provided by FirstRanker.com ---

Utilization factor = /

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--- Content provided by‌ FirstRanker.com ---

= 70 / 80

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--- Content provided by‍ FirstRanker.com ---

= 0.875

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(a) Waiting no. of vehicles in the queue is Lq

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--- Content provided by FirstRanker.com ---

= 2 / 1 -

=

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(0.875)2

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--- Content provided by‌ FirstRanker.com ---

1-0.875

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

=

0.7656

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

0.125

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

6.125

--- Content provided by FirstRanker.com ---

= 6 Vehicles

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(b) Revised time taken to pass through the gate

=30 seconds

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The new service rate after installation of an
additional gate = 1 hour/35 Seconds

= 3600/35

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--- Content provided by FirstRanker.com ---

=

102.68 Vehicles / hour

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Utilization factor = / = 70 / 102.86

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--- Content provided by FirstRanker.com ---

= 0.681

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--- Content provided by‌ FirstRanker.com ---

Percentage of idle time of the gate = (1-)%

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= (1-0.681)%

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

= 0.319%

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

= 31.9

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

= 32%

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This idle time is not less than 9% which is expected.

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Therefore

the installation of the second gate is not justified since the average waiting number of vehicles in

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the queue is more than 8 but the idle time is not less than 32%. Hence idle time is far greater than the number. of vehicles
waiting in the queue.

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5.1.11 Second Model (M/M/C) : (GD/ / )Model

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The parameters of this model are as follows:

(i)

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Arrival rate follows poisson distribution

(ii)

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Service rate follows poisson distribution

(iii)

No of servers is C'.

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(iv)

Service discipline is general discipline.

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MBA-H2040 Quantitative Techniques for Managers

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(v)

Maximum number of customers permitted in the system is infinite

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Then the steady state equation to obtain the probability of having n customers in the system is

Pn

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= n Po

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,

o n C

n!

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--- Content provided by⁠ FirstRanker.com ---

= n Po

for n > c Where / c < 1

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C n-c C!

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

Where [ / c] < 1 as = /

--- Content provided by FirstRanker.com ---

C-1

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

P0

={[ n/n!] + c / (c! [1 - /c])}-1

n = 0

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where c! = 1 x 2 x 3 x ................. upto C
Lq

--- Content provided by FirstRanker.com ---

= [ c+1 / [c-1! (c - )] ] x P0

--- Content provided by‍ FirstRanker.com ---

= (c Pc) / (c - )2

Ls

= Lq + and Ws = Wq + 1 /

--- Content provided by FirstRanker.com ---

Wq

= Lq /

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Under special conditions Po

= 1 - and Lq = C+! / c 2 Where <1 and

--- Content provided by‍ FirstRanker.com ---

Po = (C-) (c ? 1)! / c c
and L

--- Content provided by FirstRanker.com ---

q =

/ (c- ), where / c < 1

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Example 1:

At a central warehouse, vehicles are at the rate of 24 per hour and the arrival rate follows poisson distribution. The unloading
time of the vehicles follows exponential distribution and the unloading rate is 18 vehicles per hour. There are 4 unloading
crews. Find

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(i)

Po and P3

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(ii)

Lq, Ls, Wq and Ws

Solution:

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Arrival rate = 24 per hour

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Unloading rate = 18 Per hour

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No. of unloading crews C=4

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= /

= 24 / 18=1.33

--- Content provided by‍ FirstRanker.com ---

C-1

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

(i) P0

={[ n/n!] + c / (c! [1 - /c])}-1

--- Content provided by⁠ FirstRanker.com ---

n = 0
3

={[ (1.33)n/n!]+ (1.33)4 /(4! [1 - (1.33)/ 4])}-1

--- Content provided by‌ FirstRanker.com ---

n = 0

={ (1.33)0 / = 0! + (1.33)1 / 1! + (1.33)2 / 2! + (1.33)3 / 3! +
(1.33)4 / 24! [1 - (1.33)/ 4] }-1

