MIDTERM

NETWORK
 A network consists of a set of nodes linked by arcs (or branches). The notation for
describing a network is (N, A), where N is the set of nodes, and A is the set of arcs. As an
illustration, the network in Figure 1 is described as:
N = {1, 2, 3, 4, 5}
A = { (1,2), (1,3), (2,3), (2,5), (3,4), (3,5), (4,2), (4,5)}

   
                   Figure 1                                                                    Figure 2

MINIMAL SPANNING TREE ALGORITHM

 The minimal spanning tree algorithm deals with linking the nodes of a network, directly
or indirectly, using the shortest total length of connecting branches.
 A network is said to be connected if every two distinct nodes are linked by at least one
path. The network in Figure 1 demonstrates this type of network. A tree is a cycle-free
connected network comprised of a subset of all the nodes, and a spanning tree links all
the nodes of the network. Figure 2 provides examples of a tree and a spanning tree
from the network in Figure 1.

STEPS IN MINIMAL SPANNING TREE

1. Select any starting node (conventionally, node 1).
2. Select the node closest to the starting node to join the spanning tree.
3. Select the closest node not present in the spanning tree.
4. Repeat step 3 until all nodes have joined the spanning tree.

DYNAMIC PROGRAMMING
 It determines the optimum solution of a multivariable problem by decomposing it into
stages, each stage comprising a single variable sub-problem. The advantage of the
decomposition is that the optimization process at each stage involves one variable only,
a simpler task computationally than dealing with all the variables simultaneously. ADP
model is basically a recursive equation linking the different stages of the problem in a
manner that guarantees that each stage's optimal feasible solution is also optimal and
feasible for the entire problem.
 It can also be used to handle both probabilistic and deterministic problems. This
approach divides the problem into a number of sub-problems or stages. The decision we
make at each stage influences not only the next stage but also every stage to the end of
the problem. 
RECURSIVES NATURE OF COMPUTATIONS IN DP
 Computations in DP are done recursively, so that the optimum solution of one sub-
problem is used as an input to the next sub-problem. By the time the last sub-problem is
solved, the optimum solution for the entire problem is at hand. The manner in which
the recursive computations are carried out depends on how we decompose the original
problem. In particular, the sub-problems are normally linked by common constraints. As
we move from one sub-problem to the next, the feasibility of these common constraints
must be maintained.

PRINCIPLE OF OPTIMALITY
 Future decisions for the remaining stages will constitute an optimal policy regardless of
the policy adopted in previous stages.

FORWARD AND BACKWARD RECURSION

 Both the forward and backward recursions yield the same solution. Although the
forward procedure appears more logical, DP literature invariably uses backward
recursion. The reason for this preference is that, in general, backward recursion may be
more efficient computationally.
SHORTEST ROUTE
 The shortest route problem determines the shortest route between a source and
destination in a transportation network.
EXAMPLE: 
Suppose that you want to select the shortest highway route between two cities. The network in
the figure below provides the possible routes between the starting city at node 1 and the
destination city at node 7. The routes pass through intermediate cities designated by nodes 2 to

PROJECT NETWORKS
 It is a network used to represent a project.
 It consists of a number of nodes (typically shown as small circles or rectangles) and a
number of arcs (shown as arrows) that connect two different nodes.
 There are three types of information needed to describe a project:
1. Activity information: Break down the project into its individual activities (at the
desired level of detail).
 2. Precedence relationships: Identify the immediate predecessor(s) for each activity.
3. Time information: Estimate the duration of each activity.

TWO TYPES OF PROJECT NETWORKS

1. Activity-On-Arc (AOA) project network – where each activity is represented by an arc. A
node is used to separate an activity (an outgoing arc) from each of its immediate
predecessors (an incoming arc). The sequencing of the arcs thereby shows the
precedence relationships between the activities.

2. Activity-On-Node (AON) project network – where each activity is represented by a

node. Then the arcs are used just to show the precedence relationships that exist
between the activities. In particular, the node for each activity with immediate
predecessors has an arc coming in from each of these predecessors.

CRITICAL PATH
 A path through a project network is one of the routes following the arcs from the start
node to the finish node.
 The length of a path is the sum of the (estimated) durations of the activities on the path.
 The (estimated) project duration equals the length of the longest path through the
project network.
 The longest path is called the critical path.
Note: If more than one path tie for the longest, they are all considered as critical paths. 
  
