ELEMENTARY CONCEPTS AND OBJECTIVES OF OPERATIONS

RESEARCH
Introduction:

Operations Research (OR) is relatively a new discipline. The first formal activities of
OR were initiated in England during the Second World War, when a team of British
scientists set out to make decisions regarding the best utilization of war material. OR
begins when some mathematical and quantitative technique is used to verify the decision
being taken. OR provides a quantitative technique or a scientific approach to the
executives for making better decisions for operations under their control.
Historical Background of Operations Research:

This new science came into existence in military context. As the name implies,
‘Operations Research’. The term Operations Research was first coined in 1940 by
McClosky and Trefthen, both are from UK. During Second World War.

Military management called upon scientists from various disciplines, and

organized them into teams to assist in solving strategic and tactical problems i.e. to discuss,
evolve and suggest ways and means to improve the execution of various military projects.

This new approach to systematic and scientific study of the operations of the
system is cal l ed the ‘Operations Research’ or ‘Operational Research’.

The successful applications of the U.S. teams included the invention of new flight
patterns, planning sea mining and effective utilization of electronic equipment.

The most common problem was to seek methods so as to minimize the total cost
and maximize the total profit.

The first mathematical technique in the field, called the Simplex Method of linear
programming, was developed in 1947 by an American Mathematician George B. Dantzig.

In India, Operations Research came into existence in 1949 with the opening of an
OR unit at the Regional Research Laboratory at Hyderabad.

At the same time, another group was set up in the Defense Science Laboratory
which devoted itself to the problems of stores, purchase and planning.

In 1953, OR unit was established in Indian Statistical Institute, Calcutta for the
application of OR methods in national planning and survey.

OR Society of India was formed in 1955. In India, Prof. P. C. Mahalanobis made

the first important application of OR in formulating the Second Five Year Plan in order to
forecast the trends of demand, availability of resources and for scheduling the complex
schemes necessary for developing the economy of the country.

Most popular practical application of OR in India is linear programming.

Definition:
“ Operations research is a scientific approach to problem solving and decision
making for management ”
Scope of Operations Research:

OR is mainly concerned with the techniques of applying scientific

knowledge, besides the development of science. It provides an understanding which gives
the expert/manager new insights and capabilities to determine better solutions in his
decision making problems, with great speed, competence and confidence. OR has been
found to be used in the following five major areas of research:

OR is useful to the Directing Authority:

 In deciding optimum allocation of various limited resources such as men,

machines, material, time, money, etc., for achieving the optimum goal.

OR is useful to Production Specialist:

 In Designing, selecting and locating sites.

 Determining the number and size.
 Scheduling and sequencing the production runs by proper allocation of machines;
and
 Calculating the optimum product mix.

OR is useful to the Marketing Manager :

 How to buy, when to buy and what to buy at the minimum possible cost.
 Distribution points to sell the products and the choice of the customers.
 Minimum per unit sale price.
 The customer’s preference relating to the size, colour, packaging etc., for various
products and the size of the stock to meet the future demand and
 The choice of different media of advertising.

OR is useful to the Personnel Administrator:

 Skilled persons at a minimum cost.

 The number of persons to be maintained on full time basis in a variable work load
like freight handling etc.. and
 The optimum manner of sequencing personnel to a variety of jobs.

OR is useful to the Financial Manager :

 Find out a profit plan for the company.

 Determine the optimum replacement policies.
 Find out the long-range capital requirements as well as the ways and means to
generate these requirements.
Objectives of operations research:

 Decision making and improve its quality.

 Identify optimum solution
 Integrating the systems
 Improve the objectivity of analysis
 Minimize the cost and maximize the profit
 Improve the productivity
 Success in competition and market leadership
 APPLICATIONS OF OPERATIONS RESEARCH IN DECISION MAKING

INTRODUCTION:

The Operations Research may be regarded as a tool which is utilized to

increase the effectiveness of management decisions. Scientific method of OR is used to
understand and describe the phenomena of operating system. Mathematical and logical
means of Operations Research provides the executive with quantitative basis for decision
making and enhance ability to make long range plans and to solve everyday problems of
industry with greater efficiency and competence.