--- Content provided by⁠ FirstRanker.com ---

=[1 + 1.33 + 0.88 + 0.39 + 3.129/16.62] -1

=[3.60 + 0.19]-1 =

[3.79]-1

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= 0.264

We know Pn

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= ( n / n!) Po

for

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0 n c

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P3

= ( 3 / 3!) Po

--- Content provided by‍ FirstRanker.com ---

Since 0 3 4

--- Content provided by‍ FirstRanker.com ---

=

[(1.33)3 / 6 ] x 0.264

--- Content provided by‌ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

=

2.353 x 0.044

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

0.1035

(ii) Lq

--- Content provided by FirstRanker.com ---

=

C+1 X P0

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

(C ? 1)! (C-)2

--- Content provided by⁠ FirstRanker.com ---

=

(1.33)5

--- Content provided by‍ FirstRanker.com ---

X

0.264

--- Content provided by‌ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

3! X (4 ? 1.33)2

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=

(4.1616) X

--- Content provided by⁠ FirstRanker.com ---

0.264

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

6 X (2.77)2

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347

MBA-H2040 Quantitative Techniques for Managers

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

(4.1616) X

0.264

--- Content provided by FirstRanker.com ---

46 .0374

--- Content provided by‍ FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

=

1.099 / 46.0374

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

0.0239

--- Content provided by FirstRanker.com ---

=

0.0239 Vehicles

--- Content provided by FirstRanker.com ---

Ls

=

Lq +

--- Content provided by‌ FirstRanker.com ---

=

0.0239 + 1.33

--- Content provided by FirstRanker.com ---

1.3539 Vehicles

Wq

=

--- Content provided by FirstRanker.com ---

Lq /

--- Content provided by‌ FirstRanker.com ---

=

0.0239 /24

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

=

0.000996 hrs

--- Content provided by⁠ FirstRanker.com ---

Ws

=

--- Content provided by‌ FirstRanker.com ---

Wq + 1 /

=

--- Content provided by‍ FirstRanker.com ---

0.000996 + 1/18

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

=

0.000996 + 0.055555

--- Content provided by FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

=

0.056551 hours.

--- Content provided by‍ FirstRanker.com ---

Example 2 :-

--- Content provided by‌ FirstRanker.com ---

A supermarket has two girls ringing up sales at the counters. If the service time for each customer is exponential with mean 4
minutes and if the people arrive in poisson fashion at the rate of 10 per hour

a) What is the probability of having to wait for service?

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b) What is the expected percentage of idle time for each girl?
c) If a customer has to wait, what is the expected length of his waiting time?

Solution:-

--- Content provided by FirstRanker.com ---

C-1

--- Content provided by FirstRanker.com ---

P0

={[ n/n!] + c / (c! [1 - /c])}-1
n = 0

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Where = / given arrival rate = 10 per hour

= 10 / 60 = 1 / 6 per minute

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Service rate = 4 minutes

= 1 / 4

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person per minute

Hence = /

= (1 / 6) x 4

--- Content provided by‍ FirstRanker.com ---

= 2 / 3

= 0.67

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

P0 ={[ n/n!]+(0.67)2 / (2! [1 - 0.67/2])}-1

n = 0

=[1 + ( / 1!) ] + 0.4489 / (2 ? 0.67)]-1

--- Content provided by⁠ FirstRanker.com ---

=[1 + 0.67 + 0.4489 / (1.33)]-1
=[1 + 0.67 + 0.34]-1
=[ 2.01]-1
= 1 / 2

--- Content provided by‌ FirstRanker.com ---

The Probability of having to wait for the service is

P (w > 0)

--- Content provided by FirstRanker.com ---

=

c

--- Content provided by‍ FirstRanker.com ---

X P0

c! [1 - /c]

--- Content provided by FirstRanker.com ---

=

0.67 2 X (1 / 2)
2! [1 ? 0.67 /2]

--- Content provided by‍ FirstRanker.com ---

=

0.4489 / 2.66

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

0.168

--- Content provided by FirstRanker.com ---

b) The probability of idle time for each girl is

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= 1- P (w > 0)

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348
MBA-H2040 Quantitative Techniques for Managers

--- Content provided by‍ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

= 1-1/3

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= 2/3

--- Content provided by‌ FirstRanker.com ---

Percentage of time the service remains idle = 67% approximately

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c) The expected length of waiting time (w/w>0)

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=

1 / (c - )

--- Content provided by FirstRanker.com ---

=

1 / [(1 / 2) ? (1 / 6) ]

--- Content provided by FirstRanker.com ---

=

3 minutes

Examples 3 :

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A petrol station has two pumps. The service time follows the exponential distribution with mean 4 minutes and cars arrive
for service in a poisson process at the rate of 10 cars per hour. Find the probability that a customer has to wait for service.
What proportion of time the pump remains idle?