SCHEDULING THE PERT/CPM PROJECT
 The PERT/CPM scheduling procedure begins by addressing the question: When can the
individual activities start and finish (at the earliest) if no delays occur?
 Having no delays means:
1. The actual duration of each activity turns out to be the same as its estimated
duration.
2. Each activity begins as soon as all its immediate predecessors are finished.
 The starting and finishing times of each activity if no delays occur anywhere in the
project are called the earliest start time and the earliest finish time of the activity.
  
SCHEDULING THE PERT/CPM PROJECT
 These times are represented by the symbols:
o ES = earliest start time for a particular activity
o EF = earliest finish time of a particular activity
o EF = ES + (estimated) duration of the activity
  If an activity has only a single immediate predecessor, then:
o ES for the activity = EF for the immediate predecessor
 If an activity has two or more immediate predecessors, then:
o ES for the activity = Largest EF of the immediate predecessors

SCHEDULING THE PERT/CPM PROJECT

 The latest start time for an activity is the latest possible time that it can start without
delaying the completion of the project (so the finish node still is reached at its earliest
finish time), assuming no subsequent delays in the project.
 The latest finish time has the corresponding definition with respect to finishing the
activity.
 In symbols,
o LS = latest start time for a particular activity
o LF = latest finish time for a particular activity
o LS = LF - (estimated) duration of the activity
To find LF, we have a rule that the latest finish time of an activity is equal to the smallest of the
latest start times of its immediate successors. (LF = smallest LS of the immediate successors)

SLACK
 The slack for an activity is the difference between its latest finish time and its earliest
finish time.
 In symbols,
o Slack = LF – EF
o Slack = LS - ES

PERT THREE-ESTIMATE APPROACH

 The three estimates to be obtained for each activity are:
o Most likely estimate (m) - estimate of the most likely value of the duration.
o Optimistic estimate (o) - estimate of the duration under the most favorable conditions.
o Pessimistic estimate (p) - estimate of the duration under the most unfavorable
conditions.
Estimated time:       te = o + 4m + p
                          6
Project variance:     σ2 = ( (p – o) / 6 )2

Time-cost trade-off and project crashing

 Crashing is the shortening of the activity time in the network in order to reduce the
entire time in the critical path, so that completion time is reduced.
 If we need to shorten the activity, we want to do it in the most effective way.

Steps in finding a minimum cost schedule

 Prepare the network diagram showing the:
a. NC = Normal Cost
 b. CC = Crash Cost
c. NT = Normal Time
d. CT = Crash Time
 Determine the cost of unit per time to expedite each activity.
 Compute the critical path.
 Shorten the critical path at the least cost.

EXAMPLE

EXAMPLE
Given the following distances between destination nodes, what is the minimum distance that
connects the nodes?
DECISION THEORY

 It is the process of logical and quantitative analysis of various factors involved in a

problem of decision making and it helps us in making the best possible decision.
 Decisions that lend themselves to a decision theory approach tend to be characterized
by the following elements:

1. A set of possible future conditions (states of nature) that will have a bearing on the results of
the decision.
2. A list of alternatives to choose from.
3. A known payoff for each alternative under each possible condition.

IMPORTANT TERMS
Alternative – a course of action or strategy that may be chosen by the decision maker.
State of nature – an occurrence or a situation over which the decision maker has little or no
control.
Payoff – the benefit which accrues from a given combination of decision alternative and state of
nature.

STEPS IN DECISION MAKING

1. Make a list of all possible events (states of nature) which may occur.
2. Determine all the courses of action (alternative) that can be taken in the situation.
3. Determine pay-off for each combination of action and event.
4. Choose the best course of action which results in maximum pay-off.

DECISION MAKING
The information for a decision is often summarized in a payoff table, which shows the expected
payoffs for each alternative under the various possible states of nature. These tables are helpful
in choosing among alternatives because they facilitate comparison of alternatives.

DECISION ENVIRONMENTS
Operations management decisions are classified according to the degree of certainty present.
There are three basic categories:
1. Decision making under Certainty – In this environment, only one state of nature exists,
there is complete certainty about the future. It means that all parameters such as costs,
capacity and demand have known values.
2. Decision making under Uncertainty – In this environment, more than one state of nature
exists, but the decision maker has no knowledge about the various states, not even
sufficient knowledge to permit the assignment of probabilities to the states of nature.
3. Decision making under Risk - In this environment, more than one state of nature exists,
but the decision maker has information which will support the assignment of
probabilities to the states of nature.
DECISION MAKING UNDER CERTAINTY
 When it is known for certain which of the possible future conditions will actually
happen, the decision is usually relatively straightforward: Simply choose alternative that
has the best payoff under the state of nature.

