CHAPTER I

INTRODUCTION
Overview of Operations research
 The difficulty in life is the choice.
 Good decision-making brings about a better life,
a bad decision may force you to make another
one.
 A good decision is never an accident; it is always
the result of high intention, sincere effort,
intelligent direction and skillful execution; it
represents the wise choice of many alternatives.
 One must appreciate the difference between a
decision and an objective. A good decision is the
process of optimally achieving a given objective.
Overview of Operations research
 In many instances, we resort to informal
decision support techniques such as tossing a
coin, asking an oracle, visiting an astrologer,
etc.
 Business Science focuses on the formal model-
driven decision support techniques such as
mathematical programs for optimization, and
decision tree analysis for risky decisions. Such
techniques are now part of our everyday life.
Overview of Operations research
 The aim of this course is to make you a better
decision maker by learning the decision-making
process. Decision-making is a complicated process.
 This influential-cycle keeps the decision-maker
busy all the time. Selecting your goals and your
criteria for success is a dynamic process and
changes over time.
 Routine decisions are often made quickly, perhaps
unconsciously without the need for a detailed
process of consideration. However, for complex,
critical or important managerial decisions it is
necessary to take time to decide systematically
Overview of Operations research
 To make strategic decisions requires that one
takes a structured approach following a formal
decision making process. Otherwise, it will be
difficult to be sure that one has considered all
the key aspects of the decision.
 The field of Decision Science (DS) also known as
Management Science (MS), Operations Research
(OR) in a more general sense.
Overview of Operations research
 The OR/MS/DS approach to decision making
includes the diagnosis of current decision making
process.
 Diagnosis is the identification of problems (or
opportunities for improvement) in current decision
behavior; it involves determining how decisions are
currently made, specifying how decisions should be
made, and understanding why decisions are not
made as they should be.
 Nowadays, the OR/MS/DS approach has been
providing assistance to managers in developing the
expertise and tools necessary to understand the
decision problems, put them in analytical terms
and then solve them.
Foundations of Good Decision-Making Process:
Almost all decision problems have environments
with similar components as follows:
1. The decision-maker. The term decision-maker refers
to an individual, not a group.
2. The analyst who models the problem in order to
help the decision maker,
3. Controllable factors (including your personal
abilities and physical resources),
4. Uncontrollable factors,
5. The possible outcomes of the decision,
6. The environment/structural constraints
7. Dynamic interactions among these components.
Deterministic versus Probabilistic Models:
 All the decision models can be classified as either
deterministic or probabilistic models.
 In deterministic models your good decisions bring
about good outcomes. You get that which you
expect, therefore the outcome is deterministic
(i.e., risk-free).
 However, in probabilistic decision models, the
outcome is uncertain, therefore making good
decisions may not produce good outcomes. Unlike
deterministic models where good decisions are
judged by the outcome alone, in probabilistic
models, the decision maker is concerned with both
the outcome value and the amount of risk each
decision carries.
The OR/MS/DS/SS analyst performs the following sequence with some
possible feedback loops between its steps:
1. Understanding the Problem: It is critical for a good decision
maker to clearly understand the problem, the objective, and the
constraints involved.
2. Constructing an Analytical Model: This step involves the
"translation" of the problem into precise mathematical language in
order to make calculations and comparison of the outcomes under
different possible scenarios.
3. Finding a Good Solution: It is important here to choose the
proper solving technique, depending on the specific characteristics
of the model. After the model is solved, validation of the obtained
results must be done in order to avoid an unrealistic solution.
4. Communicating the Results with the Decision-Maker: The results
obtained by the OR/MS/DS/SS analyst have to be properly
communicated to the decision-maker. This is the "sale" part. If the
decision-maker does not buy the OR/MS/DS/SS analyst
recommendations, he/she will not implement any of them.
What Is OR/MS/DS/SS?
 Management Science (MS) often takes an analytical
view of a decision before making a decision. That is,
reflection before action, as a Chinese proverb says,
"To chop a tree quickly, spend twice the time
sharpening the ax." Carpenters say, "Measure twice,
cut once.“
 Analytical methods are applied to planning and
management problems in areas such as production
and operations, inventory management, and
scheduling.
 Powerful computer programs, are available to solve
problems ranging from specific business, industrial,
agricultural, and administrative operations to long-
term planning models for corporations and public
sector agencies.
What Is OR/MS/DS/SS?
 The typical OR/MS/DS/SS approach is to build a
model for the problem being studied. Such a
model is often (but not always) mathematical.
 OR/MS/DS/SS models are aimed at assisting the
decision-maker in his/her decision-making
process.
 You may ask, "Why must we learn the decision-
making process?" Here are a few motivating
reasons:
 Organizations are becoming more complex.
 Environments are changing so rapidly that past practices
are no longer adequate.
 The costs of making bad decisions have increased.
Evolution of OR
 OR originated in Great Britain during World War II to bring
mathematical or quantitative approaches to bear on military
operations.
 Since then OR/MS/DS/SS has evolved to be applicable to the
management of all aspects of a system, product, or service,
and hence is often referred to as Systems Science or
Management Science.
 It has now become recognized as an important input to
decision-making in a wide variety of applications in business,
industry, and government.
