LEARNING MODULE

MGT 208

Management Science
Introduction
Management science (MS) is the broad interdisciplinary study of problem solving and
decision making in human organizations, with strong links
to management, economics, business, engineering, management consulting, and other
fields. It uses various scientific research-based principles, strategies, and analytical
methods including mathematical modeling, statistics and numerical algorithms to improve
an organization's ability to enact rational and accurate management decisions by arriving
at optimal or near optimal solutions to complex decision problems. Management science
helps businesses to achieve goals using various scientific methods.
The field was initially an outgrowth of applied mathematics, where early challenges were
problems relating to the optimization of systems which could be modeled linearly, i.e.,
determining the optima (maximum value of profit, assembly line performance, crop yield,
bandwidth, etc. or minimum of loss, risk, costs, etc.) of some objective function. Today,
management science encompasses any organizational activity for which a problem is
structured in mathematical form to generate managerially relevant insights.

Objective
Applications of management science are abundant in industries such
as airlines, manufacturing companies, service organizations, military branches, and
in government. Management science has contributed insights and solutions to a vast range
of problems and issues, including:

• scheduling airlines, both planes and crew

• deciding the appropriate place to site new facilities such as a warehouse or factory
• managing the flow of water from reservoirs
• identifying possible future development paths for parts of the telecommunications
industry
• establishing the information needs of health services and appropriate systems to supply
them
• identifying and understanding the strategies adopted by companies for their information
systems
Management science is also concerned with so-called soft-operational analysis, which
concerns methods for strategic planning, strategic decision support, and problem structuring
methods (PSM). At this level of abstraction, mathematical modeling and simulation will not
suffice. Therefore, since the late 20th century, new non-quantified modelling methods have
been developed, including morphological analysis and various forms of influence diagrams.

Main Topic 1 Problems Solving Process vs. Decision Making Process

Problem solving vs decision making

Problem solving is an analytical process used to identify the possible solutions to the
situation at hand. Making decisions is a part of problem solving. Problem solving is a
complex process, and judgement calls – or decisions – will have to be made on the
way.
Decision making is a choice made by using one’s judgement. The art of making sound
decisions is a particularly important skill for leaders and managers. You may need to
make numerous decisions as part of the problem-solving process. And, of course,
leaders and managers will need to use their decision-making skills to determine which
solution to pursue. They will also typically need to confirm and set into motion next steps
to fix the problem.
Problem solving or decision making – which is most important?

Both problem solving and decision making go hand in hand, but success in one doesn’t
automatically lead to the other. Those in leadership and management roles need to
understand the difference between the two and aim to make lifelong improvements in
both skillsets.
Decisions are made when multiple opportunities for action present themselves. You can
make decisions, yet never solve the problem.

You can be adept at problem solving, or finding the root of an issue, and still lack the
decision making skills to choose and action viable next steps to bring about a
successful outcome.

Quick decisions don’t always lead to best-case solutions. A purist approach to problem
solving doesn’t take into account that sometimes a business needs to make the best
decision under the existing circumstances (where budget, time and resource
constraints might play a factor).

How does problem solving involve decision making?

Decision-making is part of the problem-solving process. A business may have multiple

problems that all demand time and resource. A key role in management and
leadership positions is deciding which problem to treat as a priority.

Decision making in 3 steps:

1. Use problem solving to identify potential solutions – this may involve decision making,
such as deciding to hold meetings with stakeholders or assigning team members to
tackle particular areas of the problem
2. Determine which solution is the best fit for the problem at hand
3. Make a decision on next steps to action the chosen solution
The similarities between problem solving and decision making

Problem solving and decision making are not synonymous with each other, but they are
both important skills for leaders to have. People often use the terms problem solving
and decision making interchangeably specifically because they have elements in
common.

Both problem solving and decision making involve critical thinking.

Critical thinking is a process by which you question your own assumptions – as well as
those of others - in order to decide on next steps to solve a problem. Critical thinking
often results in using a mix of research, analysis, questioning and exploration of new
ideas in order to gain rich insight into a situation, becoming informed in a way that isn’t
restricted by the subjective perspectives of peers or the status quo.