DECISION MAKING UNDER UNCERTAINTY

Five Approaches under Uncertainty:
 Maximin – it determines the worst possible payoff for each alternative, then choose the
alternative that has the “best worst”. This is essentially a pessimistic one because it takes
into account the only the worst possible outcome for each alternative.
 Maximax – it determines the best possible payoff for each alternative, then choose the
alternative with that payoff.”. This is an optimistic one, “go for it strategy” because it does
that take into account any payoff other than the best.
 Laplace – it determines the average payoff for each alternative, and choose the alternative
with the best average. It treats the states of nature as equally likely
 Minimax Regret – It determines the worst regret for each alternative, and choose the
alternative with the “best worst”. This approach seeks to minimize the difference between
the payoff that is realized and the best payoff for each state of nature.
 Hurwicz Criterion - In Hurwicz, we take into account both minimum and maximum pay-off
for each alternative and assign some weights.

DECISION MAKING UNDER UNCERTAINTY

 The parameter a is called the index of optimism. If a = 0, the criterion is conservative
because it applies the regular minimax criterion.
 If a = 1, the criterion produces optimistic results because it seeks the best of the best
conditions. We can adjust the degree of optimism (or pessimism) through a proper
selection of the value of a in the specified (0,1) range. In the absence of strong feeling
regarding optimism and pessimism, a = .5 may be an appropriate choice.
DECISION MAKING UNDER RISK
 Decision making when there are several possible states of nature and we know the
probabilities associated with each possible state.
 Most popular method is to choose the alternative with the highest Expected Monetary
Value (EMV).
 EMV Criterion – it determines the expected payoff of each alternative, and choose the
alternative that has the best expected payoff.

EXPECTED VALUE OF PERFECT INFORMATION (EVPI)

EVPI places an upper bound on what you should pay for additional information.
                      EVPI = EVwPI – Maximum EMV
EVwPI is the long run average return if we have perfect information before a decision is made.

EXPECTED OPPORTUNITY LOSS (EOL)

 Expected opportunity loss (EOL) is the cost of not picking the best solution.
 First construct an opportunity loss table.
 For each alternative, multiply the opportunity loss by the probability of that loss for
each possible outcome and add these together.
 Minimum EOL will always result in the same decision as maximum EMV.
  Minimum EOL will always equal EVPI.

DECISION TREE
 Any problem that can be presented in a decision table can also be graphically
represented in a decision tree.
 Decision trees are most beneficial when a sequence of decisions must be made.
 All decision trees contain decision points and state-of-nature points.

FIVE STEPS TO DECISION TREE ANALYSIS

1. Define the problem
2. Structure or draw the decision tree
3. Assign probabilities to the states of nature
4. Estimate payoffs for each possible combination of alternatives and states of nature
5. Solve the problem by computing expected monetary values (EMVs) for each state of nature
node

STRUCTURE OF DECISION TREES

 Trees start from left to right.
 Represent decisions and outcomes in sequential order
 Squares represent decision nodes
 Circles represent states of nature nodes
 Lines or branches connect the decisions nodes and the states of nature.

EXAMPLES
1. A manager for a well drilling company must recommend whether to build a new facility,
expand his existing one, or do nothing. He estimates that long-run profits (in dollars) will vary
with the amount of precipitation (rainfall) as follows:
Low Normal High
Do Nothing -100 100 300
Expand 350 500 200
Build New 750 300 0
If he uses the maximax criterion, which alternative will he decide to select?
If he uses the laplace criterion, which alternative will he decide to select?
If he uses the maximin criterion, which alternative will he decide to select?
If he uses the minimax regret criterion, which alternative will he decide to select?
If he uses the Hurwicz criterion, which alternative will he decide to select using α = 0.8?

Solutions:
2. A student who has to decide whether to stop his studies and for a job paying P1,500 per
month or continue his studies, after which a job awaits him paying P2,500 per month provided
he passes his remaining subjects. He feels that he can pass his remaining subjects is 40%. Which
choice is better for the student and the expected value?

3. Two professors at a nearby university want to co-author a new textbook in either economics
or statistics. They feel that if they write an economics book, they have a 50% chance of placing
it with a major publisher, and it should ultimately sell about 40,000 copies. If they can’t get a
major publisher to take it, then they feel they have an 80% chance of placing it with a smaller
publisher, with ultimate sales of 30,000 copies. On the other hand, if they write a statistics
book, they feel they have a 40% chance of placing it with a major publisher, and it should result
in ultimate sales of about 50,000 copies. If they can’t get a major publisher to take it, they feel
they have a 50% chance of placing it with a smaller publisher, with ultimate sales of 35,000
copies. Construct the decision tree.