 The term OR arose in the 1940's when research was carried
out on the design and analysis of mathematical models for
military operations.
 The growing complexity of management has necessitated the
development of sophisticated mathematical techniques for
planning and decision-making,
DEFINITION
Operations Research is defined by many authors in different ways .However, the
following definition is proposed here.
“Operations Research is a systematic analysis of a problem through scientific
methods ,carried out by appropriate specialists, working together as a team
,constituted at the instance of management for the purpose of finding an
optimum and the most appropriate solution ,to meet the given objective under a
given set constraints.”
Meaning of Operations Research: From the concept and definition given above,
Operations Research is:
1. The application of scientific methods, techniques and tools to the
problem to find an answer
2. A management tool in the hands of a manager to take a decision
3. A scientific approach to decision making process
4. An “applied research” aims at finding a solution for an immediate
problem facing a society, industry or a business enterprise.
5. A decision-oriented research, using scientific methods, for providing
management a quantitative basis for taking decision regarding
operations under its control
6. Applied decision theory. It uses scientific, mathematical and logical
means to take decisions.
DECISION MAKING
 Making appropriate decision is the most VITAL aspect
in management .Every one of us takes a number of
decisions every day. Some are important; some are
trivial.
 Problem is any variation between what was planned
and what is actually have/produced.
 Decision making requires for all human being because
each of us make decision every day in our life .Thus,
decision making is universal. Decision making is a
rational selection among alternatives.
Definition
Decision making is the process of selecting or choosing based
on some criteria, the best alternative among alternatives.
DECISION MAKING
The decision making process: Steps in the process of
rational decision making
1. Identify and define the problem: Problem is a necessary
condition for a decision. i.e: There would be no need for
decisions if problems did not exist.
2. Determine the set of alternative solutions.
3. Determine the criteria to evaluate alternatives.
4. Analyze the alternatives.
5. Select the best alternative
6. Implement the solution
7. Establishing a control and evaluation system
 On going actions need to be monitored
 Following the decision
 Evaluate the results and determine if a satisfactory solution
has been obtained.
DECISION MAKING
The Decision-Making Environment
 Decisions are made under three basic conditions:
a) Decision under certainty
b) Decision under risk
c) Decision under uncertainty
a) Decision making under conditions of certainty: The decision maker has
perfect knowledge about the outcome. Example: If you decide to invest your
money in saving account in the Commercial Bank of Ethiopia, You are certain
that you will earn three percent interest.
b) Decision making under condition of risk : Usually, decision makers cannot
have a precise knowledge about the outcome of a decision. Decision makers
may only be able to attach a probability to the expected outcomes of each
alternative. Example: If we gamble by tossing a fair coin, the probability
that a tail will turn up is 50%.
c) Decision making under conditions of uncertainty: It is a case where neither
there is complete data nor probabilities can be assigned to the surrounding
condition. It is the most difficult for a manager. Example: A corporation
that decides to expand its operation, launching a new product, or developing
of a new technology in a strong country may know little about its culture,
laws, economic environment, or politics. The political situation may be so
volatile that even experts cannot predict a possible change in government.
QUNATITIATIVE ANALYSIS PROCESS
The three basic quantitative analysis processes are:
1. Model development
2. Data presentation
3. Model solution
1. Model development: Model is a representation of real
objects/situations, Following are types of models:
a) Physical (icon) model: This is the representation of the
situation, problem or object. It is also called Static
Model. It is given in two or three dimensions. It is a
representation of the real object. Example:
 The structure of an atom
 Model of an airplane
 Photograph of a machine
 Layout drawing of a factory
 Glob .
b) Analogue Models: These are abstract models mostly showing
inter and intra relationships between two or more
parameters. For example, It may show the relationship
between an independent variable (input) with that of a
dependent variable (output). For instance; histogram,
frequency table, cause-effect diagram, flow charts, Gantt
charts, price-demand graph and others.
c) Mathematical models: This is also an abstract model. Here a
set of relations is represented in the form of mathematical
equations, using symbols to represent various parameters.
Example:
1. (x + y)2=x2+2xy+y2
2. MaxZ=3000x1 +2500x2
Subject to:
2x1+x2 < 40
x1+3x2 < 45
x1 < 12
x1 , x2 > 0
x1 and x2 are decision variables
Objective Function: A mathematical statement of
the goal of an organization, stated as intent to
maximize or to minimize some important
quantity such as profits or costs.
Max.Z=3000x1 +2500x2 is the objective function
Constraint: A restriction on the resources
available to a firm (stated in the form of an
inequality or an equation.)
2x1+x2 < 40
x1+3x2 < 45 Are constraints
x1 < 12
x1, x2 > 0
2. Data presentation: Data represent the values
of inputs to the model.
Max.Z=3000x1 +2500x2
Subject to:
2 x1+x2 < 40
x1+3x2 < 45
x1 < 12
x1 , x2 > 0
3. Model solution : optimal solution
From the above equation, x1=12, x2=11 and
Max.Z= $6350
MANAGEMENT SCIENCE IN PRACTICE
 There are various techniques used in O.R. Some of
these are listed here:
 Probability theory
 Linear Programming
 Transportation algorithm
 Assignment problems
 Queuing Theory
 PERT/CPM Method etc