Operations Research

Lesson 1: Introduction
 Objectives
After Studying this lesson, you should be able to:
1. Understand the meaning and purpose of Operations
Research (OR) and its importance in real life
2. Present a brief history of operations research
3. Explain the Applications of OR
4. Recognize the terminology frequently used in OR
5. Describe the Phases of an OR study
6. Recognize some standard tools of OR
7. Describe the Limitations of OR
 Introduction

• What is Operations Research (OR)?

• The Nature of OR
• The Origins and history of OR
• Applications of OR
• Phases of an OR study: OR Modeling Approach
• Some standard tools of OR
• OR Software Packages
• Limitations of OR
• The Rise of Analytics Together with OR
 What is Operations Research
• Operations Research as its name implies, involves
“research” on ”operations”.
• Operations Research (OR for short) is applied to
problems that concern how to conduct and coordinate the
operations (i.e., the activities) within an organization .

• The research part of the name means that operations

research uses an approach that resembles the way
research is conducted in established scientific fields. To
a considerable extent, the scientific method is used to
investigate the problem of concern.
 The Nature of OR
• In general Operations research seeks for a solutions
to problems that arise in complex organizations
• Is the discipline of applying advanced analytical methods to
help make better desicions.
• Is also called management science
Collection of techniques based on mathematics and other scientific
approaches that finds solutions to your problems.
• OR Must provide positive, understandable conclusions to the
decision maker
• A rose by any other name…
– Management Science
– Systems Engineering
– Industrial Engineering
– Operations Management
– Applied Mathematics
 The Origins of OR (cont..)
• First used in the military during WW II for Managing
allocation of scarce resources
– The formal activities of Operations Research (OR) were initiated in
England during World War II when a team of British scientists set out to
make decisions regarding the best utilization of war material.
 The Origins of OR (cont..)
• Early 1950s: OR introduced into business, industry,
and government
– Following the end of the war, the ideas advanced in military
operations were adapted to improve efficiency and
productivity in the civilian sector. Today, OR is a dominant
decision making tool.
 The Origins of OR (cont..)

Factors influencing growth of OR

– The success of OR in the war: Improved
techniques
• Simplex method
– Computer revolution
• Fast solution of complex computational problems
 The Origins of OR (cont..)

Today, Operations Research is also widely used

in regional planning, transportation, public
health, communication etc., besides military and
industrial operations.
 Applications of OR.
• Manufacturing
• Transportation
• Construction
• Telecommunications
• Financial planning
• Health care
• The military
• Public services
• …..
Applications of OR…

TRANSPORTATION and TRAVEL

OR techniques are used by airlines and rail companies to

offer varying fares and make higher revenues by filling
more seats at different prices - an OR technique known as
Yield Management. All airlines depend on the effective
use of OR techniques to make them operate at a profit.
Applications of OR…

RETAILING

In supermarkets, data from store loyalty card schemes is

analyzed by OR groups to advise on merchandising
policies and profitability improvement. OR methods are
also used to decide when and where new store
developments should be made.
Applications of OR…

HEALTH

Hospital managers use OR to make

decisions such as determining the optimal
utilization of operating rooms and personnel,
assessing the risks posed by patients with
various medical conditions, and deciding
necessary levels of perishable medicine in
stock.
Applications of OR…

FINANCIAL SERVICES

OR practitioners address issues such

as portfolio and risk management,
planning and analysis of customer
service. They are widely employed in
Credit Risk Management—a vital
area for lenders needing to ensure that
they find the optimum balance of risk
and revenue.
 Applications of OR…

GOVERNMENT

OR is a key contributor in modernizing government

services and making them more efficient. Some OR
applications include modeling the impact of performance
related paying for teachers, evaluating government call-
centers, projecting the size of the prison population, and
national defense.
 Phases of an OR study

1. Define the problem of interest

2. Gather relevant data
3. Construct the Model: Formulate a mathematical
model to represent the problem
4. Solve the model: Develop a computer-based
procedure for deriving solutions to the problem
5. Modify the model as appropriate and validate
again
6. Implement.
 OR Modeling Approach

1. Defining
Real-World the Problem 2. Formulating a
Problem and Gathering Mathematical
Data Model

5. 3. Deriving
6. Preparing 4. Testing Solutions
Implementation to Apply the Model from the
the Model Model
1. Defining the Problem and Gathering Data

– Elements of problem definition

• Identify the appropriate objectives
• Identify limitations (constraints)
• Identify interrelationships with other areas of the
organization
• Identify alternative courses of action
• Define the time constraints

• WHAT ARE THE OBJECTIVES ?

• IS THE PROPOSED PROBLEM TOO
NARROW ?
• IS IT TOO BROAD ?
1. Defining the Problem and Gathering
Data (cont..)
– OR team typically works in an advisory capacity
• Management makes the final decisions
– Identify the decision maker
• Probe his/her thinking regarding objectives
– Objectives need to be specific
• Also aligned with organizational objectives
– Example of an objective in a for-profit organization
• Maximum profit in the long run
– More typical objective
• Satisfactory profit combined with other defined objective
1. Defining the Problem and Gathering
Data (cont..)
• Parties affected by a business firm operating in a
single country
• Stockholders (owners)
• Employees
• Customers
• Suppliers
• Government (nation)
• International firms obligated to follow socially
responsible practices
1. Defining the Problem and Gathering
Data (cont..)

• Gathering relevant data necessary for:

• Complete problem understanding
• Input into mathematical models
• Problem: too little data available
• Solution: build management information system to
collect data
• Problem: too much data available
• Solution: data mining methods
2. Formulating a Mathematical Model

• WHAT KIND OF MODELS SHOULD BE USED ?

