Operations Research

MBA-024
UNIT I

OPERATIONS RESEARCH
 OR Defined
• OR is a tool employed to increase the
effectiveness of managerial decisions as an
objective supplement to the subjective feeling
of the decision-maker.
 OR: Some More Definitions
• OR is the application of the scientific method
by interdisciplinary teams to problems
involving the (control of) organised systems so
as to provide solutions which best serve the
purpose of the organisation as a whole.
• In the above definition, a number of other
definitions have been synthesised.
• The definition can be broken into three parts:
– The application of scientific method.
– By interdisciplinary teams.
– To problems involving the (control of) organised
systems so as to provide solutions which best
serve the purpose of the organisation as a whole.
• The application of scientific method.
– This refers to applying science in the field of
management.
• By interdisciplinary teams.
– We are aware that the science of management is the
focal point of many disciplines.
– Since OR is the very science of management, in an OR
team, experts are drawn from all these disciplines.
– An OR team may consist of an engineer, a
mathematician, a psychologist, an accountant, etc.,
because all of these experts bring the different
analytical tools from their respective disciplines and
we get the advantage of all the resources.
– The advantage of drawing experts from each discipline
is that each expert will view the problem from his
angle and we will have many alternative solutions.
– The OR scientist may then form an optimal solution by
taking into view all of them.
• To problems involving the (control of)
organised systems so as to provide solutions
which best serve the purpose of the
organisation as a whole. The solution that the
OR scientist gives should be best suited from
the point of view of the whole organisation
and not just a particular department.
• Important characteristics of a scientific
method:
– A keen sense of observation.
– Identification of the problem.
– Formulation of hypothesis.
– Verification of hypothesis.
• A keen sense of observation.
– A person gifted with a scientific temper has this
attribute in him.
– A good manager should also have a keen sense of
observation.
– He should be alert and sensitive to the presence
of a problem.
• Identification of the problem.
– When something is wrong with the health of an
organisation, one has to find th enature of illness.
– The problem has got to be identified and clearly
pinpointed by undertaking a thorough
investigation.
• Formulation of hypothesis.
– When the problem has been identified, a
hypothesis (a tentative solution to the problem) is
formulated.
– In OR, hypothesis usually takes the form of a
model.
– A model is an abstraction or a description of the
situation.
– There are many kinds of models – we in OR shall
be concerned with the mathematical models.
– Different types of charts and graphs are also
examples of mathematical models.
• Verification of hypothesis.
– Once the hypothesis has been determined, it has
got to be tested or verified.
 Mathematical Model
• A mathematical model in OR is described in
terms of two important variables:
– Parameters (uncontrollable variables).
– Decision (controllable variables).
• We can take a decision regarding decision
variables only.
• In LP these two variables describe a problem.
 Mathematical Model
• The contribution margin of different products
being manufactured is one example of
parameter, at least in the short term.
• Another example of a parameter is the
magnitude of resources available.
 Uses and Scope of OR
• Profit maximisation.
• Production management.
• Financial management.
• Marketing.
• Human resource management.
• Profit maximisation. Under the existing
constraints, to utilise the resources in the best
possible way so as to maximise the profits.
• Production management.
– To calculate the optimum product mix.
– For scheduling and sequencing production runs by
proper allocation of machines.
– Application of the transportation model in order
to determine the optimum production schedule.
• Financial management.
– To decide the optimum mix of equity and debt.
– Every capital has a cost, including owner’s capital,
which is opportunity cost.
– This cost, as well as the risk on borrowed capital
has to be minimised.
– OR helps in doing this.
– The financial manager not only mobilises funds,
he also has to utilise the funds.
– OR assists him in doing so.
• Marketing.
– Sales can be promoted by improving quality or
reducing cost, intensive or extensive advertising.
– OR assists in the optimal allocation of budget on
these different methods.
– OR is also useful in the prediction of the market
share of a particular firm.
– For this past experience is made use of.
– The matrix of transition probabilities is used for
the purpose.
• Human resource management. OR is useful to
the personnel administrator in finding out:
– Skilled person at the minimum cost.
– The number of persons to be maintained on the
full-time basis in a variable workload, like freight
handling, etc.
– The optimum manner of sequencing personnel to
a variety of jobs.
 Origin of OR
• OR is a systematic and scientific method of
performing operations.
• It has a military origin.
• It came into being during World War II.
• Was used to formulate appropriate strategies
to tackle military problems.
 Origin of OR
• Experts from different disciplines were
assembled to pool in their resources to find
the best possible solutions to problems at
hand.
• After the War, the economies of many
countries lay shattered.
• To rehabilitate them, OR was employed in
business and industry.
 Application of OR in Managerial
Decision-Making
• OR provides managers with quantitative basis
for decision-making.
• OR enhances the ability to make long-range
plans.
• OR aids in solving everyday problems of
running a business with greater efficiency,
competence and confidence.
• OR leads to better control.
• OR leads to better coordination.
• Application of OR models results in better
decisions.
• OR helps in evolving better systems.
• OR helps in solving extremely complex
business problems, where it becomes difficult
for a human being to arrive at a solution.
• OR helps in resolving conflicts resulting from
the various sub-divisions of the functional
areas like production , marketing, finance and
HR in an optimal, near optimal or satisfying
way.
• OR is a problem-solving and decision-making
science.
• OR leads to:
– Ease of manufacture.
– Cost minimisation.
– Maintenance of quality standards.
– Product innovation.
– High sales volume.
– Increasing market share.
– Better industrial relations.
– Getting right person on right job.
– Formulating optimal replacement policy.
• OR helps to:
– Ensuring liquidity.
– Maximising profits.
– Eliminating expenses not directly contributing to
profits.
– Minimising risk.
– Maximising difference between cost and revenue.
– Maximising long-term profits.
– Secure an increasing trend in profits over time.
– Ensuring corporate survival and growth.
• OR helps in:
– Cash management.
– Inventory control.
– Capital budgeting.