--- Content provided by‍ FirstRanker.com ---

Solution:

Given C=2

The arrival rate = 10 cars per hour.

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

= 10 / 60

= 1 / 6 car per minute

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--- Content provided by‌ FirstRanker.com ---

Service rate = 4 minute per cars.

--- Content provided by‍ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

= ? car per minute.

= /

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= (1/6) / (1/4)

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= 2 / 3

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by FirstRanker.com ---

= 0.67

Proportion of time the pumps remain busy

--- Content provided by‌ FirstRanker.com ---

= / c

= 0.67 / 2

--- Content provided by‌ FirstRanker.com ---

= 0.33
= 1 / 3

The proportion of time, the pumps remain idle

--- Content provided by⁠ FirstRanker.com ---

=1 ? proportion of the pumps remain busy

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

1-1 / 3

= 2 / 3

C-1

--- Content provided by FirstRanker.com ---

--- Content provided by⁠ FirstRanker.com ---

={[ n/n!] + c / (c! [1 - /c])}-1
n = 0

--- Content provided by FirstRanker.com ---

=[ ( 0.67)0 / 0!) + ( 0.67)1 / 1!) + ( 0.67)2 / 2!)[1- ( 0.67 / 2)1 ]-1
=[1 + 0.67 + 0.4489 / (1.33)]-1
=[1 + 0.67 + 0.33]-1
=[ 2]-1
=1 / 2

--- Content provided by FirstRanker.com ---

Probability that a customer has to wait for service

--- Content provided by‌ FirstRanker.com ---

=

p [w>0]

--- Content provided by⁠ FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

c

x P0 =

--- Content provided by FirstRanker.com ---

(0.67)2 x 1/2

--- Content provided by FirstRanker.com ---

[c [1 - / c]

--- Content provided by⁠ FirstRanker.com ---

[2![1 ? 0.67/2]

--- Content provided by FirstRanker.com ---

=

0.4489

--- Content provided by⁠ FirstRanker.com ---

=

0.4489

--- Content provided by FirstRanker.com ---

--- Content provided by‌ FirstRanker.com ---

1.33x2

--- Content provided by FirstRanker.com ---

2.66

--- Content provided by‌ FirstRanker.com ---

--- Content provided by‍ FirstRanker.com ---

0.1688

5.2 Simulation :

Simulation is an experiment conducted on a model of some system to collect necessary information on the behaviour of that

--- Content provided by‌ FirstRanker.com ---

system.

5.2.1 Introduction :

The representation of reality in some physical form or in some form of Mathematical equations

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are called Simulations .

Simulations are imitation of reality.

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For example :

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349

MBA-H2040 Quantitative Techniques for Managers

--- Content provided by FirstRanker.com ---

1. Children cycling park with various signals and crossing is a simulation of a read model traffic system
2. Planetarium
3. Testing an air craft model in a wind tunnel.

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5.2.2. Need for simulation :

Consider an example of the queueing system, namely the reservation system of a transport corporation.

The elements of the system are booking counters (servers) and waiting customers (queue). Generally

--- Content provided by‍ FirstRanker.com ---

the arrival rate of customers follow a Poisson distribution and the service time follows exponential

distribution. Then the queueing model (M/M/1) : (GD/ / ) can be used to find the standard results.

--- Content provided by FirstRanker.com ---

But in reality, the following combinations of distributions my exist.

1. Arrived rate does not follow Poisson distribution, but the service rate follows an exponential distribution.

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2. Arrival rate follows a Poisson distribution and the service rate does not follow exponential distribution.

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3. Arrival rate does not follows poisson distribution and the service time also does not follow exponential distribution.

In each of the above cases, the standard model (M/M/1) : (G/D/ / ) cannot be used. The last resort to find the
solution for such a queueing problem is to use simulation.

--- Content provided by‍ FirstRanker.com ---

5.2.3. Some advantage of simulation :

1. Simulation is Mathematically less complicated

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2. Simulation is flexible
3. It can be modified to suit the changing environments.
4. It can be used for training purpose
5. It may be less expensive and less time consuming in a quite a few real world situations.

