Operations Research

MANAGEMENT SCIENCE
Management science is a synonymous with operational research. Operations research
provides a quantitative technique or a scientific approach to the executives for making good
decisions for operation under control. It provides a scientific approach to problem solving for
executive management.

Definitions

Operations research is the application of methods of science to complex problems arising

in the direction and management of large systems of man, machine, material and money in
industry, business, government and defense. The distinctive approach is to develop a scientific
model of the system, incorporating measurements of factors such as chance and risk, with which
to predict and compare the outcomes of the alterative decisions, strategies and control. The purpose
is to help management, determine its policy and actions scientifically.

Operations Research is defined as Scientific method for providing executive departments

a quantitative basis for decisions regarding the operations under their control. - P.M. Morse and
G.E. Kimball. This definition suggests that the Operations Research provides scientific methods
for an executive to make optimal decisions but does not give any information about various models
or methods. But this suggests that executives can use scientific methods for decision-making.

Operations research is anew discipline. This method utilizes the inter disciplinary team
work to solve a complex management problem. An operations research approach seeks to obtain
an optimal solution to the problem under analysis. It is a continuous process.

Objectives of operations research

The objective of Operations Research is to provide a scientific basis to the decision maker
for solving the problems involving the interaction of various components of an organization by
employing a team of scientists from various disciplines, all working together for finding a solution
which is in the best interest of the organization as a whole. The best solution thus obtained is
known as optimal decision”.

Characteristics of Operations research technique

1. Operations research technique is multidisciplinary.

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2. It is used to solve complex management problems.

3. It is a continue process.

4. It is a set of mathematical techniques.

5. It is a scientific approach in decision making.

6. It is a team activity.

Scope of Operations Research

The main objective of operations research is to solve complex management problems. It is

mainly used in decision problem. A multi disciplinary team used various operations research
techniques to solve complex decision problems. The members of the team work together to find a
feasible solution which is beneficial for the entire organization. The scope of the operations
research involves the following areas.

1. In defense operations

A number of components are involved in military operations. Each component works to

achieve maximum gain from its operation. The experts in this field coordinate the entire activities
and they utilize their skill to achieve optimum solution.

2. In industry

In an industrial organization there are number of departments. Each department tries to

optimize capital investment. HRM department tries to appoint efficient people at minimum cost.
There is a conflict between these departments. The application of operations research techniques
helps to integrate the activities of various departments to attain the overall objective of the
organization. Decision trees, inventory model, linear programming, transportation model,
sequencing model, assignment model and replacement model are helpful to the mangers to solve
various problems.

3. In agriculture

Operations research techniques are used to select land area for agriculture and the seed of
food grains.

4. In traffic control

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Queuing theory is used for traffic control.

5. In hospitals

In hospitals we can see lengthy queues. This problem can be solved by the application of operations
research techniques.

Operations Research Models

1. Iconic Models:

These models are scaled version of the actual object. They explain all the features of the actual
object.

2. Analogue Model:

In this model one set of properties are used to represent another set of properties. Many a time we
represent various aspects on graph by different colours or different lines all these are analog
models.

3. Symbolic Models or Mathematical Models:

In these models the variables of a problem is represented by mathematical symbols, letters etc. To
show the relationships between variables and constraints we use mathematical symbols.

4. Descriptive model:

The descriptive model simply explains certain aspects of the problem or situation or a system so
that the user can make use for his analysis the approximate results of the situation under question.

5. Prescriptive models:

Prescriptive models prescribe the courses of action to be taken by the manager to achieve the
desired goal.

6. Deterministic Models:

In this model the operations research analyst assumes complete certainty about the values of the
variables and the available resources and expects that they do not change during the planning
horizon.

7. Probabilistic or Stochastic Models:

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In these models, the values of variables, the pay offs of a certain course of action cannot be
predicted accurately because of element of probability. It takes into consideration element of risk
into consideration.

Techniques of Operations Research

1. Linear Programming:

This model is used for resource allocation when the resources are limited and there are number of
competing candidates for the use of resources. The model may be used to maximize the returns or
minimize the costs.

2. Sequencing

When a manufacturing firm has some job orders, which can be processed on two or three machines
and the processing times of each job on each machine is known, then the problem of processing in
a sequence to minimize the cost or time is known as Sequencing model.

3. Waiting Line Model or Queuing Model

A model used for solving a problem where certain service facilities have to provide service to its
customers, so as to avoid lengthy waiting line or queue, so that customers will get satisfaction from
effective service and idle time of service facilities are minimized is waiting line model or queuing
model.

4. Decision theory

OR technique of Decision theory is applied in the stage of evaluation of alternatives.

5. Game theory

Game theory helps to determine the best course of action for a firm in view of the expected counter
moves from the competitors.

6. Transportation problem

The aim of this technique is find out the minimum transportation cost.

7. The assignment problem

This technique is used to assign jobs to efficient and suitable persons at minimum cost.

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8. Net work analysis

Program evaluation and review technique and critical path method are powerful tools for planning
and control of complex jobs involving a large number of complex activities.

Operations research and modern management

The objective of operations research is to provide a scientific base to the decision maker
for solving the problems involving the interaction of various components of an organization by
employing a team of scientists from various disciplines, all working together for finding a solution
which is in the best interest of the organization as a whole.

Operations Research provides manager mathematical tools, techniques and various models
to analyze the problems in hand and to evaluate the outcomes of various alternatives and make an
optimal choice. This helps the manger in making better and quick decisions. A manger, without
the knowledge of these techniques has to make decisions by thumb rules or by guess work.

Business and organizations frequently face challenging operational problems whose

successful solution requires certain expertise in applied statistics, optimization, stochastic
modeling or a combination of these areas.