How to use decision making in solving problems

It all boils down to one thing: When faced with a challenge, break the problem down
into manageable components that require decisions to be made.

Learning Activity:
1. Identify 2 or 3 of your own problems or problems of others shared to you. List down
the processes of the decision making in solving the problems.
Main Topic 2 Qualitative vs. Quantitative Method
When collecting and analyzing data, quantitative research deals with numbers and
statistics, while qualitative research deals with words and meanings. Both are important
for gaining different kinds of knowledge.

Quantitative researchQuantitative research is expressed in numbers and graphs. It

is used to test or confirm theories and assumptions. This type of research can be used to
establish generalizable facts about a topic.
Common quantitative methods include experiments, observations recorded as
numbers, and surveys with closed-ended questions.
Qualitative researchQualitative research is expressed in words. It is used to
understand concepts, thoughts or experiences. This type of research enables you to
gather in-depth insights on topics that are not well understood.
Common qualitative methods include interviews with open-ended questions,
observations described in words, and literature reviews that explore concepts and
theories.

When to use qualitative vs. quantitative research

A rule of thumb for deciding whether to use qualitative or quantitative data is:

• Use quantitative research if you want to confirm or test something (a theory or

hypothesis)
• Use qualitative research if you want to understand something (concepts,
thoughts, experiences)

For most research topics you can choose a qualitative, quantitative or mixed methods
approach. Which type you choose depends on, among other things, whether you’re
taking an inductive vs. deductive research approach; your research question(s);
whether you’re doing experimental, correlational, or descriptive research; and
practical considerations such as time, money, availability of data, and access to
respondents.

Research questionHow satisfied are students with their studies?

Quantitative research approach

You survey 300 students at your university and ask them questions such as: “on a scale
from 1-5, how satisfied are your with your professors?”

You can perform statistical analysis on the data and draw conclusions such as: “on
average students rated their professors 4.4”.

Qualitative research approach

You conduct in-depth interviews with 15 students and ask them open-ended questions
such as: “How satisfied are you with your studies?”, “What is the most positive aspect of
your study program?” and “What can be done to improve the study program?”

Based on the answers you get you can ask follow-up questions to clarify things. You
transcribe all interviews using transcription software and try to find commonalities and
patterns.

Mixed methods approach

You conduct interviews to find out how satisfied students are with their studies. Through
open-ended questions you learn things you never thought about before and gain new
insights. Later, you use a survey to test these insights on a larger scale.
It’s also possible to start with a survey to find out the overall trends, followed by
interviews to better understand the reasons behind the trends.

How to analyze qualitative and quantitative data

Qualitative or quantitative data by itself can’t prove or demonstrate anything, but has
to be analyzed to show its meaning in relation to the research questions. The method of
analysis differs for each type of data.

Analyzing quantitative data

Quantitative data is based on numbers. Simple math or more advanced statistical
analysis is used to discover commonalities or patterns in the data. The results are often
reported in graphs and tables.

Applications such as Excel, SPSS, or R can be used to calculate things like:

• Average scores
• The number of times a particular answer was given
• The correlation or causation between two or more variables
• The reliability and validity of the results

Analyzing qualitative data

Qualitative data is more difficult to analyze than quantitative data. It consists of text,
images or videos instead of numbers.

Some common approaches to analyzing qualitative data include:

• Qualitative content analysis: Tracking the occurrence, position and meaning of

words or phrases
• Thematic analysis: Closely examining the data to identify the main themes and
patterns
• Discourse analysis: Studying how communication works in social contexts

Learning Activity:

[Link]’s the difference between quantitative and qualitative methods?

[Link] is mixed-methods research?

[Link] do I decide which research methods to use?

[Link] is data collection?

[Link] do you analyze qualitative data?

Main Topic 3 Decision Tree and Probability Analysis

What is a Decision Tree Analysis?

A Decision Tree Analysis is a graphic representation of various alternative solutions that
are available to solve a problem. The manner of illustrating often proves to be decisive
when making a choice. A Decision Tree Analysis is created by answering a number of
questions that are continued after each affirmative or negative answer until a final
choice can be made.

