Decision Models in Business Assignment

By
Sivasundar.V.G.
10md093
Case

Shiva & Co which manufactures furniture has three production facilities, in Mumbai, Chennai
and Coimbatore. The company makes office tables, office chairs, swings, beds, ottomans, doors,
dining tables, sofas, coffee tables, benches, recliners and desks. The Mumbai facility
manufactures benches, recliners, desks and coffee tables. The Chennai facility manufactures
sofas, dining tables, doors and ottomans. The Coimbatore facility manufactures office tables,
office chairs, beds and swings.

The company does not supply to the domestic market. The company only exports its goods. The
company exports to Sri Lanka, Bangladesh, Japan and United Arab Emirates. It costs the
company Rs.13 to export to Sri Lanka, Rs.16 to export to Bangladesh, Rs.19 to export to Japan
and Rs.17 to export to United Arab Emirates from its Mumbai facility. It costs the company
Rs.17 to export to Sri Lanka, Rs.19 to export to Bangladesh, Rs.16 to export to Japan and Rs.15
to export to United Arab Emirates from its Chennai facility. It costs the company Rs.15 to export
to Sri Lanka, Rs.17 to export to Bangladesh, Rs.17 to export to Japan and Rs.16 to export to
United Arab Emirates from its Coimbatore facility.

The total supply for benches, recliners, desks and coffee tables is 250. The total supply for sofas,
dining tables, doors and ottomans is 200. The total supply of office tables, office chairs, beds and
swings is 250. The demand from Sri Lanka is 100, 150 from Bangladesh, 250 from Japan and
100 from United Arab Emirates.
Transportation Model

An organization has four destinations and three sources for supply of goods. The transportation
cost per unit is given below. The entire availability is 700 units which exceeds the cumulative
demand of 600 units.

Solution

Step 1:           Check for balance of supply and demand

                        S Supply = 250 + 200 + 250 = 700 units

                        S Demand = 100 + 150 + 250 + 100 = 600 units

Decision Rule

(i)            If S Supply = S Demand

then go to next step.

(ii)          Else; if S Supply > S Demand

then, add a “dummy destination” with zero transportation cost.

(iii)         Or else; if S supply < S Demand

 then, add a “dummy source” with zero transportation cost.

Since, in this problem

S supply > S Demand

Hence; add a “dummy destination” (say D5) with zero transportation cost and balance demand
which is difference in supply and demand (= 100 units).

The initial transportation matrix is now formulated with transportation cost in the small box of
each route. Note that each cell of the transportation matrix represents a potential route.

Initial Assignment by Vogel’s Approximation Method (VAM)

In this method, we calculate the difference between the two least-cost routes for each row and
column. The difference is called as penalty cost for not using the least-cost route.
                      

                                  First calculation of Penalty cost in VAM

Highest of all calculated penalty costs is for S3 and (S2). Therefore, allocation is to made in row
of source S3. The route (or cell), which one must select, should be the lowest cost of this row.
This route S3D5. Hence, first allocation is as follows.

                           

                                             First calculation in Vogel’s method

Now, with the first allocation, destination D5 is consumed. We exclude this column and work on
the remaining matrix for calculating the penalty cost. We get the following matrix.
Now for this, source S1 has highest penalty cost. For this row, the least cost route is S1D1. Hence,
next assignment is due in this route:

                               

                                          Second calculation of Penalty cost in VAM

                                     

                                              Second allocation in Vogel’s method

After second allocation, since destination D1 is consumed, we leave this column and proceed for
calculation of next penalty cost. Allocation is done in route S1D2. Since there is tie between all
routes, we break the tie by arbitrarily selecting any route (S1D2 in this case.) 
                              

                                           Third calculation of Penalty cost

                   

                                           

                                             Third allocation in Vogel’s method

 
                            

                                        Fourth calculation of Penalty cost in VAM

                                          

                                          Fourth allocation in Vogel’s method

With the fourth allocation, column D4 is consumed. In the only left column D3, the allocations of
100 units and 150 units are done in route S2D3 and S4D3 respectively. Thus, we get the following
allocations in the Vogel’s approximation method.
                            

                                        Final allocation through Vogel’s method

The initial cost for this allocation is (13 × 100 + 16 × 150 + 16 × 100 + 15 × 100 + 17 × 150 + 0
× 100) or equal to Rs. 9350:

Step 3:           Check for degeneracy

                        (m + n – 1) = 7

Number of filled cell = 6, which is one less than (m + n + 1). Hence, go to step 4 for removing
the degeneracy.

Step 4:           We allocate n the least-cost un-filled cell. This cell is route S1D5 or S2D5. Let us
select route S1D5. Thus, we get following matrix after removing degeneracy.

 
                                 

                                Final allocation after removing degeneracy in Vogel’s method

                           

Optimization of Initial Assignment

 The initial feasible assignment is done by using least-cost method or North-West corner method
or Vogel's approximation method. However, none of these methods guarantees optimal solution.
Hence, next step is to check the optimality of the initial solution.

 Step 5:   Check the optimality of the initial solution

 For this, we have to calculate the opportunity cost of un-occupied routes.

 First, we start with any row (or column). Let us select row 1, i.e., source S1; For this row, let us
define row value, u1 = 0. Now consider all filled routes of this row. For these routes, calculate
column values v. using following equation:

 u1 + v1 = Cij (For any filled route)

 where             u1 = row value

 vj = column value

 Cij = unit cost of assigned route

 Once first set of column values (vj is known, locate other routes of filled cells in these columns.
Calculate next of ui (or vj values using above equation. In this way, for all rows and columns, ui
and vj values are determined for a non- degenerate initial solution.

 Step 6:           Check the optimality

 Calculate the opportunity of non-allocated orunfilled routes. For this, use the following
equation:

                                

                                               Opportunity unassigned route = ui + vj – Cij 

where             ui = row value

 vj = column value

 Cij = unit cost of unassigned route

 If the opportunity cost is negative for all unassigned routes, the initial solution is optimal. If in
case any of the opportunity costs is positive, then go to next step.

      

Step 7: Calculate opportunity cost of un-assigned routes.

                           

                             Calculation of ui and vj for Vogel method’s initial solutions

Opportunity cost of above assignment is as follows:  

Unassigned route Opportunity cost (ui + vj – Cij)

S1D3 0 + 17 – 19 = –2

S1D4 0 + 16 – 17 = –1

S2D1 –1 + 13 – 17 = –5

S2D2 –1 + 16 – 19 = –4

S2D5 –1 + 0 – 0 = –1

S3D1 0 + 13 – 15 = –2

S3D2 0 + 16 – 17 = –1

S3D4 0 + 16 – 16 = 0
Conclusion:

Since all opportunity costs are negative or zero, the initial assignment of Vogel’s solution is
optimal with total cost of Rs.9350.The optimal assignment of routes is 100 units in S1D2, 100
units in S2D3, 100 units in S2D4, and 150 units in S3D3.