FEATURES (CHARACTERISTICS) OF OPERATIONS RESEARCH:

(i) Inter-Disciplinary Team Approach:

This requires an inter-disciplinary team including individuals with skills in mathematics,

statistics, economics, engineering, material sciences, computer etc.

(ii) Wholistic Approach to the System:

While evaluating any decision, the important interactions and their impact on the whole
organization against the functions originally involved are reviewed.

(iii) Methodological Approach:

Operations Research utilizes the scientific method to solve the problem

(iv) Objective Approach:

Operations Research attempts to find the best or optimal solution to the problem under
consideration, taking into account the goals of the organization.

MODELING IN OPERATIONS RESEARCH:

A MODEL is a representation of the reality. Most of our thinking of operations

research in business take place in the context of models. The objective of model is not to
identify all aspects of the situation but to identify significant factors and their intre-
relationship. A major advantage of modeling is that it permits the decision maker to
examine the behavior of a system without interfering with as going operations.

TYPES OF OR MODELS

PHYSICAL MATHEMATICAL BY NATURE OF BY THE

EXTENT
MODEL MODEL ENVIRONMENT OF
GENERALITY

ICONIC ANALOG DETERMINISTIC PROBABALISTIC GENERAL

SPECIFIC
MODELS MODELS MODELS MODELS MODELS
MODELS
Physical models:

These models include all forms of diagrams, drawings of graphs and charts. Most of
which are designed to deal with specific types of problems. There are two types of
physical models which are explained as follows:
a. Iconic models

These models are pictorial representation of real systems and have the
appearance of the real thing. In other words it is an image. Examples of such models are
photograph, a physical model such as smal scale model of a dairy plant, etc. These kinds
of models are cal ed ‘Iconic’ because they are look alike items to understand and interpret
the real things.
b. Analog models

These models are the one in which one set of properties is used to represent
another set of properties. After the problem is solved, the solution is re-interpreted in terms
of the original system. For example, graphs and maps in various colours are analogue
models in which dif erent colours correspond to dif erent characteristics e.g., blue
representing water, brown representing land, yel ow representing production etc.

Mathematical models

The Symbolic or mathematical models employ a set of mathematical

symbols to represent the decision variable of the system under study. These variables are
related together by mathematical equations. Following are the examples of mathematical
models which have been applied to business and industry.
 Allocation model
 Routing model
 Queuing model
 Simulation
 Replacement model
 Sequencing model
By nature of environment :

a. Deterministic model

Such models assume conditions of complete certainty and perfect knowledge. for
example; linear programming, transportation and assignment models are deterministic
models.

b. Probabilistic model

These models handle those situations in which consequences or payoff of

managerial actions cannot be predicted with certainty.
By the extent of generality
a. General models

General model is one in which does not apply one situation

b. Specific model
Specific model is applicable under specific condition only e.g. sales response
curve, equation as a function of advertising is applicable in marketing function alone.
METHODOLOGY OF OPERATIONS:

The six methodology involves in operation research are as follows:

Formulating the Problem

Constructing a Mathematical Model
Deriving Solution from the Model
Testing the Model and the Solution Derived from it
Establishing Controls over the Solution
Implementation of the Solution.