The following are the some of the areas where the operation research techniques are
applied. Some of the areas are Finance, budgeting, investment, purchase, production, marketing,
personnel, research and development.
Limitations of OR
OR—though it is a great aid to management as explained earlier—cannot be a substitute for
decision-making. The choice of a criterion as to what is actually best for a business enterprise is
still that of an executive who has to fall back upon his experience and judgement. This is so because
of the several limitations of OR. Some important limitations are as follows:
(1) The inherent limitations concerning mathematical expressions. OR involves the use of
mathematical models, equations and similar other mathematical expressions. Assumptions are
always incorporated in the derivation of an equation or model and such an equation or model may
be correctly used for the solution of the business problems when the underlying assumptions and
variables in the model are present in the concerning problem. If this caution is not given due care,
then there always remains the possibility of wrong application of OR techniques. Quite often,

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operations researchers have been accused of having many solutions without being able to find
problems that fit.
(2) High costs are incurred in the use of OR techniques. OR techniques usually prove to be
expensive. Services of specialized persons are invariably called for (and along with it the use of
computers) while using OR techniques. As such only big concerns can think of using such
techniques. Even in big business organizations, we can expect that OR techniques will continue to
be of limited use simply because they are not in many cases worth their cost. As opposed to this,
a typical manager exercising intuition and judgement may be able to make a decision very
inexpensively. Thus, the use of OR is a costlier affair and this constitutes an important limitation
of OR.
(3) OR does not take into consideration the intangible factors, i.e., nonmeasurable human factors.
OR makes no allowance for intangible factors such as skill, attitude, vigour of the management
people in taking decisions but in many instances success or failure hinges upon the
consideration of such non-measurable intangible factors. There cannot be any magic formula for
getting an answer to management problems; much depends upon proper managerial attitudes and
policies.
(4) OR is only a tool of analysis and not the complete decision-making process. It should always
be kept in mind that OR alone cannot make the final decision. It is just a tool and simply suggests
best alternatives, but in the final analysis many business decisions will involve human
element. Thus, OR is at best a supplement rather than a substitute for management; subjective
judgement is likely to remain a principal approach to decision-making.
(5) Other limitations. Among other limitations of OR, the following deserve mention:
(i) Bias. The operational researchers must be unbiased. An attempt to show results into a
confirmation of management’s prior preferences can greatly increase the likelihood of failure.
(ii) Inadequate objective functions. The use of a single objective function is often an insufficient
basis for decisions. Laws, regulations, public relations, market strategies, etc., may all serve to
overrule a choice arrived at in this way.
(iii) Internal resistance. The implementation of an optimal decision may also confront internal
obstacles such as trade unions or individual managers with strong preferences for other ways of
doing the job.

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(iv) Competence. Competent OR analysis calls for the careful specification of alternatives, a full
comprehension of the underlying mathematical relationships and a huge mass of data. Formulation
of an industrial problem to an OR set programme is quite often a difficult task.
(v) Reliability of the prepared solution. At times, a non-linear relationship is changed into linear
for fitting the problem to the linear programming pattern. This may disturb the solution.

Operational Research as Management science

Management science is a synonymous with operational research. Operations research provides a

quantitative technique or a scientific approach to the executives for making good decisions for
operation under control. It provides a scientific approach to problem solving for executive
management.

Management science is an interdisciplinary branch of applied mathematics, engineering and

sciences that uses various scientific research-based principles, strategies, and analytical methods
including mathematical modeling, statistics and algorithms to improve an organization's ability to
enact rational and meaningful management decisions. The discipline is typically concerned with
maximizing profit, assembly line performance, crop yield, bandwidth, etc or minimizing expenses,
loss, risk, etc.

Operations research is the application of methods of science to complex problems arising in the
direction and management of large systems of man, machine, material and money in industry,
business, government and defence. The distinctive approach is to develop a scientific model of the
system, incorporating measurements of factors such as chance and risk, with which to predict and
compare the outcomes of the alterative decisions, strategies and control. The purpose is to help
management, determine its policy and actions scientifically.

Operations Research is defined as Scientific method for providing executive departments a

quantitative basis for decisions regarding the operations under their control. - P.M. Morse and G.E.
Kimball.

Operations research is a new discipline. This method utilizes the inter disciplinary team work to
solve a complex management problem. An operations research approach seeks to obtain an optimal
solution to the problem under analysis. It is a continuous process.

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The following characteristics of Operations research technique is also revealed it as management

science:

1. Operations research technique is multidisciplinary.

2. It is used to solve complex management problems.

3. It is a continue process.

4. It is a set of mathematical techniques.

5. It is a scientific approach in decision making.

6. It is a team activity.

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LINEAR PROGRAMMING PROBLEM

Linear programming is widely used mathematical modeling technique, which is developed
to help decision makers in planning and decision making as far as resource allocation is concerned.
It is a technique for choosing the best alternatives from a set of feasible alternatives, in situation
in which the objective function as well as constraints can be expressed as linear mathematical
functions. Linear programming involves optimization of certain functions called objective
function subject to certain constraints. Linear programming technique may be used for solving
broad range of problems arising in business, government, industry, hospitals, libraries, etc.

Any linear programming model (problem) must have the following properties:

(a) The relationship between variables and constraints must be linear.

(b) The model must have an objective function.

(c) The model must have structural constraints.

(d) The model must have non-negativity constraint.

Objectives of Linear programming

Linear programming is a quantitative tool for optimal allocation of limited resources

among competing activities. The objective of linear programming is maximization of profit or
minimization of cost.

1. Linear programming problem is based on certain assumptions. It is assumed that the decision
maker here is completely certain (i.e., deterministic conditions) regarding all aspects of the
situation, i.e., availability of resources, profit contribution of the products, technology, courses of
action and their consequences etc.

2. It is assumed that the relationship between variables in the problem and the resources available

i.e., constraints of the problem exhibit linearity. Here the term linearity implies proportionality and
additively. This assumption is very useful as it simplifies modeling of the problem.

3. We assume here fixed technology. Fixed technology refers to the fact that the production
requirements are fixed during the planning period and will not change in the period.

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4. It is assumed that the profit contribution of a product remains constant, irrespective of level of
production and sales.

5. It is assumed that the decision variables are continuous. It means that the companies manufacture
products in fractional units. For example, company manufactures 2.5 vehicles, 3.2 barrels of oil
etc. This is referred to as the assumption of divisibility.

6. It is assumed that only one decision is required for the planning period. This condition shows
that the linear programming model is a static model, which implies that the linear programming
problem is a single stage decision problem.

7. All variables are restricted to non negative values (i.e., their numerical value will be ≥0).

Application of Linear Programming

1. Agriculture application

Linear programming can be applied in agriculture planning. Example; allocation of limited

resources such as acreage, labour, water supply, working capital etc. in a way so as to maximize
net revenue.

2. Military application

It includes the problem of selecting weapons system against the enemy.

3. Production management :

i. Product mix: A company can produce different products each of which requires the use of limited
production resources. The management wants to determine the quantity of each product to be
produced, knowing the managerial contribution and the amount of resources to be used. In this
case the objective function may be maximization of the total profit or minimization of loss subject
to certain constraints.

ii. Production planning: This deals with the determination of the minimum cost of production over
the planning period.

4. Portfolio selection

This involves the selection of specific investment activity among several activities. The objective
function is to find the allocation which maximizes the expected return.

