Operations Research

OTM – 615
Dr. Ateeq-ur-Rehman Irshad
Email:
ateeq.irshad@nbs.nust.edu.pk
 Books
 Primary:
a. Barry Render, Ralph Stair, and Michael Hanna, Quantitative Analysis for
Management, 10th ed. or later
b. B. W. Taylor, Introduction to Management Science, Prentice Hall, 10th Edition.

a. Nahmias, Steven. Production and operations analysis. 4th/5th/6th edition. New

York: McGraw-Hill.
b. Simio and simulation: Modeling, Analysis, and Applications, 3rd Edition by W.
David Kelton, Jeffrey S. Smith and David T. Sturrock. Simio LLC (Selected
portion)

a. Wayne L Winston, Christian Albright, Operations Research: Application and

Algorithms, 4th edition or later
 Grading Policy
Nature of Duration Frequen Weightage
Examination cy
End Semester 3 hours 1
Examination 40 %
2 hours 1
Mid Term
20 %
- Minimum
Quizzes
of 3 15 %

Project Report
18%
Project
Presentation 7%
Management Science

Chapter 1
The Management Science Approach

 Management science uses a scientific approach to

solving management problems.
 It is used in a variety of organizations to solve many
different types of problems.
 It encompasses a logical mathematical approach to
problem solving.
 Management science, also known as operations
research, quantitative methods, etc., involves a
philosophy of problem solving in a logical manner.
 What is Operations Research?
Operations
The activities carried out in an organization.
Research
The process of observation and testing
characterized by the scientific method.
Situation, problem statement, model
construction, validation, experimentation,
candidate solutions.

Operations Research is a quantitative approach to

decision making based on the scientific method
of problem solving.
6
 Terminology
• The British/Europeans refer to “Operational
Research", the Americans to “Operations Research" -
but both are often shortened to just "OR".

• Another term used for this field is “Management

Science" ("MS"). In U.S. OR and MS are combined
together to form "OR/MS" or "ORMS".

• Yet other terms sometimes used are “Industrial

Engineering" ("IE") and “Decision Science" ("DS").
The Management Science Process
Steps in the Management Science Process

 Observation - Identification of a problem that exists (or may occur

soon) in a system or organization.
 Definition of the Problem - problem must be clearly and
consistently defined, showing its boundaries and interactions with the
objectives of the organization.
 Model Construction - Development of the functional mathematical
relationships that describe the decision variables, objective function
and constraints of the problem.
 Model Solution - Models solved using management science
techniques.
 Model Implementation - Actual use of the model or its solution.
 Quantitative Analysis and Decision
Making
• Potential Reasons for a Quantitative Analysis
Approach to Decision Making
– The problem is complex.
– The problem is very important.
– The problem is new.
– The problem is repetitive.

10
 Deterministic vs. Stochastic Models
Deterministic models
assume all data are known with certainty

Stochastic models
explicitly represent uncertain data via
random variables or stochastic processes.

Deterministic models involve optimization

Stochastic models
characterize / estimate system performance.

11
 Model Development
• Models are representations of real objects or
situations.
• Three forms of models are iconic, analog, and
mathematical.
– Iconic models are physical replicas (scalar
representations) of real objects.(Airplane Model)
– Analog models are physical in form, but do not
physically resemble the object being
modeled.(Speedometer, Thermometer)
– Mathematical models represent real world problems
through a system of mathematical formulas and
expressions based on key assumptions, estimates,
or statistical analyses.
12
 Advantages of Models
• Generally, experimenting with models
(compared to experimenting with the real
situation):
– requires less time
– is less expensive
– involves less risk
“Mathematical models does not have to be exact; it
just has to be close enough to provide better results
than can be obtained by common sense” Herbert A.
Simon 13
 Example
• You are Unemployed and you would like
a position that will lead to a satisfying
career.
• Accept Position in
• Islamabad
• Lahore
• Sahiwal
• Single-Criteria decision: Salary
• Multi-Criteria Decision: Salary+ Growth+ Location 14
Example of Model Construction (1 of 3)

As an example, consider a business firm that sells a product.

The product costs $5 to produce and sells for $20. A model
that computes the total profit that will accrue from the items
sold is: Z = $20X - $5X
 Product requires 4 pounds of steel to make
 Firm has 100 pounds of steel
Business Problem:
 Determine the number of units to produce to make the
most profit, given the limited amount of steel available.
Example of Model Construction (2 of 3)

Variables: X = # units to produce (decision variable)

Z = total profit (in $)
Model: Z = $20X - $5X (objective function)
4X = 100 lb of steel (resource constraint)
Parameters: $20, $5, 4 lbs, 100 lbs (known values)
Formal Specification of Model:
maximize Z = $20X - $5X
subject to 4X = 100
Example of Model Construction (3 of 3)

Model Solution:
Solve the constraint equation:
4x = 100
(4x)/4 = (100)/4
x = 25 units

Substitute this value into the profit function:

Z = $20x - $5x
= (20)(25) – (5)(25)
= $375
(Produce 25 units, to yield a profit of
$375)
Model Building:
Break-Even Analysis (1 of 9)

■ Used to determine the number of units of a product to

sell or produce that will equate total revenue with total
cost.

■ The volume at which total revenue equals total cost is

called the break-even point.

■ Profit at break-even point is zero.

Model Building:
Break-Even Analysis (2 of 9)
Model Components
 Fixed Cost (cf) - costs that remain constant regardless of
number of units produced.

 Variable Cost (cv) - unit production cost of product.

 Volume (v) – the number of units produced or sold

 Total variable cost (vcv) - function of volume (v) and

unit variable cost.
Model Building:
Break-Even Analysis (3 of 9)
Model Components
 Total Cost (TC) - total fixed cost plus total variable cost.

TC  c f  vcv

 Profit (Z) - difference between total revenue vp (p = unit

price) and total cost, i.e.
Z  vp - c f - vcv
Model Building:
Break-Even Analysis (4 of 9)
Computing the Break-Even Point
The break-even point is that volume at which total
revenue equals total cost and profit is zero:
vp  c f  vcv  0
v ( p  cv )  c f

The break-even point cf

v
p  cv
Model Building:
Break-Even Analysis (5 of 9)

Example: Western Clothing Company

Fixed Costs: cf = $10000

Variable Costs: cv = $8 per pair
Price : p = $23 per pair

The Break-Even Point is:

v = (10,000)/(23 -8)
= 666.7 pairs
Model Building:
Break-Even Analysis (6 of 9)

Figure 1.2
 Computer Software

• A variety of software packages are available

for solving mathematical models, some are:
– Spreadsheet packages such as Microsoft Excel
– The Management Scientist (MS)
– Quantitative system for business (QSB)
– LINDO, LINGO
– Quantitative models (QM)
– Decision Science (DS)
24
Break-Even Analysis: Excel Solution (1 of 5)

Exhibit 1.1
Break-Even Analysis: Excel QM Solution (2 of 5)
Characteristics of Modeling Techniques

 Linear Mathematical Programming - clear objective;

restrictions on resources and requirements; parameters
known with certainty. (Chap 2-6, 9)
 Probabilistic Techniques - results contain uncertainty.
(Chap 11-13)
 Network Techniques - model often formulated as
diagram; deterministic or probabilistic. (Chap 7-8)
 Other Techniques - variety of deterministic and
probabilistic methods for specific types of problems
including forecasting, inventory, simulation, multicriteria,
etc. (Chap 10, 14-16)
Thank you