Decision making process

A Decision Tree Analysis is a scientific model and is often used in the decision making
process of organizations. When making a decision, the management already
envisages alternative ideas and solutions.
By using a decision tree, the alternative solutions and possible choices are illustrated
graphically as a result of which it becomes easier to make a well-informed choice.

This graphic representation is characterized by a tree-like structure in which the

problems in decision making can be seen in the form of a flowchart, each with
branches for alternative choices.
What if

The Decision Tree Analysis makes good use of the ‘what if’ thought. There are several
alternatives that consider both the possible risks and benefits that are brought about by
certain choices. The possible alternatives are also made clearly visible and therefore
the decision tree provides clarity with respect to the consequences of any decisions
that will be made.

Representation

There are several ways in which a decision tree can be represented. This Analysis is
commonly represented by lines, squares and circles. The squares represent decisions,
the lines represent consequences and the circles represent uncertain outcomes. By
keeping the lines as far apart as possible, there will be plenty of space to add new
considerations and ideas.

The representation of the decision tree can be created in four steps:

1. Describe the decision that needs to be made in the square.

2. Draw various lines from the square and write possible solutions on each of the lines.
3. Put the outcome of the solution at the end of the line. Uncertain or unclear
decisions are put in a circle. When a solution leads to a new decision, the latter can
be put in a new square.
4. Each of the squares and circles are reviewed critically so that a final choice can be
made.
Decision Tree Analysis example

Suppose a commercial company wishes to increase its sales and the associated profits
in the next year.

The different alternatives can then be mapped out by using a decision tree. There are
two choice for both increase of sales and profits: 1- expansion of advertising
expenditure and 2- expansion of sales activities. This creates two branches. Two new
choices arise from choice 1, namely 1-1 a new advertising agency and 1-2 using the
services of the existing advertising agency. Choice 2 presents two follow-up choices in
turn; 2-1-working with agents or 2-2- using its own sales force.

The branching continues.

The following alternatives from 1-1 are:

1-1-1 The budget will increase by 10% -> end result: sales up 6%, profits up 2%
1-1-2 The budget will increase by 5% -> end result: sales up 4%, profits up 1.5 %

The alternatives that arise from 1.2:

1-2-1 The budget increases by 10% -> end result: sales up 5%, profits up 2.5%
1-2-2 The budget increases by 5 % -> end result: a sales up 4%, profits up 12%

From 2.1 possibly follows:

2-1-1 Set up with own dealers -> end result: sales up 20%, profits up 5%
2-1-2 Working with existing dealers -> end result: sales up 12.5%, profit up 8%

From 2.2 possibly follows:

2-2-1 Hiring of new sales staff -> end result: sales up 15%, profits up 5%
2-2-2 Motivating of existing sales staff -> end result: sales up 4%, profits up 2%.
The above example illustrates that, in all likelihood, the company will opt for 1-2-2,
because the forecast of this decision is that profits will increase by 12%.

This Analysis is particularly useful in situations in which it is considered desirable to

develop various alternatives of decisions in a structured manner as this will present a
clear substantiation. This method is increasingly used by medical practitioners and
technicians as it enables them to make a diagnosis or determine car problems.

Learning activity:

1. Create a decision tree for the following and give the result or conclusion:

• Opening a new location has a 40% chance of success that would yield a $50,000
profit. It also has a 60% chance of failure that would yield a $30,000 loss.
• Launching a new product has a 48% chance of success that would yield a
$65,000 profit. It also has a 52% chance of failure that would yield a $78,000 loss.

Main Topic 4. Capital Asset Pricing model (CAPM)

What is CAPM?

The Capital Asset Pricing Model (CAPM) is a model that describes the relationship
between the expected return and risk of investing in a security. It shows that the
expected return on a security is equal to the risk-free return plus a risk premium, which is
based on the beta of that security. Below is an illustration of the CAPM concept.
Expected Return

The “Ra” notation above represents the expected return of a capital asset over time,
given all of the other variables in the equation. “Expected return” is a long-term
assumption about how an investment will play out over its entire life.
Risk-Free Rate

The “Rrf” notation is for the risk-free rate, which is typically equal to the yield on a 10-
year US government bond. The risk-free rate should correspond to the country where
the investment is being made, and the maturity of the bond should match the time
horizon of the investment. Professional convention, however, is to typically use the 10-
year rate no matter what, because it’s the most heavily quoted and most liquid bond.