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5. Profit planning

It involves the maximization of profit margin from investment in plant facilities and equipment,
cash in hand etc.

6. Physical distribution

It determines the most economical and efficient manner of allocating manufacturing plants and
distribution centres for physical distribution.

7. Job evaluation

Selection of suitable person for a specified job and evaluation of a job in organization has been
done with the help of Linear programming technique.

Formulation of Mathematical Model to Linear Programming Program

Formulation of Linear Programming model involves the following steps.

1. Identification of the problem and setting up of objectives.

2. Establish the interrelationship between the variables of the situation.

3. Identification of alternative variables

4. Specification of constraints.

5. Summarizing the problem in a mathematical form.

Graphical method

Graphical method is used to solve linear programming problem. It involves two variables. Each
line is represented by each constraint. The steps involved in the graphical method are as follows.

Step 1 Consider each inequality constraint as an equation.

Step 2 Plot each equation on the graph as each will geometrically represent a straight line.

Step 3 Mark the region. If the inequality constraint corresponding to that line is O then the region
below the line lying in the first quadrant (due to non-negativity of variables) is shaded. For the
inequality constraint P sign, the region above the line in the first quadrant is shaded. The points
lying in common region will satisfy all the constraints simultaneously. The common region, thus
obtained, is called the feasible region.

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Step 4 Assign an arbitrary value, say zero, for the objective function.

Step 5 Draw a straight line to represent the objective function with the arbitrary value (i.e., a
straight line through the origin).

Step 6 Stretch the objective function line till the extreme points of the feasible region. In the
maximization case, this line will stop farthest from the origin, passing through at least one corner
of the feasible region. In the minimization case, this line will stop nearest to the origin and passes
through at least one corner of the feasible region.

Step 7 Find the coordinates of the extreme points selected in step 6 and find the maximum or
minimum value of Z.

Simplex method

Simplex method is an iterative procedure for solving LPP in a finite number of steps. This
method provides an algorithm which consists of moving from one vertex of the region of feasible
solution to another in such a manner that the value of the objective function at the succeeding
vertex is less or more as the case may be than at the previous vertex. This procedure is repeated
and since the number of vertices is finite, the method leads to an optimal vertex in a finite number
of steps or indicates the existence of unbounded solution.
Summary of LPP Procedure
Step 1: Formulate the LP problem.

Step 2: Introduce slack /auxiliary variables.

if constraint type is £ introduce + S

if constraint type is ³ introduce – S + a and

if constraint type is = introduce a

Step 3: Find the initial basic solution.

Step 4: Establish a simplex table and enter all variable coefficients. If the objective function is
maximization, enter the opposite sign co-efficient and if minimization, enter without changing the
sign.

Step 5: Take the most negative coefficient in the objective function, Zj to identify the key column
(the corresponding variable is the entering variable of the next iteration table).

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Step 6: Find the ratio between the solution value and the coefficient of the key column. Enter the
values in the minimum ratio column.

Step 7: Take the minimum positive value available in the minimum ratio column to identify the
key row. (The corresponding variable is the leaving variable of the table).

Step 8: The intersection element of the key column and key row is the pivotal element.

Step 9: Construct the next iteration table by eliminating the leaving variable and introducing the
entering variable.

Step 10: Convert the pivotal element as 1 in the next iteration table and compute the other elements
in that row accordingly. This is the pivotal equation row (not key row).

Step 11: Other elements in the key column must be made zero. For simplicity, form the equations
as follows: Change the sign of the key column element, multiply with pivotal equation element
and add the corresponding variable.
Key Terms
Basic Variable: Variable of a basic feasible solution has n non-negative value.
Non Basic Variable: Variable of a feasible solution has a value equal to zero.
Artificial Variable: A non-negative variable introduced to provide basic feasible solution and
initiate the simplex procedures.
Slack Variable: A variable corresponding to a ≤ type constraint is a non-negative variable
introduced to convert the inequalities into equations.
Surplus Variable: A variable corresponding to a ≥ type constraint is a non-negative variable
introduced to convert the constraint into equations.
Basic Solution: System of m-equation and n-variables i.e. m<n is a solution where at least n-m
variables are zero.
Basic Feasible Solution: System of m-equation and n-variables i.e. m<n is a solution where m
variables are non-negative and n-m variables are zero.
Optimum Solution: A solution where the objective function is minimized or maximized.
Dual Problem: A dual problem is a linear programming problem is another linear programming
problem formulated from the parameters of the primal problem.

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NETWORK ANALYSIS
Network analysis is the general name given to certain specific techniques which can be
used for the planning, management and control of projects. Network analysis is a vital technique
in project management. It enables us to take a systematic quantitative structured approach to the
problem of managing a project through to successful completion. Moreover, as will become clear
below, it has a graphical representation which means it can be understood and used by those with
a less technical background. A complex project's data is broken down into its component parts
(activities, events, durations, etc.) and plotting them to show their interdependencies and
interrelationships.

A network analysis is a generic term for a family of related techniques developed to aid
management in the planning and control of projects. These techniques show the inter-relationship
of the various jobs or tasks which make up the overall project and clearly identify the critical parts
of the project. They can provide planning and control information on the time, cost and resource
aspects of a project.

The main objective of network analysis is to establish the overall completion time of
projects by calculating what is known as the Critical Path.

Classification of activities:

Activity

This is the task or job of work which takes time and resources. An activity is represented in a
network by an arrow, the head indicating where the task ends and the tail where it begins. It
normally points left-to-right and is seldom to scale.

Predecessor activity: Activities that must be completed immediately prior to the start of another
activity are called predecessor activities.

Successor activity: The activities that cannot be started until one or more of other activities are
completed but immediately succeed them are called successor activities.

Concurrent activities: The activities that can be accomplished together are known as concurrent
activities.

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Dummy activity: An activity which does not consume any resource but merely depicts the
dependence of one activity on other is called dummy activity. This is an activity which does not
consume time or resources, but is merely used to show clear logical dependencies between
activities so as not to violate the rules for drawing networks; it is shown by a dotted arrow.

Event:

The beginning and end of activities are called as events. Events are represented by numbered
circles called nodes. i j Event start, Event finish

Path & Network:

An unbroken chain of activity arrows connecting the initial event to some other event is called a
path. A network is the graphical representation of logically and sequentially connected arrows and
nodes representing activities and events of a project. It is a diagram depicting precedence
relationships between different activities.