--- Content provided by⁠ FirstRanker.com ---

5.2.4. Some Limitations of Simulation :

1. Quantification or Enlarging of the variables maybe difficult.

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2. Large number of variables make simulations unwieldy and more difficult.
3. Simulation may not. Yield optimum or accurate results.
4. Simulation are most expensive and time consuming model.
5. We cannot relay too much on the results obtained from simulation models.

--- Content provided by‌ FirstRanker.com ---

5.2.5. Steps in simulation :

1. Identify the measure of effectiveness.

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2. Decide the variables which influence the measure of effectiveness and choose those variables, which affects the

measure of effectiveness significantly.

3. Determine the probability distribution for each variable in step 2 and construct the cumulative probability

--- Content provided by FirstRanker.com ---

distribution.

4. Choose an appropriate set of random numbers.
5. Consider each random number as decimal value of the cumulative probability distribution.

--- Content provided by⁠ FirstRanker.com ---

6. Use the simulated values so generated into the formula derived from the measure of effectiveness.
7. Repeat steps 5 and 6 until the sample is large enough to arrive at a satisfactory and reliable decision.

5.2.6. Uses of Simulation

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Simulation is used for solving

1.Inventory Problem
2. Queueing Problem

--- Content provided by‍ FirstRanker.com ---

3. Training Programmes etc.

Example :

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350
MBA-H2040 Quantitative Techniques for Managers
Customers arrive at a milk booth for the required service. Assume that inter ? arrival and service time

--- Content provided by FirstRanker.com ---

are constants and given by 1.5 and 4 minutes respectively. Simulate the system by hand computations

for 14 minutes.

--- Content provided by FirstRanker.com ---

(i) What is the waiting time per customer?
(ii) What is the percentage idle time for the facility?
(Assume that the system starts at t = 0)

--- Content provided by FirstRanker.com ---

Solution :

First customer arrives at the service center at t = 0
His departure time after getting service = 0 + 4 = 4 minutes.
Second customer arrives at time t = 1.5 minutes

--- Content provided by‌ FirstRanker.com ---

he has to wait = 4 ? 1.5 = 2.5 minutes.
Third customer arrives at time t = 3 minutes
he has to wait for = 8-3 = 5 minutes
Fourth customer arrives at time t = 4.5 minutes and he has to wait for 12 ? 4.5 = 7.5 minutes.
During this 4.5 minutes, the first customer leaves in 4 minutes after getting service and the second customer is getting

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service.
Fifth customer arrives at t = 6 minutes
he has to wait 14 ? 6 = 8 minutes
Sixth customer arrives at t = 7.5 minutes
he has to wait 14 ? 7.5 = 6.5 minutes

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Seventh customer arrives at t = 9 minutes
he has to wait 14 ? 9 = 5 minutes
During this 9 minutes the second customer leaves the service in 8th minute and third person is to get service in 9th minute.
Eighth customer arrives at t = 10.5 minutes
he has to wait 14 ? 10.5 = 3.5 minutes

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Nineth customer arrives at t = 12 minutes

he has to wait 14 ? 12 = 2 minutes
But by 12th minute the third customer leaves the Service
10th Customer arrives at t = 13.5 minutes

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he has to wait 14-13.5 = 0.5 minute

From this simulation table it is clear that

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(i) Average waiting time for 10 customers

= 2.5+5+7.5+8+6.5+5.0+3.5+2+0.5

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= 40.5 = 4.05

10
(ii) Average waiting time for 9 customers who are in waiting for service

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40.5

= 4.5 minutes.

9

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But the average service time is 4 minutes which is less that the average waiting time, the percentage of idle time for service =
0%

Exercise :

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1. The arrival rate of customers at a banking counter follows a poisson distribution with a mean of 45
per hors. The service rate of the counter clerk also poisson distribution with a mean of 60 per hours.

(a) What is the probability of having Zero customer in the system (P0).