1. Formulating the Problem:

In this phase, the problem is formulated in an appropriate form. This phase

should give a statement of the problem’s elements that include the controllable (decision)
variables, the uncontrollable parameters, the restrictions or constraints on the variables
and the objectives for defining a good or improved solution.
2. Constructing a Mathematical Model :

In this phase, both static and dynamic structural elements and the representation
of inter-relationship among the elements in terms of mathematical formulae need to be
specified. A mathematical model should include mainly the following three basic sets of
elements:

 Objective Function

 Decision Variables and Parameters

 Constraints or Restrictions

3. Deriving the solution from the model:

This phase of the study deals with the mathematical calculations for obtaining the
solution to the model. A solution of the model means those values of the decision
variables that optimize one of the objectives and give permissible levels of performance
on any other of the objectives.
4. Testing the model and its solution:

This phase of the study involves checking the validity of the model used. A
model may be said to be valid if it can give a reliable prediction of the system’s
performance.
5. Establishing Controls over the Solution :

This phase of the study establishes control over the solution by proper feedback
of the information on variables which deviated significantly. As soon as one or more of
the controlled variables change significantly, the solution goes out of control. In such a
situation the model may accordingly be modified.
6. Implementation of the Solution:

This phase of the study deals with the implementation of the tested results of the
model. This would basically involve a careful explanation of the solution to be adopted
and its relationship with the operating realities.
ADVANTAGES/ MERITS OF OR TECHNIQUES:

Optimum use of production factors:

Linear programming techniques indicate how a manager can utilize most
effectively his inputs/ factors and by more efficiently selecting and distributing these
elements.
Improved quality of decision:

The effect on the profitability due to changes in the production pattern will be
clearly indicated in the simplex table. These tables give a clear picture of the happenings
within the basic restrictions and possibilities of behavior of compound elements involved
in the problem.

Preparation of future managers:

These methods substitute a means for improving the knowledge and skill of young
managers.

Modification of mathematical solution:

OR presents a possible practical solution when one exists, but it is always a

responsibility of the manager to accept or modify the solution before its use. The effect of
these modifications may be evaluated from the computation steps and tables.

Alternative solutions:

OR techniques suggest al the alternative solutions available for the same profit so
that the management may decide on the basis of its strategies.

LIMITATIONS OF OR

Practical application:

Formulation of an industrial problem to an OR set programme is a dif icult task.

Reliability of the proposed solution:

A non-linear relationship is changed to linear for fitting the problem to linear

programming. This may disturb the solution.

Money and time cost:

When the basic data is subject to frequent changes, the cost of changing
programme manual y is a costly affair.

Combining two or more objective functions:

Very frequently maximum profit does not come from manufacturing the maximum
quantity of the most profitable product at the most convenient machine and at the
minimum cost, since this may lead to underutilization of certain lines of production.
The aim is not to optimize individual objective function. It is, therefore,
necessary to have a single objective function which can cover several objective functions
at the same time. Despite al the above limitations, OR is a powerful tool and an analytical
process that offers the presentation of an optimal solution.
MATHEMATICAL FORMULATION OF THE LINEAR PROGRAMMING PROBLEM
AND ITS GRAPHICAL SOLUTION

Introduction

A large number of business and economic situations are concerned with problems of
planning and allocation of resources to various activities. In each case there are limited
resources at our disposal and our problem is to make such a use of these resources so as to
maximize production or to derive the maximum profit, or to minimize the cost of production
etc. Such problems are referred to as the problems of constrained optimization. Linear
programming (LP) is one of the most versatile, popular and widely used quantitative techniques.
Linear Programming is a technique for determining an optimum schedule chosen from a large
number of possible decisions. The technique is applicable to problem characterized by the
presence of a number of decision variables, each of which can assume values within a certain
range and affect their decision variables. The variables represent some physical or economic
quantities which are of interest to the decision maker and whose domain are governed by a
number of practical limitations or constraints which may be due to availability of resources like
men, machine, material or money or may be due quality constraint or may arise from a variety
of other reasons. The most important feature of linear programming is presence of linearity in
the problem. The word Linear stands for indicating that all relationships involved in a particular
problem are linear. Programming is just another word for “planning” and refers to the process
of determining a particular plan of action from amongst several alternatives. The problem thus
reduces to maximizing or minimizing a linear function subject to a number of linear inequalities

MATHEMATICAL FORMULATION OF THE LINEAR PROGRAMMING

PROBLEM

Linear

The word linear is used to describe the relationship among two or more variables which are
directly proportional. For example, if the production of a product is proportionately
increased, the profit also increases proportionately, then it is a linear relationship. A linear
form is meant a mathematical expression of the type,

Programming

The term “Programming” refers to planning of activities in a manner that achieves some
optimal result with resource restrictions. A programme is optimal if it maximizes or
minimizes some measure or criterion of effectiveness, such as profit, cost or sales.