Application of network analysis:

It can be applied in Construction industry, Manufacturing, Research development, administration,

Marketing, planning, Inventory planning

Advantages:

1. Planning & controlling projects

2. Flexibility

3. Designation of responsibilities

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4. Achievement of objective with least cost

5. Better managerial control

Guidelines for Network Construction:

• A complete network should have only one point of entry - a START event and only one point of
exit - a FINISH event.

• Every activity must have one preceding or 'tail' event and one succeeding or ‘head' event (an
activity must not share the same tail event and the same head event with any other activities.)

• No activity can start until its tail event is reached.

• An event is not complete until all activities leading in to it are complete.

• 'Loops' i.e. a series of activities which lead back to the same event are not allowed

• All activities must contribute to the network’s progression or be discarded as irrelevant (those
which do not are termed 'danglers'.)

• Networks proceed from left to right.

A complete network diagram should have one stand point and one finish point. The flow
of the diagram should be from left to right. Arrows should not be crossed unless it is completely
unavoidable. Arrows should be kept straight and curved or bent. Angle between arrows should as
large as possible. Each activity must have a tail or head event. No two or more activities may have
same tail and head events. Once the diagram is complete the nodes should be numbered from left
to right. It should then be possible to address each activity uniquely by its tail and head event.

Network techniques

The main network techniques are

1. Critical path Method

2. Program Evaluation Review Technique

Critical path method (CPM)

The Critical Path Method (CPM) is one of several related techniques for doing project
planning. CPM is for projects that are made up of a number of individual "activities." If some of

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the activities require other activities to finish before they can start, then the project becomes a
complex web of activities. CPM provides the following benefits:

 Provides a graphical view of the project.

 Predicts the time required to complete the project.
 Shows which activities are critical to maintaining the schedule and which are not.

Steps in CPM Project Planning

1. Specify the individual activities.

2. Determine the sequence of those activities.

3. Draw a network diagram.

4. Estimate the completion time for each activity.

5. Identify the critical path (longest path through the network)

6. Update the CPM diagram as the project progresses.

Critical path

Those activities which contribute directly to the overall duration of the project constitute
critical activities; the critical activities form a chain running through the network which is called
critical path. The critical path is the longest path in the network from the starting event to ending
event & defines the minimum time required to complete the project. The critical path is denoted
by darker or double lines.

Critical event: - The slack of an event is the difference between the latest and earliest events time.
The events with zero slack time are called as critical events.

Critical activities: - The difference between latest start time and earliest start time of an activity
will indicate amount of time by which the activity can be delayed without affecting the total project
duration. The difference is usually called total float. Activities with 0 total float are called as critical
activities.

To determine the duration of individual activities, the four activity times are to be
computed.

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 Earliest start time: - The earliest time at which the activity can start given that its
precedent activities must be completed first.
 Earliest finish time: - It is equal to the earliest start time for the activity plus the time
required completing the activity.
 Latest finish time: - The latest time at which the activity can be completed without
delaying the project.
 Latest start time: - It is equal to the latest finish time minus the time required to complete
the activity.

Types of float

Float is the amount of time by which completion of an activity could be delayed beyond
the earliest expected completion time without affecting the overall project duration time.

 Free float: - This is concerned commencement of subsequent activity. It may be defined as

“time by which the completion of an activity can be delayed beyond the earliest finish time
without affecting the earliest start of a subsequent activity.
 Independent Float: - it may be defined as the amount of time by which the start of an
activity can be delayed without affecting the earliest start time of any successor activity,
assuming that preceding activity has finished at its latest finish time.

Slack time: The slack time for an activity is the time between its earliest and latest start time, or
between its earliest and latest finish time. Slack is the amount of time that an activity can be
delayed past its earliest start or earliest finish without delaying the project.

Computation of EFT and LFT

1. Forward pass

The forward pass method yields the earliest start time and earliest finish times for each activity
and indirectly earliest expected occurrence of each event. The computation begins from the start
node and move to the end node. To accomplish this, the forward pass computations start with an
assumed earliest occurrence time of zero for the initial project event E1 = 0 Earliest start time for

activity ( I,j) is the earliest event time of the tail end event ESij = Ei. Earliest finish time of the
activity is the earliest start time of the activity plus the duration of the activity. EFij = ES ij+ tij

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Earliest occurrence time of the event j is the maximum of the earliest finish times of all the
activities into that event.

Eg.E1 =0, E2 = E1 + activity duration

2. Backward Pass Method:

The latest occurrence time specifies the time by which all the activities entering into that event,
must be completed without delaying the total project. These are computed by reversing the method
of calculation used for earliest event times. Latest finish time of an activity is equal to the latest
vent time j. LFij= L j. Latest start time of an activity is given by latest completion time

minus the activity time. LSij = LFij - tij Latest event time for event is the minimum of the latest
start time of all activities originating from that event.

Eg.L10 =20, L9 = 20 – activity duration

Programme Evaluation and Review Technique

PERT is designed for scheduling complex projects that involve many interrelated tasks. It
improves planning process because: It forms planner to define the projects various components
activities. It provides a basis for normal time estimates and yet allows for some measure of
optimism or pessimism in estimating the completion dates. It shows the effects of changes to
overall plans they contemplated. It provides built in means for ongoing evaluation of the plan.

The Program (or Project) Evaluation and Review Technique, commonly abbreviated
PERT, is a statistical tool, used in project management, that is designed to analyze and represent
the tasks involved in completing a given project.

It shows

◦ Sequence of tasks

◦ Which tasks can be performed simultaneously

◦ Permits determination of the critical path for the individual tasks to be completed on time in order
for the project to meet its completion deadline.

Time estimates in PERT

There are three time estimates

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1. Optimistic time estimate

2. Most likely time estimate

3. Pessimistic time estimate

1. Optimistic time estimate (a or to)

This is the fastest time an activity can be completed. For this, the assumption is made that all the
necessary resources are available and all predecessor activities are completed as planned. it is that
time estimate of an activity when everything is assumed to go as per plan. In other words it is the
estimate of minimum possible time which an activity takes in completion under ideal conditions.

2. Most likely time (m or tm)

The time which the activity will take most frequently if repeated number of times.