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(b) What is the probability of having 5 customer in the system (P5).
(c) What is the probability of having 10 customer in the system (P10).
(d) Find Ls, Lq, Ws and Wq

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MBA-H2040 Quantitative Techniques for Managers

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2. Vehicles pass through a toll gate at a rate of 90 per hour. The average time to pass through the gate is
36 seconds. The arrival rate and service rate follow poisson distribution. There is a complaint the
vehicles wait for long duration. The authorities are willing to install one more gate to reduce the
average time to pass through the toll gate to 30 seconds if the idle time of the toll gate is less than 10%
and the average queue length at the gate is more than 5 vehicles. Vehicle whether the installation of

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second gate is justified?

3. At a central ware house, vehicles arrive at the rate of 24 per hours and the arrival rate follows poisson
distribution. The unloading time of the vehicles follows exponentional distribution and the unloading
rate is 18 vehicles per hour. There are 4 unloading crews. Find the following.

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a) P0 and P3
b) Lq, Ls, Wq and Ws

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4.

Explain Queneing Discipline

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5.

Describe the Queueing models (M/M/1) : (GD/ /)

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and (M/M/C) : (GD/ / )

6.

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Cars arrive at a drive-in restaurant with mean arrival rate of 30 cars per hors and the service rate

of the cars is 22 per hors. The arrival rate and the service rate follow poisson distribution. The number
parking space for cars is only 5. Find the standard results.

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(Ans Lq = 2.38 cars, Ls = 3.3133 Cars, Wq = 0.116 hors and
Ws = 0.1615 hors)

7.

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In a harbour, ship arrive with a mean rate of 24 per week. The harbour has 3 docks to handle

unloading and loading of ships. The service rate of individual dock is 12 per week. The arrival rate and
the service rate follow poisson distribution. At any point of time, the maximum No. of ships permitted
in the harbour is 8. Find P0, Lq, Ls, Wq, Ws

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(Ans P0 = 0.1998, Lq = 1.0371 ships, Ls = 2.9671 ships,
Wq = 0.04478 week and Ws = 0.1281 week)

8.

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Define simulation and its advantages.

9.

Discuss the steps of simulation.

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5.3. Replacement models

5.3.1. Introduction:

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The replacement problems are concerned with the situations that arise when some items such as men,

machines and usable things etc need replacement due to their decreased efficiency, failure or

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breakdown. Such decreased efficiency or complete breakdown may either be gradual or all of a sudden.

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If a firm wants to survive the competition it has to decide on whether to replace the out dated

equipment or to retain it, by taking the cost of maintenance and operation into account. There are two

basic reasons for considering the replacement of an equipment.

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They are

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MBA-H2040 Quantitative Techniques for Managers

(i)

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Physical impairment or malfunctioning of various parts.

(ii)

Obsolescence of the equipment.

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The physical impairment refers only to changes in the physical condition of the equipment itself.

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This will lead to decline in the value of service rendered by the equipment, increased operating cost of

the equipments, increased maintenance cost of the equipment or the combination of these costs.

Obsolescence is caused due to improvement in the existing Tools and machinery mainly when the

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technology becomes advanced therefore, it becomes uneconomical to continue production with the same

equipment under any of the above situations. Hence the equipments are to be periodically replaced.

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Some times, the capacity of existing facilities may be in adequate to meet the current demand. Under

such cases, the following two alternatives will be considered.

1. Replacement of the existing equipment with a new one

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2. Argument the existing one with an additional equipments.

5.3.2 Type of Maintenance

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Maintenance activity can be classified into two types

i)

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Preventive Maintenance

ii)

Breakdown Maintenance

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Preventive maintenance (PN) is the periodical inspection and service which are aimed to detect

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potential failures and perform minor adjustments a requires which will prevent major operating problem

in future. Breakdown maintenance is the repair which is generally done after the equipment breaks

down. It is offer an emergency which will have an associated penalty in terms of increasing the cost of

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maintenance and downtime cost of equipment, Preventive maintenance will reduce such costs up-to a

certain extent . Beyond that the cost of preventive maintenance will be more when compared to the cost

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of the breakdown maintenance.

Total cost = Preventive maintenance cost + Breakdown maintenance cost.

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This total cost will go on decreasing up-to P with an increase in the level of maintenance up-to a

point, beyond which the total cost will start increasing from P. The level of maintenance corresponding

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to the minimum total cost at P is the Optional level of maintenance this concept is illustrated in the

follows diagram

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MBA-H2040 Quantitative Techniques for Managers

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The points M and N denote optimal level of maintenance and optimal cost respectively

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5.3.3 Types of replacement problem

The replacement problem can be classified into two categories.