Beta

The beta (denoted as “Ba” in the CAPM formula) is a measure of a stock’s risk (volatility
of returns) reflected by measuring the fluctuation of its price changes relative to the
overall market. In other words, it is the stock’s sensitivity to market risk. For instance, if a
company’s beta is equal to 1.5 the security has 150% of the volatility of the market
average. However, if the beta is equal to 1, the expected return on a security is equal
to the average market return. A beta of -1 means security has a perfect negative
correlation with the market.

Market Risk Premium

From the above components of CAPM, we can simplify the formula to reduce
“expected return of the market minus the risk-free rate” to be simply the “market risk
premium”. The market risk premium represents the additional return over and above
the risk-free rate, which is required to compensate investors for investing in a riskier asset
class. Put another way, the more volatile a market or an asset class is, the higher the
market risk premium will be.

Why CAPM is Important

The CAPM formula is widely used in the finance industry. It is vital in calculating
the weighted average cost of capital (WACC), as CAPM computes the cost of equity.

WACC is used extensively in financial modeling. It can be used to find the net present
value (NPV) of the future cash flows of an investment and to further calculate
its enterprise value and finally its equity value.

CAPM Example – Calculation of Expected Return

Let’s calculate the expected return on a stock, using the Capital Asset Pricing
Model (CAPM) formula. Suppose the following information about a stock is
known:

• It trades on the NYSE and its operations are based in the United States
• Current yield on a U.S. 10-year treasury is 2.5%
• The average excess historical annual return for U.S. stocks is 7.5%
• The beta of the stock is 1.25 (meaning its average return is 1.25x as
volatile as the S&P500 over the last 2 years)

What is the expected return of the security using the CAPM formula?
Let’s break down the answer using the formula from above in the article:

• Expected return = Risk Free Rate + [Beta x Market Return Premium]

• Expected return = 2.5% + [1.25 x 7.5%]
• Expected return = 11.9%

Learning Activity:

1. Calculate expected return.

• It trades on the NYSE and its operations are based in the United States
• Current yield on a U.S. 10-year treasury is 2.7%
• The average excess historical annual return for U.S. stocks is 7.2%

The beta of the stock is 1.25.

Main Topic 5 Portfolio Management (Regression and Correlation)

In this section we will first discuss correlation analysis, which is used to quantify the
association between two continuous variables (e.g., between an independent and a
dependent variable or between two independent variables). Regression analysis is a
related technique to assess the relationship between an outcome variable and one or
more risk factors or confounding variables. The outcome variable is also called
the response or dependent variable and the risk factors and confounders are called
the predictors, or explanatory or independent variables. In regression analysis, the
dependent variable is denoted "y" and the independent variables are denoted by "x".

[NOTE: The term "predictor" can be misleading if it is interpreted as the ability to

predict even beyond the limits of the data. Also, the term "explanatory variable"
might give an impression of a causal effect in a situation in which inferences
should be limited to identifying associations. The terms "independent" and
"dependent" variable are less subject to these interpretations as they do not
strongly imply cause and effect.

Correlation Analysis

In correlation analysis, we estimate a sample correlation coefficient, more specifically

the Pearson Product Moment correlation coefficient. The sample correlation coefficient,
denoted r,

ranges between -1 and +1 and quantifies the direction and strength of the linear
association between the two variables. The correlation between two variables can be
positive (i.e., higher levels of one variable are associated with higher levels of the other)
or negative (i.e., higher levels of one variable are associated with lower levels of the
other).

The sign of the correlation coefficient indicates the direction of the association. The
magnitude of the correlation coefficient indicates the strength of the association.

For example, a correlation of r = 0.9 suggests a strong, positive association between two
variables, whereas a correlation of r = -0.2 suggest a weak, negative association. A
correlation close to zero suggests no linear association between two continuous
variables.