• IS THE MODEL ACCURATE ?
• IS THE MODEL TOO COMPLEX ?
 2. Formulating a Mathematical
Model (Cont..)
• Models
• Idealized representations
• Examples: model airplanes, portraits, globes
• Mathematical models
• Expressed in terms of mathematical symbols
• Example: Newton’s Law: F = ma
• Mathematical model of a business problem
• Expressed as system of equations
 2. Formulating a Mathematical
Model (Cont..)
• Determining parameter values
• Often difficult
• Done by gathering data
• Typical expression of the problem
• Choose values of decision variables so as to
maximize the objective function
• Subject to the specified constraints
• Real problems often do not have a single “right”
model
 2. Formulating a Mathematical
Model (Cont..)

• What are the advantages of a mathematical

model over a verbal description of the problem?
• More concise
• Reveals important cause and effect relationships
• Clearly indicates what data is relevant
• Forms a bridge to use computers for analysis
 2. Formulating a Mathematical
Model (Cont..)

• What are the disadvantages of mathematical

models?
• Often must simplify assumptions to make problem
solvable

CHART
3. Deriving Solutions from the Model

• Sometimes a relatively simple step

• Algorithms applied in a computer using a
commercially-available software package
• Search for the optimal solution
• Common theme in OR problems
• Recognize that the solution is optimal only with
respect to model being used
• More common goal: seek a satisfactory solution,
rather than the optimal
 4. Testing the Model

• DO OUTPUTS MATCH CURRENT

OBSERVATIONS FOR CURRENT INPUTS ?
• ARE OUTPUTS REASONABLE ?
• COULD THE MODEL BE ERRONEOUS ?
 4. Testing the Model (Cont..)

• Model validation
• Process of testing model output and improving the model until
satisfied with output
• Computer program analogy
• Find and correct major bugs
• Determine flaws in the model
• Example of flaws:
• Factors that were not incorporated
• Parameters that were estimated incorrectly
4. Testing the Model (Cont..)

• Retrospective test
• Uses historical data to reconstruct the past
• Determines how well the model and solution
would have performed
• If it had been used
• Disadvantages of the retrospective test
• Uses same data as used to formulate the model
• The past may not be indicative of the future
 5. Preparing to Apply the Model
• Install a well-documented system for applying
the model
• Includes the model, solution procedure, and
implementation procedures
• Usually computer-based
• Databases and management information
systems
• Provide up-to-date model input
• Decision-support system
• Interactive, computer-based system
• Helps managers use data and models to support
their decision-making
 6. Implementation

• Benefits of the study are reaped during

implementation phase
• Important for OR team to participate in launch
• To make sure model is correctly translated
• Success of implementation depends on support
from:
• Top management
• Operations management
 6. Implementation (Cont..)
• Steps in the implementation phase
• OR gives management explanation of new system
• How does it relate to operating realities?
• Develop procedures to put system into operation
• Responsibility of OR team and management
• Initiate new course of action
• OR team evaluates initial experience
• Gather feedback
• Document methodology
• Work should be reproducible
• Periodically revisit assumptions
 Some standard tools of OR
Out of many…
▪ Mathematical Programming (such as; linear
programming, nonlinear programming,
integer programming, dynamic programming,
Stochastic Programming)
▪ Queueing Theory
▪ Inventory Theory
▪ Network Scheduling
▪ Project Management Methods.
 OR Software Packages
• A very popular approach now is to use today’s premier
spreadsheet package, Microsoft Excel, to formulate small OR
models in a spreadsheet format. The Excel Solver then is used
to solve the models.
• LINDO (and its companion modeling language LINGO)
continues to be a dominant OR software package. Student
versions of LINDO and LINGO now can be downloaded free
from the Web.
• CPLEX is a state-of-the-art software package that is widely
used for solving large and challenging OR problems
• MPL such as AMPL is a user-friendly modeling system that
uses CPLEX as its main solver, but can also has several other
solvers.
 Limitations of Operations Research:
• Distance between O.R. specialist and Manager: Operations Researchers
might not be aware of the business problems. Similarly, a manager is unable
to understand the complex nature of OR. Thus there is a big gap between the
two personnel.
• Magnitude of Calculations; which can be handled only by machines
(sometimes not tractable).
• Money and Time Costs; frequent changes in the data, incorporating these
changes into the operations research models is very expensive (a fairly good
solution at present may be more desirable than a perfect operations research
solution available in future or after some time).
• Non-quantifiable Factors; non-quantifiable factors are not incorporated in
O.R. models. Importantly O.R. models do not take into account emotional
factors or qualitative factors.
The Rise of Analytics Together with OR

• Analytics (business analytics)

• Introduced in 2006 by Thomas H. Davenport
• Similar in concept to operations research
• Transforms data into insight to make better decisions
• Big data
• Refers to the massive amounts of data available today (big data)
The Rise of Analytics Together with
OR (cont..)
• Categories of analytics applications
• Descriptive analytics
• Identify interesting patterns to describe what is currently
happening
• Predictive analytics
• Using data to predict what will happen in the future
• Prescriptive analytics
• Using data to prescribe what should be done in the future
 Before next class
1. Referee to chapters 1 and 2 in your text book.
2. Watch the videos on the black board, more videos are listed below
for an over view on the origin, development and applications of
OR:
• A New View of Analytics and Operations Research
• OR Origin Story
• OR in a nutshell 1
• OR in a nutshell 2
• What is Operations Research?
• OR development and applications
• OR in politics and recent military operations
• OR in healthcare
3. Install AMPL software (included in the section AMPL in BB).