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i)

Replacement of assets that deteriorate with time (replacement due to gradual failure, due to wear
and tear of the components of the machines) This can be further classified into the following

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types.

a)

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Determination of economic type of an asset.

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b)

Replacement of an existing asset with a new asset.

ii)

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simple probabilistic model for assets which will fail completely (replacement due to sudden
failure).

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5.3.4. Determination of Economic Life of an asset

Any asset will have the following cost components
i)

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Capital recovery cost (average first cost), Computed form the first cost (Purchase price) of the
asset.

ii)

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Average operating and maintenance cost.

iii)

Total cost which is the sum of capital recovery cost (average first cost) and average operating

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and maintenance cost.

A typical shape of each of the above cost with respect to
life of the

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asset is shown below

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MBA-H2040 Quantitative Techniques for Managers

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From figure, when the life of the machine increases, it is clear that the capital recovery cost

(average first cost) goes on decreasing and the average operating and maintenance cost goes on

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increasing. From the beginning the total cost goes on decreasing upto a particular life of the asset and

then it starts increasing. The point P were the total cost in the minimum is called the Economic life of

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the asset. To solve problems under replacement, we consider the basics of interest formula.

Present worth factor denoted by (P/F, i,n). If an amount P is invested now with amount earning

interest at the rate i per year, then the future sum (F) accumulated after n years can be obtained.

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P

-

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Principal sum at year Zero

F

-

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Future sum of P at the end of the nth year

i

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-

Annual interest rate

n

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-

Number of interest periods.

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Then the formula for future sum F = P ( 1 + i ) n

P = F/(1 +i)n = Fx (present worth factor)

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If A is the annual equivalent amount which occurs at the end of every year from year one through n
years is given by

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A

=

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P x i (1 +i)n

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(1 +i)n - 1

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=

P ( A / P, i, n )

=

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P x equal payment series capital recovery factor

Example:

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A firm is considering replacement of an equipment whose first cost is Rs. 1750 and the scrap value is
negligible at any year. Based on experience, it is found that maintenance cost is zero during the first
year and it increases by Rs. 100 every year thereafter.

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(i) When should be the equipment replaced if

a) i = 0%

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b) i = 12%

Solution :

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Given the first cost = Rs 1750 and the maintenance cost is Rs. Zero during the first years and

then increases by Rs. 100 every year thereafter. Then the following table shows the calculation.

Calculations to determine Economic life

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(a) First cost Rs. 1750

Interest rate = 0%

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Summation Average cost Average first Average

Maintenan

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End

of

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of

of

cost

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if total

cost

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ce cost at

year (n)

maintenanc

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maintenance

replaced

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at through the

end of year

e

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through the the

given given year

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MBA-H2040 Quantitative Techniques for Managers

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Cost

given year

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year and

A

B (Rs)

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C (Rs)

D (in Rs)

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E (Rs)

F (Rs)

1750

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C = B

C/A

D + E

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A

1

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0

0

0

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1750

1750

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2

100

100

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50

875

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925

3

200

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300

100

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583

683

4

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300

600

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150

438

588

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5

400

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1000

200

350

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550

6

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500

1500

250

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292

542

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7

600

2100

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300

250

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550

8

700

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2800

350

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219

569

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The value corresponding to any end-of-year (n) in Column F represents the average total cost of

using the equipment till the end of that particulars year.

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In this problem, the average total cost decreases till the end of the year 6 and then it increases.

Hence the optimal replacement period is 6 years ie the economic life of the equipment is 6 years.

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(e) When interest rate i = 12%

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When the interest rate is more than 0% the steps to get the economic life are summarized in the

following table.