It is important to note that there may be a non-linear association between two

continuous variables, but computation of a correlation coefficient does not detect this.
Therefore, it is always important to evaluate the data carefully before computing a
correlation coefficient. Graphical displays are particularly useful to explore associations
between variables.

The figure below shows four hypothetical scenarios in which one continuous variable is
plotted along the X-axis and the other along the Y-axis.

Example - Correlation of Gestational Age and Birth Weight

A small study is conducted involving 17 infants to investigate the association between

gestational age at birth, measured in weeks, and birth weight, measured in grams.
We wish to estimate the association between gestational age and infant birth weight.
In this example, birth weight is the dependent variable and gestational age is the
independent variable. Thus y=birth weight and x=gestational age. The data are
displayed in a scatter diagram in the figure below.
Each point represents an (x,y) pair (in this case the gestational age, measured in weeks,
and the birth weight, measured in grams). Note that the independent variable is on the
horizontal axis (or X-axis), and the dependent variable is on the vertical axis (or Y-axis).
The scatter plot shows a positive or direct association between gestational age and
birth weight. Infants with shorter gestational ages are more likely to be born with lower
weights and infants with longer gestational ages are more likely to be born with higher
weights.
Not surprisingly, the sample correlation coefficient indicates a strong positive correlation.

As we noted, sample correlation coefficients range from -1 to +1. In practice, meaningful

correlations (i.e., correlations that are clinically or practically important) can be as small as 0.4
(or -0.4) for positive (or negative) associations. There are also statistical tests to determine
whether an observed correlation is statistically significant or not (i.e., statistically significantly
different from zero). Procedures to test whether an observed sample correlation is suggestive of
a statistically significant correlation are described in detail in Kleinbaum, Kupper and Muller.

Main Topic 6. Description and Procedure in creating Gantt Chart

How to Make a Gantt Chart
On this page we will explain how to make a Gantt chart. If you need to understand the
concept of the Gantt chart, you can read: What is a Gantt Chart?

Gantt charts are created using project management information system (PMIS)
applications, such as Primavera Project Planner®, Microsoft Project®, and MindView®.
A typical approach for creating a schedule is to hold meetings with selected project
team members and to begin identifying activities. While this approach will result in a
schedule, it may not be a complete schedule. A complete schedule contains enough
activities to ensure compliance with the 100% Rule. The 100% Rule requires that the
scope baseline addresses 100% of the project scope. The scope baseline components
are the primary sources used to identify the schedule activities. If the scope baseline
addresses 100% of the project scope, then the schedule activities address 100% of the
project scope. Following these steps will ensure that the final project schedule is a
complete schedule.

6 Steps to Make a Gantt Chart

Step 1 - Review Scope Baseline

Gather the team and review the approved scope baseline, which consists of three
components: 1) the Scope Statement, 2) the Work Breakdown Structure (WBS) and 3)
the WBS Dictionary. The project team member should confirm that the scope baseline
addresses 100% of the project scope.

Step 2 - Create Activities

Using a technique called Decomposition, the project team breaks down each WBS
work package into activities. Just like when creating the WBS work packages, the team
needs to set rules for creating schedule activities. The final schedule needs to be the
one that is effective and efficient. Too many activities can be as bad as too few. It is
also important to identify deadlines and milestones while decomposing the project.
 Gantt chart deadlines passing

Step 3 - Sequence Activities

Every activity is related to one or more other activities. Every activity, except the first
and last, has a relationship with a predecessor and a successor. Sequencing activities
means placing the activities in the right order using the right relationships. There are four
types of relationships:

▪ 1. Finish to Start – Cannot start the successor activity until its predecessor Is
finished.
▪ 2. Start to Start – Cannot start the successor activity until its predecessor has
started.
▪ 3. Start to Finish – Cannot finish the successor activity until its predecessor had
started.
▪ 4. Finish to Finish – Cannot finish the successor activity until its predecessor has
finished.

Relationships 1 and 2 are the most commonly used. Finish to Start is a sequential
relationship and Start to Start is typically a parallel or over-lapping relationship.