Decision variables and their relationship

The decision (activity) variables refer to candidates (products, services, projects etc.) that are
competing with one another for sharing the given limited resources. These variables are
usually inter-related in terms of utilisation of resources and need simultaneous solutions. The
relationship among these variables should be linear.
 Objective function

The Linear Programming problem must have a well defined objective function for
optimization. For example, maximization of profits or minimization of costs .

Constraints

There are always limitations on the resources which are to be allocated among various
competing activities. These resources may be production capacity, manpower, time, space or
machinery.

Non-negativity restriction

All the variables must assume non-negative values, that is, all variables must take on values
equal to or greater than zero. Therefore, the problem should not result in negative values for
the variables.

Formulation of a Linear Programming Problem

The formulation of the Linear Programming Problem (LPP) as mathematical model involves
the following steps:

Step 1. Identify the decision variables to be determined and express them in terms of
algebraic symbols as X1,X2, --- , Xn.

Step 2. Identify the objective which is to be optimized (maximized or minimized) and

express it as a linear function of the above defined decision variables.

Step 3. Identify all the constraints in the given problem and then express them as linear
equations or inequalities in terms of above defined decision variables.

Step 4. Non-negativity restrictions on decision variables.

Example 1

A milk plant manufactures produce two types of products A and B and sells them at a profit
of Rs. 5 on type A and Rs. 3 on type B. Each product is processed on two machines M1 and
M2. Type A requires one minute of processing time on M1 and two minutes on M2; type B
requires one minute on M1 and one minute on M2. The machine M1 is available for not more
than 6 hours 40 minutes, while machine M2 is available for 8 hours 20 minutes during any
working day; so formulate the problem as LP problem.

Example 2 :

A milk plant manufactures produce two types of products A and B and sells them at a profit
of Rs. 10 on type A and Rs. 15 on type B. Each product is processed. Its required resources
R1 & R2. Type A requires two minutes on R1 and one minute on R2; type B requires one
minute on R1 and Three minutes on R2. Availability of resources R1 is 45 minutes, while R2
is 50 minutes so formulate the problem as LP problem.

Example 3:
In the production of 2 types of toys, a factory uses 3 machines A, B and C. The time required to
produce the first type of toy is 6 hours, 8 hours and 12 hours in machines A, B and C
respectively. The time required to make the second type of toy is 8 hours, 4 hours and 4
hours in machines A, B and C respectively. The maximum available time (in hours) for the
machines A, B, C are 500, 1000 and 800 respectively. The profit on the first type of toy is 5
Rs. while that on the second type of toy is 3 Rs.. Find the number of toys of each type that
should be produced to get maximum profit.

Example 1:

Consider two different types of food stuffs say F1 and F2. Assume that these food stuffs
contain vitamin A and B. Minimum daily requirements of vitamin A and B are 40mg and
50mg respectively. Suppose food stuff F1 contains 2mg of vitamin A and 5mg of vitamin B
while F2 contains 4mg of vitamin A and 2mg of vitamin B. Cost per unit of F1 is Rs. 3 and
that of F2 is Rs. 2.5. Formulate the minimum cost diet that would supply the body at least the
minimum requirements of each vitamin.

Example 2:

A house wife have to mix to types of foods F1 and F2 in such a way vitamins contains of
the mixers at least 8 units of vitA and 11 units of vitB . food F1 cost was Rs.60/Kg and food
F2 cost was Rs.80/Kg, food F1 contains 3 units / Kg of vit A and 5 units/Kg of vit B while
food F2 contains 4 units/Kg of vitA and 2units/Kg of vitB . So formulate this problem as
LPP to minimize the cost of the mixtures.