3. Pessimistic time (b or tp):

The unlikely but possible performance time if whatever could go wrong, goes wrong in series. In
other words it is the longest time the can take. From the above time estimates we can calculate the
expected time of each activity by using the following formula.
te = to + 4tm +tp
6

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GAME THEORY
A game is a generic term, involving conflict situations of particular sort. Game Theory is a set of
tools and techniques for decisions under uncertainty involving two or more intelligent opponents
in which each opponent aspires to optimize his own decision at the expense of the other opponents.
In game theory, an opponent is referred to as player. Each player has a number of choices, finite
or infinite, called strategies. The outcomes or payoffs of a game are summarized as functions of
the different strategies for each player.
Game theory is a type of decision theory in which one’s choice of action is determined after taking
into account all possible alternatives available to an opponent playing the same game,
rather than just by the possibilities of several outcomes. The game theory has only been capable
of analysing very simple competitive situations. Thus, there has been a great gap between what
the theory can handle and most actual competitive situations in industry and elsewhere. So the
primary contribution of game theory has been its concepts rather than its formal application to
solving real problems.
Game is defined as an activity between two or more persons involving activities by each person
according to a set of rule at the end of which each person receives some benefit or satisfaction or
suffers loss (negative benefit). The set of rules defines the game. Going through the set of rules
once by the participants defines a play.

Major Assumptions

1. Players – the number of participants may be two or more. A player can be a single individual or
a group with the same objective.

2. Timing – the conflicting parties decide simultaneously

.3. Conflicting Goals – each party is interested in maximizing his or her goal at the expense of the
other.

4. Repetition – most instances involve repetitive solution.

5. Payoff – the payoffs for each combination of decisions are known by all parties.

6. Information Availability – all parties are aware of all pertinent information. Each player knows
all possible courses of action open to the opponent as well as anticipated payoffs.

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Basic Definitions
1. Competitive Game. A competitive situation is called a competitive game if it has the following
four properties:
i. There are finite number (n) of competitors (called players) such that n ~ 2. In case n = 2, it is
called a two person game and in case n > 2, it is referred t9 as an n person game.
ii. Each player has a list of finite number of possible activities (the list may not be same for each
player).
iii. A play is said to occur when each player chooses one of his activities. The choices are assumed
to be made simultaneously, i.e. no player knows the choice of the other until he has decided on his
own.
iv. Every combination of activities determines an outcome (which may be points, money or
anything else whatsoever) which results in again of payments (+ ve, - ve or zero) to each player,
provided each player is playing uncompromisingly to get as much as possible. Negative gain
implies the loss of same amount.
2. Zero-sum and Non-zero-sum Games. Competitive games bare classified according to the
number of players involved, i.e. as a two person game.. three person game, etc. Another important
distinction is between zero-sum games and nonzero-sum games. If the players make payments only
to each other, i.e. the loss of one is the gain of others, and nothing comes from outside, the
competitive game is said to be zero-sum.
3. Strategy. A strategy of a player has been loosely defined as a rule for decision-making in
advance of all the plays by which he decides the activities he should adopt. In other words, a
strategy for a given player is a set of rules (programmes) that specifies which of the available
course of action he should make at each play. This strategy may be of two kinds:
i. Pure Strategy. : If a player knows exactly what the other player is going to do, a deterministic
situation is obtained and objective function is to maximize the gain. Therefore, the pure strategy
is a decision rule always to select a particular course of action. A pure strategy is usually
represented by a number with which the course of action is associated.
ii. Mixed Strategy. If a player is guessing as to which activity is to be selected by the other on any
particular occasion, a probabilistic situation is obtained and objective function is to maximize the
expected gain. Thus, the mixed strategy is a selection among pure strategies with fixed
probabilities.

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4. Two-Person, Zero-Sum (Rectangular) Games. A game with only two players (say, Player A and
Player B) is called a ‘two person, zero-sum game’ if the losses of one player are equivalent to the
gains of the other, so that the sum of their net gains is zero. Two-person, zero-sum games are also
called rectangular games as these are usually represented by a payoff matrix in rectangular form.
5. Payoff Matrix. Suppose the player A has m activities and the player B has n activities. Then a
payoff matrix can be formed by adopting the following rules:
i. Row designations for each matrix are activities available to player A.
ii. Column designations for each matrix are activities available to player B.
iii. Cell entry ‘vij , is the payment to player A in A’s payoff matrix when A chooses the activity i
and B chooses the activity.
iv. With a ‘zero-sum, two person game’, the cell entry in the player B’ s payoff matrix will be
negative of the corresponding cell entry ‘Vi, in the player A’s payoff matrix so that sum of payoff
matrices for player A and player B is ultimately zero.
Saddle point A saddle point of a game (if it exists) is that point in the pay-off matrix (of player A)
where maximin gain of A is equal to the minimax loss of player B. In such a case, the saddle point
is the value of the game. To find a saddle point
(i) Find the minimum values in the rows;
(ii) Mark the maximum of these minimums. This is the maximin value (or gain) for player A;
(iii) Find the maximum values in columns;
(iv) Mark the minimum of these maximums. This is the minimax value (or loss) for player B;
(v) If the maximin gain of A = the minimax loss of B, the point in the pay-off matrix is the
saddle point.

Classifications of Games

1. Zero-Sum Games – the winner(s) receive(s) the entire amount of the payoff which is contributed
by the loser (strictly competitive).

2. Non-Zero Sum Games – the gains of one player differ from the losses of the other. Some other
parties in the environment may share in the gain or losses (not strictly competitive).

3. Two-Person, Zero-Sum Game– Pure Strategy Characteristics:

1. There must be two players, each with a finite set of strategies.

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2. Zero-sum implies that the losses of one player is the exact gain of the other.

3. Pure strategy refers to a prescribed solution in which one alternative is repeatedly

recommended to each player.
4. Bargaining is not allowed. There could be no agreement that could be mutually
advantageous.

Probability approach to solve a 2X2 game

In this method, the expected value of the game for a player is maximized and the probability (mixed
strategy) corresponding to which this maximum value exists, is obtained. Consider the zero sum
two person game given below:

Player B

I II

Player A I a b

II c d
 The solution of the game is:
A play’s (p, 1 - p) where:
d-c
p = --------------------
(a + d) - (b + c)
B play’s (q, 1 - q) where:
d-b
q = -------------------
(a + d) - (b + c)

ad-bc
Value of the game, V = --------------------
(a + d) - (b + c)
DOMINANCE PROPERTY
The principle of dominance states that if one strategy of a player dominates over the other strategy
in all conditions then the later strategy can be ignored. A strategy dominates over the other only if

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it is preferable over other in all conditions. The concept of dominance is especially useful for the
evaluation of two-person zero-sum games where a saddle point does not exist. In case of pay-off
matrices larger than 2 × 2 size, the dominance property can be used to reduce the size of the pay-
off matrix by eliminating the strategies that would never be selected. a game, sometimes a strategy
available to a player might be found to be preferable to some other strategy / strategies. Such a
strategy is said to dominate the other one(s). The rules of dominance are
used to reduce the size of the payoff matrix. These rules help in deleting certain rows and/or
columns of the payoff matrix, which are of lower priority to atleast one of the remaining rows,
and/or columns in terms of payoffs to both the players. Rows / columns once deleted will never be
used for determining the optimal strategy for both the players. This concept of domination is very
usefully employed in simplifying the two – person zero sum games without saddle point. In general
the following rules are used to reduce the size of payoff matrix.
The RULES (PRINCIPLES OF DOMINANCE)
Rule 1: If all the elements in a row ( say ith row ) of a pay off matrix are less than or equal to the
corresponding elements of the other row ( say jth row ) then the player A will never choose the ith
strategy then we say ith strategy is dominated by jth strategy and will delete the ith row.
Rule 2: If all the elements in a column ( say rth column ) of a payoff matrix are greater than or
equal to the corresponding elements of the other column ( say sth column ) then the player B will
never choose the rth strategy or in the other words the rth strategy is dominated by the sth strategy
and we delete rth column .
Rule 3: A pure strategy may be dominated if it is inferior to average of two or more other pure
strategies.
Game Theory Graphical Method
Graphical Method For (2 X n) AND (mx2) Games
The optimal strategies for a (2 x n) or (m x 2) matrix game can be located easily by a simple
graphical method. This method enables us to reduce the 2 x n or m x 2 matrix game to 2 x 2 game
that could be easily solved by the earlier methods.
If the graphical method is used for a particular problem, then the same reasoning can be used to
solve any I game with mixed strategies that have only two undominated pure strategies for one of
the players.

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Optimal strategies for both the players assign non-zero probabilities to the same number of pure
strategies. It is clear that if one player has only two strategies, the other will also use two strategies.
Hence, graphical method can be used to find two strategies of the player. The method can be
applied to 3 x n or m’x3 Games also by carefully drawing three dimensional diagram.
Graphical Method for 2 x n Games
The (2 x n) games are also treated in the like manner except that the maxmin point P is the highest
point on the uppermost boundary instead of highest point on the lowest boundary.
Step 1. Construct two vertical axes, axis I at the point x) =0 and axis 2 at the point x) :;: 1.
Step 2. Represent the payoffs V2j’j = 1. 2, ..., n on axis I and payoff line vlj ,j =I, 2, ..., n on axis
2.
Step 3. Join the point representing vij on Axis 2 to the point representing V2jon axis I. The resulting
straight-line is the expected payoff line
Step 4. Mark the lowest boundary of the lines E.i (x) so plotted, by thick line segments. The highest
point on this lowest boundary gives the maximin point P and identifies the two critical. moves of
player B.
If there are more than two lines passing through the maximin point P. there are ties for the optimum
mixed strategies for player B. Thus any two such lines with opposite sign slopes will define an
alternative optimum for
Graphical Solution of m x 2 Games
The (m x 2) games are also treated in the like manner except that the minimax point P is the lowest
point on the uppermost boundary instead of highest point on the lowest boundary.
(above steps will be followed for constructing graph)

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TRANSPORTATION PROBLEM
Transportation model was first introduced by F.L. Hitchcock in 1941. Later on, it was
further improved by T.C. Koopman in 1949 and George. B. Dantizing in 1951. The objective of
transportation model is to transport the similar quantities which are initially stored at various
origins (supply) to different destinations (demand) in such a way that the total transportation cost
is minimum.

Meaning

Transportation problem is the problem of physical distribution of goods. It is a special type

of linear programming problem that involves the transportation or physical distribution of goods
and services from several supply origin to several demand destinations. Example: A manufacturer
may wish to transport several units of products from several warehouses (origins) to a number of
retail stores (destinations). Then Transportation problem is to determine the transportation
schedule that minimizes the total cost of transporting the manufactured products from various
plants to various retail shops.

General structure of transportation problem

Let,
a1, a2…..ai…am = quantity of product available at m places called origin i

b1, b2….bj…bn = Quantity of product required at n places called destination j

Cij = Cost of transporting unit ofr product from origin i to destination j.

Xij = Quantity of product transported from origin i to destination j.

Then the problem is to determine Xij, the quantity that is to be transported from i th origin
to the j th destination, in such a way that the total cost is minimum. The problem can be put in the
form of a table, which represented a cost array or matrix as follows:

Destination Supply or
Origin
D1 D2 Dj Dn Availability- ai
O1 C11 C12 C1j C1n a1
O2 C21 C22 C2j C2n a2
Oi Ci1 Ci2 Cij Cin ai
Oj Cm1 Cm2 Cmj Cmn am
Demand or
b1 b2 bj bn ai= bj
Requirement -bj

This matrix is known as Transportation Table or cost effectiveness matrix.

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Basic assumptions in Transportation problem

1. ai= bj, i.e., total quantity available for distribution is equal to total requirements in
different destinations together.

2. The unit transportation cost from one origin to destination is certain.

3. The unit cost is independent of the quantity transported.

4. Objective is to minimize the total transportation cost.

Algorithm for Transportation problem

To solve any type of Transportation problem, the following steps are to be followed:

1. Formulate the given problem in matrix form

2. Obtain an initial feasible solution by any of the following methods:

a) North-West Corner Method

b) Least Cost Method

c) Vogel’s Approximation Method

3. Test the optimality of the initial solution by MODI method.

4. Update the solution accordingly and repeat the step 3 until the most feasible solution is
reached.

Initial Feasible Solution

A feasible solution to a Transportation problem is a set of non-negative allocations which

satisfy the rows and column sum restrictions. Therefore, for feasibility the sum of the allocations
in the row must be equal to the availability in that row. Similarly, sum of the allocation in the
column must be equal to the demand in that column. A feasible solution is said to be optimal if it
minimize the total transportation cost.

A feasible solution to a m x n [column x row] Transportation problem is said to be a basic

feasible solution, if the total number of allocation is exactly equal to m+n-1.

A feasible solution of m x n Transportation problem is said to be non-degenerate; basic

feasible solution, if;

a) the number of allocation is equal to m+n-1.

b) the allocation are in independent position.

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Following methods can be used for obtain an initial feasible solution:

North-West Corner Method

In this method, assignments are made without regarded to the cost. The first assignment is
made in the cell at the upper left hand corner (north west corner). Maximum number of units is
assigned to that cell depending on the availability and demand of that cell. Further assignments are
then made to other cells moving from the upper left hand cell down to the lower right hand cell,
according to the supply and demand of each cell. When all available units are assigned to various
cells, we have the initial feasible solution according to north west corner method.

Least Cost Method

The allocation according to this method is useful as it takes into consideration the lowest
cost. Choose the cell, having the lowest cost in the matrix. Allocate as much as possible which is
the minimum of row total and column total. Thus either a row total or column total is exhausted,
cross off corresponding row or column. From the reduced matrix, locate to that cell maximum
possible, this leading to a further reduction of matrix. Continue this process until all the available
quantities are exhausted. This method is also known as matrix minimum method.

Vogel’s Approximation Method – VAM

It is a systematic procedure for setting up the initial solution which is closer to the optimal
solution in a transportation problem. This method is also known as penalty method. The steps
involved in determining a VAM solution are as follows:

1. From the cost matrix calculate the difference between the two lowest cost figures for each row
and column in the table. These differences are known as column difference or column penalties
and row difference or row penalties.

2. Select the row or column with largest penalty and find lowest cost figure in the selected row or
column and make maximum allocation to that cell according to the demand and supply position of
that cell. Thus either row total or column total is completely exhausted and crops off that row or
column. Then construct the reduced matrix.

3. For the reduced matrix obtained, apply step 1 & 2 until all row and column totals are exhausted.

MODI method

An optimal solution for the transportation problem provides the allocations which are suit
the best possible for the problem by lowering the total cost up to the maximum possible extent and
the transportation problem cannot be further reduced.

For this calculate every unoccupied cell in terms of an opportunity of reducing the total
cost. Then the cell which has the largest negative value of opportunity cost is selected and is

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exchanged by an already occupied cell in a unique loop (closed) whose allocation will became
zero at the first move as more units are allocated to the newly selected unoccupied cell. This
process occurs repeatedly until there is no negative opportunity cost which indicated the sign of
optimal solution. This whole process is done by a method known as MODI (Modified Distribution
method). It is also known as u-v method, which involve the following steps:

1. find the initial solution

2. Count the number of occupied cells, if they are less than (m+n-1), there is degeneracy, then
introduced a small number equal to zero to make the number of occupied cells equal to m+n-1.

3. Solve the equation Ui + Vj = Cij for each occupied cell in the table, starting initially by Ui =0
or Vj =0.

4. Calculate Dij = Cij – (Ui+Vj) for each unoccupied cells.

5. If all Dij values are positive the solution is optimal and unique. If at least one of them is zero
and others positive the solution is optimal but alternative solution exit. If at least one Dij is
negative, the solution is not optimal.

6. If the solution is not optimal, make reallocation. Give maximum allocation to one of the
occupied cells empty. Then repeat the steps 1 to 5, until solution become optimal.

Degeneracy

Degeneracy is a condition where the number of allocation or assignments in the solution is less
than (m+n-1); where m is number of sources or supply and n is the number of receiving points or
destination or demand. In a solution, the cell to which allocation are made are known as stone
squares and the cell which do not have any allocation are called water square. A solution is said to
be degenerate when the number of stone square in it is less than (m+n-1). Degeneracy may occur
ether at the initial stage itself or at subsequent solutions.

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ASSIGNMENT PROBLEM
An assignment problem is a particular case of transportation problem where the objective
is to assign a number of resources to an equal number of activities so as to minimize total cost or
maximize total profit of allocation.
The problem of assignment arises because available resources such as men, machines, etc., have
varying degrees of efficiency for performing different activities. Therefore, cost, profit or time of
performing the different activities is different. Thus, the problem is : How should the assignments
be made so as to optimize the given objective. Some of the problems where the assignment
technique may be useful are : Assignment of workers to machines, salesmen to different sales
areas, clerks to various checkout counters, classes to rooms, vehicles to routes, contracts to bidders,
etc. An assignment problem can be solved by the following four
methods :
 Enumeration method
 Simplex method
 Transportation method
 Hungarian method
Hungarian Assignment Method (HAM) :
It may be observed that none of the three working methods discussed earlier to solve an assignment
is efficient. A method, designed specially to handle the assignment problems in an efficient way,
called the Hungarian Assignment Method, is available, which is based on the concept of
opportunity cost. For a typical balanced assignment problem involving a certain number of persons
and an equal number of jobs, and with an objective function of the minimization type, the method
is applied as listed in the following steps :
Step 1. Deduct the smallest element in each row from the other elements of the row. The matrix
thus got is known as Row opportunity cost matrix (ROCM). The logic here is if we assign the job
to any machine having higher cost or time, then we have to bear the penalty. If we subtract smallest
element in the row or from all other element of the row, there will be at least one cell having zero,
i.e zero opportunity cost or zero penalty. Hence that cell is more competent one for assignment.
Step 2. Deduct the smallest element in each column from other elements of the column. The matrix
thus got is known as Column opportunity cost matrix (COCM). Here also by creating a zero by

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subtracting smallest element from all other elements we can see the penalty that one has to bear.
Zero opportunity cell is more competent for assignment.
Step 3. To make assignment: Search for a single zero either row wise or column wise. If you start
row wise, proceed row by row in search of single zero. Once you find a single zero; assign that
cell by enclosing the element of the cell by a square. Once all the rows are over, then start column
wise and once you find single zero assign that cell and enclose the element of the one cell in a
square. Once the assignment is made, then all the zeros in the row and column corresponding to
the assigned cell should be cancelled. Continue this procedure until all assignments are made.
Sometimes we may not find single zero and find more than one zero in a row or column. It
indicates, that the problem has an alternate solution. We can write alternate solutions. (The
situation is known as a TIE in assignment problem).
After the above operations, there arise two situations:
A) It has assignment in every row and column so that we got solution
B) It dose not contain assignment in all row and column.
In the second situation the following procedure may be followed:
Step 4. If the lines drawn are less than the number of rows or columns, then we cannot make
assignment. Hence the following procedure is to be followed: [The cells covered by the lines are
known as Covered cells. The cells, which are not covered by lines, are known as uncovered cells. The cells
at the intersection of horizontal line and vertical lines are known as Crossed cells.]
a) Mark √ all rows for which have assignments have not been made.
b) Mark √ columns which have zero in marked row.
c) Mark √ rows (not already marked) which have assignment in marked columns
d) Repeat step (b) and (c) until the chain of marking ends.
e) Draw lines through unmarked rows and through marked columns to cover all the zeros.
Step 5: Identify the smallest element in the uncovered cells.
(i) Subtract this element from the elements of all other uncovered cells.
(ii) Add this element to the elements of the crossed cells.
(iii) Do not alter the elements of covered cells.
Now re-apply the steps 3 to 5 to the modified solution, until the final solution.