Gantt chart dependencies

Step 4 - Estimate Resources

Before the durations can be estimated, resources must be identified and estimated.
Resources include labor, material and equipment. There are several estimating
techniques used including Analogous, Parametric, Three-Point and Bottom Up. Skills,
competencies and technology are key factors to consider in the basis of the estimate.
After estimating the resources, they are loaded in the schedule against the respective
activities. A resource calendar is also created to show when resources are needed and
available.
Step 5 - Estimate Durations

Duration is the time between the start and end of an activity. Review the resources,
relationships and sequencing, then estimate the duration for each activity. The same
estimating techniques used for estimating resources can be used to estimate durations,
but make sure you identify constraints. Which are limitations or restrictions on an activity.

Gantt chart constraints

Step 6 - Develop Schedule

Create the Gantt chart by loading all information into a project management software
tool. Review the schedule and ensure that all schedule risks have been addressed.
Check that response plans and schedule contingencies have been included. A typical
way to address schedule contingencies is to add Buffers at the activity level, the project
level or both. A Buffer is an activity with no resources or scope to provide additional
time and reduce schedule risks. Resource optimization techniques, such as resource
smoothing or leveling are used to create realistic schedules. Review and approve the
schedule. The approved Gantt chart schedule becomes the schedule baseline.

How To Use A Gantt Chart

The Gantt chart schedule baseline is the formal document used to execute, monitor
and control the project schedule performance. The project team members were
assigned work packages in the Work Breakdown Structure. The respective team
members status their work package activities using a disciplined method. There are two
statusing methods commonly used: 1) Percent complete and 2) Earned Value
Management System (EVMS). Percent complete is simple to use, but can be somewhat
subjective. EVMS, on the other hand, measures schedule performance based on the
value of the work accomplished.

The actual schedule performance is compared to the planned performance to identify

variances. Special attention is applied to the Critical Path activities. The Critical Path is
the longest path in the schedule and has zero float. It is referred to as critical because
any delay in a critical path activity results in the same delay in the project end date.
The Critical Path is usually colored red when shown in Gantt charts. If the variance
exceeds an established threshold, the project team needs to consider taking either
preventive or corrective action. Only if the variance cannot be adequately addressed
by these actions should the project team issue a change request to formally change
the baseline.

Gantt chart highlighting critical path

There are a number of techniques available to take actions to address

variances. The project team can add Leads or Lags. A Lead is an
intentional adjustment to an activity by making the start date earlier
than planned. A Lead can be used to accelerate the schedule.
However, schedule risk is typically increased. Similarly, a Lag is an
intentional adjustment to an activity that delays the start date. If
making a Lead or a Lag, the schedule relationship remains the same. In
addition, if only schedule acceleration is needed, then there are two
techniques used without reducing scope. These two techniques are: 1)
Fast Tracking and 2) Crashing. Fast tracking is increasing the
overlapping of activities and can result in increased risks. Crashing is
increasing resources and can result in increased costs.

Linear Programming Problems (Application)

Linear programming is the process of taking various linear inequalities relating

to some situation, and finding the "best" value obtainable under those
conditions. A typical example would be taking the limitations of materials and
labor, and then determining the "best" production levels for maximal profits
under those conditions.

In "real life", linear programming is part of a very important area of

mathematics called "optimization techniques". This field of study (or at least the
applied results of it) are used every day in the organization and allocation of
resources. These "real life" systems can have dozens or hundreds of variables,
or more. In algebra, though, you'll only work with the simple (and graphable)
two-variable linear case.

The general process for solving linear-programming exercises is to graph the

inequalities (called the "constraints") to form a walled-off area on the x,y-plane
(called the "feasibility region"). Then you figure out the coordinates of the
corners of this feasibility region (that is, you find the intersection points of the
various pairs of lines), and test these corner points in the formula (called the
"optimization equation") for which you're trying to find the highest or lowest
value.
• Find the maximal and minimal
value of z = 3x + 4y subject to
the following constraints:

The three inequalities in the

curly braces are the
constraints. The area of the
plane that they mark off will
be the feasibility region. The
formula "z = 3x + 4y" is the optimization equation. I need to find
the (x, y) corner points of the feasibility region that return the largest and
smallest values of z.