Example 3:

A diet is to contain at least 4000 units of carbohydrates, 500 units of fat and 300 units of
protein. Two foods A and B are available. Food A costs 2 Rs. per unit and food B costs 4 Rs.
per unit. A unit of food A contains 10 units of carbohydrates, 20 units of fat and 15 units of
protein. A unit of food B contains 25 units of carbohydrates, 10 units of fat and 20 units of
protein. Formulate the problem as an LPP so as to find the minimum cost for a diet that
consists of a mixture of these two foods and also meets the minimum requirements.

The above information can be represented as

Let the diet contain x units of A and y units of B.

Total cost = 2x + 4y

The LPP formulated for the given diet problem is

Minimize Z = 2x + 4y

subject to the constraints

Graphical Solution of Linear Programming Problem
1. LP problems which involve only two variables can be solved graphically.
2. Feasible solution

A set value of the variables of a linear programming problem which satisfies the set of
constraints and the non-negative restrictions is called feasible solution of the problem.
3. Feasible region

The collection of all feasible solutions is known as the feasible region. Any point which
does not lie in the feasible region cannot be a feasible solution to the LP problems. The feasible
region does not depend on the form of the objective function in any way. If we can represent the
relations of the general LP problem on dimensional space, we will obtain a shaded solid figure
representing the domain of the feasible solution.

[Link] solution

A feasible solution of a linear programming problem which optimizes its objective function is
called the optimal solution of the problem.

Steps to find graphical solution of the linear programming problem

Step 1: Formulate the linear programming problem.

Step 2: Draw the constraint equations on XY-plane.

Step 3: Identify the feasible region which satisfies all the constraints simultaneously. For less than
or equal to constraints the region is generally below the lines and for greater than or equal to
constraints, the region is above the lines.

Step 4: Locate the solution points on the feasible region. These points always occur at the vertices
of the feasible region.
 Step 5: Evaluate the optimum value of the objective function.
Find the graphical solution of problem

Solution
Let number of full cream and single toned milk pouches to be produced is X1and X2 and Let
profitable
Z Objective function: Max. Z = 8X1+7X2

Subject to constraints: X1 + X2 45000 (1)

X1 20000 (2)

X2 40000 (3)

3X1 + X2 66000 (4)

Non-negativity restrictions X1, X2 0

To find the optimal solution find the values of objective function at the various extreme

Extreme Point Coordinates Profit Function Z = 8X1+7X2

 O X1=0 , X2=0 Z=8(0)+7(0)=0

A X1=0 , X2=40000 Z=8(0)+7(40000)=280000

B X1=5000, Z=8(5000)+7(40000)=320000
X2=40000

C X1=10500, Z=8(10500)+7(34500)=325500
X2=34500

D X1=20000 , Z=8(20000)+7(6000)=202000
X2=6000

E X1=20000 , X2=0 Z=8(20000)+7(0)=160000

So maximum value of Z occurs at point C (10500, 34500) so it is the optimal solution. It can
be concluded that Dairy Plant must produce 10500 pouches of full cream milk and 34500
pouches of single toned milk.

Simplex method
Step 1. All the constraints should be converted to equations except for the non-negativity

restrictions which remain as inequalities (≥0).

Step 2. The right side element of each constraint should be
made

non-negative.

Step 3. All variables must have non-negative values.

Step 4. The objective function should be of maximization form.

Slack variables

If a constraint has less than or equal sign, then in order to make it on equality we have to
add something positive to the left hand side. The non-negative variable which is added to the
left hand side of the constraint to convert it into equation is called the slack variable. For
example, consider the constraints.
 3X1 + 5X2 ≤ 2, 7X1 + 4X2 ≤ 5, X1, X2 ≥ 0

We add the slack variables S1 ≥ 0, S2 ≥ 0 on the left hand sides of above inequalities
respectively to obtain 3X1+5X2+S1 = 2

Surplus variables

If a constraint has greater than or equal to sign, then in order to make it an equality we have
to subtract something non-negative from its left hand side. The positive variable which is
subtracted from the left hand side of the constraint to convert it into equation is called the
surplus variable.

For example, consider the constraints.

3X1 + 5X2 ≥ 2, 2X1 + 4X2 ≥ 5, X1, X2 ≥0

We subtract the surplus variables S3 ≥0, S4 ≥ 0 on the left hand sides of above inequalities
respectively to obtain
3X1+5X2 –S1 = 2

Inventory : The term is generally used to indicate raw material, work-in-progress

(intermediate good), finished goods, packaging material and other stock in order to meet an
expected demand or distribution in future as well as day to day functioning of any
organization.

• The term inventory is generally classified into two categories:

 Direct inventory and Indirect Inventory

• Direct inventories play a direct role in the manufacturing and become a bigger part of
finished goods. They are further classified into three groups:

– Raw material inventories

– Work in progress inventories

– Finished goods inventories

• Indirect Inventory

They include those items which are necessary for manufacturing but do not become
component of the finished goods, such as oil, grease, petrol, lubricant, office material,
maintenance material etc.

Types of inventory

• Fluctuation Inventory
 These have to be carried because sales and production time can’t be predicted accurately.
There is fluctuation in the demand and lead times that affect the production of items such
type of results stock or safety stock are called fluctuation inventory

• Anticipation Inventory

These are built in advance for the season of large scale of production and a promotional
programme . In this inventory are store for future requirement.

• Cycle or lot size Inventory

In practical situations the rate of consumption is same as rate of production so the items are
purchased in large quantity than they are required. This results in cycle or lot size inventory.

Costs Involved in Inventory Control Models

• Holding Cost

Costs associated with carrying or holding goods in stock is known as carrying or holding
cost which is denoted by Cc or Ch per unit of goods for a unit of time, respectively.

However cost is assumed to be varying directly the size of inventory as well as the time
for which the item is in stock. The following components constitute the holding cost.

• Interest charged on investment

• Record keeping and administrative costs

• Handling cost and Storage cost

• Depreciation, deterioration or obsolescence cost

• Insurance cost

• Purchase Cost or Production Cost

Setup Cost:

These include the fixed cost associated with obtaining goods through placing of an order or
purchasing or manufacturing or setting up of a machine before start of production. So they
include cost of purchase, requisition, quality control etc. These are also known as order cost
or Setup cost. It is denoted by CO.

Economic Lot Size(ELS)

• It is the quantity of material or units of manufacture goods that can be produced or

purchased with in the lowest unit cost range.

• A manufacturer must determine the production lot size that will result in minimum
production and storage cost.

• Economic Lot Size(ELS) = √(2DS/H) × √(p/p-d)

• Where as D = Annual demand in units for the inventory items

S = Setup or Ordering cost per order

 H = Holding cost or Carrying cost per unit per year

p = Production rate

d = Daily demand

• Total Annual Cost:

C = ELS/2(p-d/p) H + D/ELS × S

• Time Between Orders:

(TBO)ELS = ELS/D (Work days/Year)

• Production time per lot (PT) = ELS/p

Economic Order Quantity(EOQ)

• This concept was developed by FW. Harris in 1916. The concept is as a large size
quantity increases the carrying cost (holding cost) CH will increases. While ordering
cost (CO)will decreases. On the other hand as a large size quantity decreases the
carrying cost (holding cost) CH will increases and also ordering cost (CO)will
increase.

• EOQ is the size of order which minimize total annual cost of carrying inventory and
cost of ordering under the assumed conditions of certainly an annual demands are
known.

• EOQ = √(2DCO / CH)

Where as D = Annual Demand

CO = Ordering Cost

CH = Holding Cost

• No . of Orders per annum = D/EOQ

• Time Between Orders = (12/52/365) / No. of. orders

• Total Inventory cost = Purchase cost + Total ordering cost + Total carrying cost

• Purchase cost = D × cost per unit

• Total ordering cost = (D/EOQ) × CO

• Total carrying cost = (EOQ/2) × CH

REPLACEMENT THEORY
Types of Replacement Situations:

The replacement situations may be classified into three categories:

 Replacement of items that become worse with time e.g. milk plant machinery,
tools, vehicles, equipment etc.
  Replacement of items which do not deteriorate with time but break down
completely after certain usage e.g. electric tubes, machinery parts etc.
 Replacement of items that becomes obsolete due to new developments.

The problem is to decide the best policy to adopt with regard to replacement.
The need for replacement arises in a number of different situations so that different
types of decisions may have to be taken. For example:
It may be necessary to decide whether to wait for certain items to fail, which
might cause some loss, or to replace the same in advance, even at a higher cost.
An item can be considered individually to decide whether or not to replace
immediately.
It is necessary to decide whether to replace by the same item or by an improved type
of item.

Types of Failures:

There are two types of failure: i) Gradual failure ii) Sudden failure

Gradual failure:

It means slow or progressive failure as the life of the item increases, its
efficiency decreases resulting in decreased productivity, increased operating cost and
decrease in the value of the item, e.g. machines/equipment etc.

Sudden failure:

In this type of failure the items do not deteriorate markedly with service but
which ultimately fail after some period of usage, thus precipitating cost of failure.
Sometimes sudden failure of an item may cause loss of production or may also
account for damaged or faulty products. The period between installation and failure is
not constant for any particular type of equipment but will follow some probability
distribution which may be progressive, retrogressive or random in nature.

i) Progressive failure

Under this mechanism, the probability of failure increases with the

increase in the life of an item.

ii) Retrogressive failure

Certain items have more probability of failure in the beginning of their

life and as time passes, the chances of failure become less. In other words, the ability
of the unit to survive the initial period of life increases its expected life.

iii) Random failure

Under this mechanism, constant probability of failure is associated

with items that fail from random causes such as physical shocks, not related to age.

Assumptions:

Following assumptions are essentially required for replacement decisions:

i) The quality of the output remains constant.

 ii) Replacement and maintenance costs remain constant.

iii) The operational efficiency of the equipment remains constant.

iv) There is no change in technology of the asset under consideration.

OR Methodology of Solving Replacement Problem:

OR provides a methodology for tackling replacement problem which is discussed below:

 Identify the items to be replaced and also their failure mechanism.

 Collect the data relating to the depreciation cost and the maintenance cost for the
items which follow gradual failure mechanism. In case of sudden failure of items,
collect the data for replacement cost of the failed items.

 Select a suitable replacement model.

Replacement Decisions
The problem is to decide the best policy to adopt with regard to replacement. The
need for replacement arises in a number of different following situations so that different
types of decisions may have to be taken.
 It may be necessary to decide whether to wait for a certain item to fail which might
cause some loss or to replace earlier at the expense of higher cost of the item.
 The item can be considered individually to decide whether to replace now or if not
when to reconsider the item in question.
 It is necessary to decide whether to replace by the same item or by a different type of
item.
Types of Replacement Problems
i) Replacement policy for items, efficiency of which declines gradually with time
without change in money value.
ii) Replacement policy for items, efficiency of which declines gradually with time but
with change in money value.
iii) Replacement policy of items breaking down suddenly
a) Individual replacement policy
b) Group replacement policy
iv) Staff replacement
In this lesson we confine ourselves to first two situations only
Replacement of Items that Deteriorate with Time
There are certain items which deteriorate gradually with usage and such items
decline in efficiency over a period of time. Generally, the maintenance cost of certain items
always increase gradually with time and a stage comes when the maintenance cost
becomes so large that it is better and economical to replace the item with a new one. There
may be number of alternatives and we may have a comparison between various
alternatives by considering the costs due to waste, scrap, loss of output, damage to
equipment and safety risks etc.