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Note: For maximization same procedure is adopted, once we convert the maximization problem
into minimization problem by multiplying the matrix by (-1) or by subtracting all the elements of
the matrix from highest element in the matrix.

COMPARISION BETWEEN TRANSPORTATION PROBLEM AND ASSIGNMENT

PROBLEM
Similarities
1. Both are special types of linear programming problems.
2. Both have objective function, structural constraints, and non-negativity constraints. And the
relationship between variables and constraints are linear.
3. The coefficients of variables in the solution will be either 1 or zero in both cases.
4. Both are basically minimization problems. For converting them into maximization problem
same procedure is used.
Differences
Transportation Problem Assignment Problem.
1. The problem may have rectangular matrix [Link] matrix of the problem must be a square
or square matrix. matrix
[Link] rows and columns may have any number [Link] rows and columns must have one to one
of allocations depending on the rim conditions. allocation. Because of this property, the matrix
must be a square matrix.
[Link] basic feasible solution is obtained by [Link] basic feasible solution is obtained by
northwest corner method or matrix minimum Hungarian method or Flood's technique or by
method or VAM Assignment algorithm.
[Link] optimality test is given by stepping [Link] test is given by drawing
stone method or by MODI method. minimum
number of horizontal and vertical lines to
cover all the zeros in the matrix.

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[Link] basic feasible solution must have [Link] column and row must have at least one
m + n – 1 allocations. zero. And one machine is assigned to one job
and vice versa.
[Link] rim requirement may have any 6. The rim requirements are always 1 each for
numbers (positive numbers). every row and one each for every column.
[Link] transportation problem, the problem deals [Link] row represents jobs or machines and
with one commodity being moved from columns represents machines or jobs.
various origins to various destinations.
TRAVELING SALESMAN PROBLEM
Just consider how a postman delivers the post to the addressee. He arranges all the letters in an
order and starts from the post office and goes from addressee to addressee and finally back to his
post office. If he does not arrange the posts in an order he may have to travel a long distance to
clear all the posts. Similarly, a traveling sales man has to plan his visits. Let us say, he starts from
his head office and go round the branch offices and come back to his head office. While traveling
he will not visit the branch already visited and he will not come back until he visits all the branches.
There are different types of traveling salesman's problems. One is cyclic problem. In this problem,
he starts from his head quarters and after visiting all the branches, he will be back to his head
quarters. The second one is Acyclic problem. In this case, the traveling salesman leaves his head
quarters and after visiting the intermediate branches, finally reaches the last branch and stays there.
The first type of the problem is solved by Hungarian method or Assignment technique. The second
one is solved by Dynamic programming method.

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REPLACEMENT MODEL
The problem of replacement arises when any one of the components of productive resources, such
as machinery, building and men deteriorates due to time or usage. The examples are:
(a) A machine, which is purchased and installed in a production system, due to usage some of
its components wear out and its efficiency is reduced.
(b) A building in which production activities are carried out, may leave cracks in walls, roof etc,
and needs repair.
(c) A worker, when he is young, will work efficiently, as the time passes becomes old and his work
efficiency falls down and after some time he will become unable to work.
Costs Associated with Maintenance
Our main aim in this chapter is to find optimal replacement period so as to minimize the
maintenance cost. Hence we are very much interested in the various cost associated with
maintenance. Various costs to be discussed are:
(a) Purchase cost or Capital cost:
This cost is independent of the age of the machine or usage of the machine. This is incurred at the
beginning of the life of the machine, i.e. at the time of purchasing the machine or equipment. But
the interest on the invested money is an important factor to be considered.
(b) Salvage value / Scrap value / Resale value / Depreciation:
As the age of the machine increases, the resale value decreases as its operating efficiency decreases
and the maintenance costs increases. It depends on the operating conditions of the machine and
life of the machine.
(c) Running costs including maintenance, Repair and Operating costs:

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These costs are the functions of age of the machine and usage of the machine. As the usage
increases or the age increases, due to wear and tear, many components fail to work and they are to
be replaced. As the age increases, failures also increase and the maintenance costs goes on
increasing. At some period the maintenance costs are so high, which will indicate that the
replacement of the machine or equipment is essential.

TYPES OF REPLACEMET PROBLEMS

Replacement of items is a field of application rather than a method of analysis. The study
involves, the comparison of alternative replacement policies. Various types of replacement
problems we come across in this chapter is:
(a) Replacement of Capital equipment, which looses its operating efficiency due to aging
(passage of time), or due to continuous usage (due to wear and tear of components). Examples are:
Machine tools, Transport and other vehicles, etc., Here the system can maintain the level of
performance by installing a new unit at the beginning of some unit of time (year, month or week)
and decide to keep it up to some suitable period so as to minimize the operating and maintenance
costs. In this case the deterioration process is predictable and is represented by an increased
maintenance cost and decreased in scrap cost and increased production cost per unit. In such cases
the optimum life of the item is determined on the assumption that increased age reduces efficiency.
Deterministic models explain the problem and they are very much similar to that of inventory
models where deterioration corresponds to demand against the desired level of efficiency (level of
inventory). The cost of new item is similar to cost of replenishment of inventory and maintenance
cost corresponds to cost of holding inventory. These types of problems are solved by two methods.
They are:
(i) By calculating the cost per unit of time, without considering the money value. Here we calculate
the total cost up to the period and divide by time unit (years, months, weeks etc.,) to find the
average cost to decide the period of replacement.
(ii) By taking the money value into consideration using present value concept to compare on a
one number basis.

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(b) Replacement of items that fail completely all in a sudden in a random nature. We use Group
replacement or Preventive maintenance technique for these items and these are expensive to
replace individually. Examples are: Electric bulbs, Transistors, Electronic components etc., Here
replacement of items are done in anticipation of failure, which is known as preventive
maintenance. We assume that the items will have relatively constant efficiency until they fail or
die. These models require the knowledge of statistics and stochastic process involving probability
of failure. The replacement policy is formulated to balance the wasted life of items replaced before
failure against the costs incurred when items fail in service.
(c) Replacement of human beings in organizations, known as Staffing problem, or known as
Human resource planning or Mortality and Staffing problem. This problem requires the
knowledge of life distribution for service of staff in a system.
(d) Miscellaneous problems such as replacement of existing units due to availability of more
effective and new and advanced technology. In these problems replacement will become necessary
due to research of new and advanced and more effective technology and old technology becomes
out of date.
***********************

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