My first step is to solve each inequality for the more-easily graphed

equivalent forms:

graph the system: Elizabeth Stapel 2006-2011 All Rights Reserved

 To find the corner points -- which aren't always clear from the graph --
I'll pair the lines (thus forming a system of linear equations) and solve:

y = –( 1/2 )x + 7 y = –( 1/2 )x + 7 y = 3x
y = 3x y=x–2 y=x–2
–( 1/2 )x + 7 = 3x –( 1/2 )x + 7 = x – 2
3x = x – 2
–x + 14 = 6x –x + 14 = 2x – 4
2x = –2
14 = 7x 18 = 3x
x = –1
2=x 6=x
y = 3(–1) = –3
y = 3(2) = 6 y = (6) – 2 = 4
corner point at (2, 6) corner point at (6, 4) corner pt. at (–1, –3)

So the corner points are (2, 6), (6, 4), and (–1, –3).

Somebody really smart proved that, for linear systems like this, the
maximum and minimum values of the optimization equation will always
be on the corners of the feasibility region. So, to find the solution to this
exercise, I only need to plug these three points into "z = 3x + 4y".

(2, 6): z = 3(2) + 4(6) = 6 + 24 = 30

(6, 4): z = 3(6) + 4(4) = 18 + 16 = 34
(–1, –3): z = 3(–1) + 4(–3) = –3 – 12 = –15

Then the maximum of z = 34 occurs at (6, 4),

and the minimum of z = –15 occurs at (–1, –3).

The Graphical Method

We will first discuss the steps of the algorithm:

Step 1: Formulate the LP (Linear programming) problem

We have already understood the mathematical formulation of an LP problem in a

previous section. Note that this is the most crucial step as all the subsequent steps depend
on our analysis here.

Step 2: Construct a graph and plot the constraint lines

The graph must be constructed in ‘n’ dimensions, where ‘n’ is the number of decision
variables. This should give you an idea about the complexity of this step if the number of
decision variables increases.

One must know that one cannot imagine more than 3-dimensions anyway! The constraint
lines can be constructed by joining the horizontal and vertical intercepts found from each
constraint equation.

Step 3: Determine the valid side of each constraint line

This is used to determine the domain of the available space, which can result in a feasible
solution. How to check? A simple method is to put the coordinates of the origin (0,0) in
the problem and determine whether the objective function takes on a physical solution or
not. If yes, then the side of the constraint lines on which the origin lies is the valid side.
Otherwise it lies on the opposite one.

Step 4: Identify the feasible solution region

The feasible solution region on the graph is the one which is satisfied by all the constraints.
It could be viewed as the intersection of the valid regions of each constraint line as well.
Choosing any point in this area would result in a valid solution for our objective function.

Step 5: Plot the objective function on the graph

It will clearly be a straight line since we are dealing with linear equations here. One must
be sure to draw it differently from the constraint lines to avoid confusion. Choose the
constant value in the equation of the objective function randomly, just to make it clearly
distinguishable.

Step 6: Find the optimum point

Optimum Points

An optimum point always lies on one of the corners of the feasible region. How to find it?
Place a

ruler on the graph sheet, parallel to the objective function. Be sure to keep the orientation
of this ruler fixed in space. We only need the direction of the straight line of the objective
function. Now begin from the far corner of the graph and tend to slide it towards the
origin.

• If the goal is to minimize the objective function, find the point of contact of the ruler
with the feasible region, which is the closest to the origin. This is the optimum point
for minimizing the function.
• If the goal is to maximize the objective function, find the point of contact of the ruler
with the feasible region, which is the farthest from the origin. This is the optimum
point for maximizing the function.

Step 7: Calculate the coordinates of the optimum point.

This is the last step of the process. Once you locate the optimum point, you’ll need to find
its coordinates. This can be done by drawing two perpendicular lines from the point onto
the coordinate axes and noting down the coordinates.

Otherwise, you may proceed algebraically also if the optimum point is at the intersection
of two constraint lines and find it by solving a set of simultaneous linear equations. The
Optimum Point gives you the values of the decision variables necessary to optimize the
objective function.