Calculation to determine Economic life

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First Cost = Rs. 1750

Interest rate = 12%

Mai

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Present

Summation

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nten

worth

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as of present

(A/P,

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En

Present

ance

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beginning

worth

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of

12%,n)

Annual

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d

simulator

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cost

of years

maintenanc

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=i (1+i)n

equipment

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of

maintena

at

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(P/F,12v,n)

1

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of e

costs

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(1+i)n-1

total

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cost

ye

nce

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cost

end

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maintenanc

through the

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through the

ar

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and first

of

e costs

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given year

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giver year

(n)

cost

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year

G

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s

A

B

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C

D

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E

F

G

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C =

B

1

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E+

BxC

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D

FxG

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(iR)

(1+12/100) n

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Rs. 1750

1

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0

0.8929

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0

0

1750

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1.1200

1960

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2

100

0.7972

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79.72

79.72

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1829.72

0.5917

1082.6

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3

200

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0.7118

142.36

222.08

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1972.08

0.4163

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820.9

4

300

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0.6355

190.65

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412.73

2162.73

0.3292

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711.9

5

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400

0.5674

226.96

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639.69

2389.69

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0.2774

662.9

6

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500

0.5066

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253.30

892.99

2642.99

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0.2432

642.7

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7

600

0.4524

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271.44

1164.43

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2914.430

0.2191

638.5

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8

700

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0.4039

282.73

1447.16

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3197.16

0.2013

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680.7

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MBA-H2040 Quantitative Techniques for Managers

Identify the end of year for which the annual equivalent total cost is minimum in column. In this

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problem the annual equivalent total cost is minimum at the end of year hence the economics life of the

equipment is 7 years.

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5.3.5.

Simple probabilistic model for items which completely fail

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Electronic items like bulbs, resistors, tube lights etc. generally fail all of a sudden, instead of gradual

failure. The sudden failure of the item results in complete breakdown of the system. The system may

contain a collection of such items or just an item like a single tube-light. Hence we use some

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replacement policy for such items which would minimize the possibility of complete breakdown. The

following are the replacement policies which are applicable in these cases.

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i) Individual replacement policy :

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Under this policy, each item is replaced immediately after failure.

ii) Group replacement policy :

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Under group replacement policy, a decision is made with regard the replacement at what equal internals,

all the item are to be replaced simultaneously with a provision to replace the items individually which

fail during the fixed group replacement period.

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Among the two types of replacement polices, we have to decide which replacement policy we

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have to follow. Whether individual replacement policy is better than group replacement policy. With

regard to economic point of view. To decide this, each of the replacement policy is calculated and the

most economic one is selected for implementation.

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Exercise :

1. List and explain different types of maintenance

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2. Discuss the reasons for maintenance.
3. Distinguish between breakdown maintenance and preventive maintenance.
4. Distinguish between individual and group replacement polices.
5. A firm is considering replacement of an equipment whose first cost is Rs.4000 and the scrap

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value is negligible at the end of any year. Based on experience, it has been found that the
maintenance cost is zero during the first year and it is Rs.1000 for the second year. It increase by
Rs.300 every years thereafter.

a) When should the equipment be replace if i = 0%

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b) When should the equipment be replace if i = 12%

Ans . a) 5 years

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b) 5 years

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6. A company is planning to replace an equipment whose first cost is Rs.1,00,000. The operating

and maintenance cost of the equipment during its first year of operation is Rs.10,000 and it
increases by Rs. 2,000 every year thereafter. The release value of the equipment at the end of the

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MBA-H2040 Quantitative Techniques for Managers

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first year of its operation is Rs.65,000 and it decreases by Rs.10,000 every year thereafter. Find
the economic life of the equipment by assuming the interest rate as 12%.

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[Ans : Economic life = 13 years and the corresponding annual equivalent cost = Rs. 34,510]

7. The following table gives the operation cost, maintenance cost and salvage value at the end of

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every year of machine whose purchase value is Rs. 12,000. Find the economic life of the
machine assuming.

a) The interest rate as 0%
b) The interest rate as 15%

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Operation cost at Maintenance cost Salvage value at the end

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End

of the end of year at the end of year of year (Rs)

year

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(Rs)

(Rs)

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1

2000

2500

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8000

2

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3000

3000

7000

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3

4000

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3500

6000

4

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5000

4000

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5000

5

6000

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4500

4000

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6

7000

5000

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3000

7

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8000

5500

2000

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8

9000

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6000

1000

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Ans :

a) Economic life of the machine = 2 years
b) Economic life of the machine = 2 years

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MBA-H2040 Quantitative Techniques for Managers

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This post was last modified on 14 March 2022

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