EXAMPLE:

CASIO produces a scientific calculator and a graphing calculator. Long-term projections

indicate an expected demand of at least 100 scientific and 80 graphing calculators each day.
Because of limitations on production capacity, no more than 200 scientific and 170 graphing
calculators can be made daily. To satisfy a shipping contract, a total of at least 200 calculators
much be shipped each day.

If each scientific calculator sold results in a $2 loss, but each graphing calculator produces
a $5 profit, how many of each type should be made daily to maximize net profits?

The question asks for the optimal number of calculators, so my variables will stand for that:

x: number of scientific calculators produced

y: number of graphing calculators produced

Since they can't produce negative numbers of calculators, I have the two
constraints, x > 0 and y > 0. But in this case, I can ignore these constraints, because I already
have that x > 100 and y > 80. The exercise also gives maximums: x < 200 and y < 170. The
minimum shipping requirement gives me x + y > 200; in other words, y > –x + 200. The profit
relation will be my optimization equation: P = –2x + 5y. So the entire system is:
 P = –2x + 5y, subject to:
100 < x < 200
80 < y < 170
y > –x + 200

The feasibility region graphs as: C

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When you test the corner points at (100, 170), (200, 170), (200, 80), (120, 80), and (100, 100),
you should obtain the maximum value of P = 650 at (x, y) = (100, 170). That is, the solution is
"100 scientific calculators and 170 graphing calculators".

EXERCISES:

1. TOYOTA makes two products (X and Y) using two machines (A and B). Each unit of X that
is produced requires 50 minutes processing time on machine A and 30 minutes processing time
on machine B. Each unit of Y that is produced requires 24 minutes processing time on machine
A and 33 minutes processing time on machine B.

At the start of the current week there are 30 units of X and 90 units of Y in stock. Available
processing time on machine A is forecast to be 40 hours and on machine B is forecast to be 35
hours.

The demand for X in the current week is forecast to be 75 units and for Y is forecast to be 95
units. Company policy is to maximise the combined sum of the units of X and the units of Y in
stock at the end of the week.

Main Topic 6 PERT and CPM

PROJECT MANAGEMENT (PERT and CPM)

CPM ( Critical Path Method )

 - is an algorithm for scheduling a set of project activities. It is commonly used in conjunction
with the program evaluation and review technique (PERT). A critical path is determined by identifying
the longest stretch of dependent activities and measuring the time required to complete them from
start to finish.

The essential technique for using CPM is to construct a model of the project that includes the
following:

1. A list of all activities required to complete the project (typically categorized within a work
breakdown structure),
2. The time (duration) that each activity will take to complete,
3. The dependencies between the activities and,
4. Logical end points such as milestones or deliverable items.

Determine the longest time of activity the project below be finished:

Activity Predecessor(s) Duration

A − 5
B A 4
C A 5
D B 6
E C 3
F D,E 4

B D

A F

C E

ES AC EF

LS D LF

ES – early start
EF – early finish
AC -activity
D – duration
EF- early Finish
LF – late finish
 5 B 9 9 D 15
5 4 9 9 6 15

0 A 5 15 F 19
0 5 5 15 4 19

5 C 10 10 E 13
7 5 12 12 3 15

PERT ( Project Evaluation and Review Techniques )

-is a method of analyzing the tasks involved in completing a given project, especially the
time needed to complete each task, and to identify the minimum time needed to complete the
total project. It incorporates uncertainty by making it possible to schedule a project while not
knowing precisely the details and durations of all the activities. It is more of an event-oriented
technique rather than start- and completion-oriented, and is used more in these projects where
time is the major factor rather than cost. It is applied on very large-scale, one-time, complex, non-
routine infrastructure and on Research and Development projects.
-is a statistical tool used in project management, which was designed to analyze and
represent the tasks involved in completing a given project.

In PERT, each activity will have three time estimates.

- Optimistic time
- Most likely time
- Pessimistic time
Consider the following table summarizing the details of a project:
As we can see there are two critical paths along which E-values and L-values are similar,
but the longest network of critical activities is known as critical path.

Critical path is 1-2-3-6-7-8

Expected length of critical path is = 6 + 3 + 4 + 2 + 2 = 17 weeks

Learning Activity: