Q1.

What is the economic order quantity for inventory, see class example of
a book company,
Trying to decide total cost of placing orders for books once, twice, 5, 10 and
20 times a year, then calculate the EOQ, the economic order quantity model
is frequently alleged to be Robust critically evaluate this view, valid what
right what wrong (evaluate the validity and assumption of the basic EOQ
model and all its inconsistencies.

Q2. A simple linear programme problems similar to one given in a class

concerning a company making tables and chairs using 2 departments
assembly and finishing..

The evaluation of whether or not to use overtime is also similar. Discuss the
concept of shadow prices.

Q3. Transportation problems to be solved. A. using a north west corner

solution.
* Using Vogel’s Method
* A discussion of how the NW corner solution may be improved.
*. How do you know if a solution is optimal

Q4. A queueing theory problems. What are the assumption and charteristics
of simple queueies
• explain the significance of (Lambda), Mu and Pie and how they
interrelates
• using queueing formulae given in the exam paper calculate the use
rate of the system average time in the system, number of items in the
system at a given time.
• Probabilities of different numbers of items in the system at a given
time.

Q5 There are also 2 probabilities based question.

A forecasting (Regression) and Correlation question and a critical path

method question.
Q3. Transportation problems to be solved. A. using a north west corner
solution.
* Using Vogel’s Method
* A discussion of how the NW corner solution may be improved.
*. How do you know if a solution is optimal

Transportation AND problems:-

Typical problems : - Diostribution of a product from 3 factories to 3
warehouse all in different towns what is the least cost way to do this

From \ to a b c capacity
D £5 £4 £3 100
E £8 £4 £3 300
F £9 £7 £5 300
Required 300 200 200 700
Demand Constraints Total Demand

+Supply

From \ to a b c capacity
D 100/£5 £4 £3 000
E £8 £4 £3 300
F £9 £7 £5 300
Required 200 200 200 600

From \ to a b c capacity
D 100/£5 £4 £3 000
E 200/£8 100/£4 £3 000
F £9 £7 £5 300
Required 000 100 200 300

From \ to a b c capacity
D 100/£5 £4 £3 000
E 200/£8 100/£4 £3 000
F £9 100/£7 200£5 000
Required 000 000 000 000

Cost of shipping one unit from F to A

2 principals approach exist for this

1. A north west corner initial feasible solution – modified by either the

stepping stone or modified distribution index (Modi) method.

2. Vodels approximation method (VAM)

Cost = 100x£5 + £8x200 + £4 x 100 + £7 x 100 + £5 x 200

500 + 1600 + 400 + 700 + 1000
= 4200 Intial feasible solution

This is an intiail feasible solution but is it least cost ?

The stepping stone and Modi methid test unused routes by sending one unit
of the product by that route to see if the initial feasible solution cost can be
redced

These routes are similar to the simplex method

Vogels method – uses a different approach called minimax (Minimization of

maximum cost penalties or opportunity cost)

The penalty cost incurred by the firm if it does not use the cheapest route

From \ to a b c capacity
D £5 £4 £3 100
E £8 £4 £3 300
F £9 £7 £5 300
Required 300 200 200 700
Demand Constraints Total Demand

+Supply

From \ to a b c capacity
(Row penalties)
D 100/£5 £4 £3 000 £1/-
E £8 200/£4 100/£3 000
£1 £ 1 £ 5
F 200/£9 £7 100/£5 000
£2 £ 2 £ 4
Required 000 000 000 700
Demand Constraints Total Demand

+Supply

Column penalties

£3 £0 £0
£1 £3 £2
£1 - £2

Cost £ 100x5 + 200x 4 + 100x3 + 200x9 + 100x5

500+800+300+1800+500
£3900

Less than the initial feasible solution vogels method will always give a best
solution
The stepping stone procedure or rooks tour

This is a technique to improve an intial northwest corner feasible solution to

a transportation problems

From \ to a b c available
D £5 £4 £3 100
E £8 £4 £3 300
F £9 £7 £5 300
Demand 300 200 200 700

From \ to a b c available
D 100/£5 £4 £3 000
E 200/£8 100/£4 £3 000
F £9 100/£7 200/£5 000
Demand 000 200 200 700

Total Cost 5x100 + 8x200 + 4x100 + 7x100 + 5x200

500 + 1600 + 400 + 700 + 1000
4200

If we ship from so the cost can be reduced using this route

The stepping stone procedure

We test each unused cell or root by using the question what will happening
to total cost if one unit of the product were shippied on that route.

The test is as followis

1 sleect any unused route to evaluate

2. beginning this cell, trace, an anticlock wise closed path back to that square
using cell currently in use
3. beginning with A + + ign at the first square place alternative (+) abd (d)
(-) sign at each corner the path
4. calculate A unit cost (improvement index from these
5. repeat for all unused squares if index vaue is >/ cost can not be reduced if
index values is < 0 it can
To ship one unit from D to B the change in unit cost is, in this solution, there
is only one route that gives a reduction in unit cost
+4
-5
+8
-4
-----
+£3 an increased in unit cost
====

If we ship from F to a we get

+9
-7
+4
-8
= £ -2

But the stepping stone procedure will not tell you the exact allocation that
must be made to this route. It simply identifies that cost can be saved using
this route. Vogels method using calculated cost penalties or opportunity cost
of not being able to use the cheaper routes will always give a least cost
solution

Penalties

Vogels Approximation algoritham

Calculate Row Penalties

Calculate Coulmn Penalties
Penalties are the difference between using the least cost route and the
next least cost route
Allocate as many as possible items to the least cost route associated
with the highest penalty
Repeat until all products are allocated to route

From \ to a b c capacity
D £5 £4 £3 100
E £8 £4 £3 300
F £9 £7 £5 300
Required 300 200 200 700
Demand Constraints Total Demand

+Supply

From \ to a b c capacity
(Row penalties)
D 100/£5 0£4 0£3 000 £1/-
E £8 200/£4 100/£3 000
£1 £ 1 £ 5
F 200/£9 £7 100/£5 000
£2 £ 2 £ 4
Required 000 000 000 700
Demand Constraints Total Demand

+Supply

Column penalties

*£3 £0 £0
£1 £3 £2
£1 - £2
• bigger penalty not to pay

total cost = 5 x100 = 500

+ 4 x 200 = 800
£ 3 x 100 = 3..
£ 9 x 200 = 1800
£5 x 100 = 500
3900

The transportation technique

Fm \ to a b c Factory Row
Availibility penalties
W £4 £3 £3 35 £0 £ 0 £1
Y £6 £7 £6 50 £0 £0 £0
Z £8 £2 £5 50 £3
Demand 30 65 40 135

Fm \ to a b c Factory Row
Availibility penalties

W £4 15£3 20£3 00 £0 £ 0 £1
Y 30£6 £7 20£6 00 £0 £0 £0
Z £8 50£2 £5 00 £3
Demand 00 00 00 135

Coulmn £2 £1(1) £2
£2 £4(2) £3
£2 - £3(3)

Total Cost £3 x 15 = 45
£3 x 30 60
£6 x 30 = 180
£6 * 20 = 120
£ 2 x 50 = 100
Total 505

If demand and supply are not equal we can introduce dummy destination

E:g in our original problems, assume the capacity of factory D increase from
100 to 250 but demand is unchanged

Fm \ to a b c Dummy Capacity

D £5 £4 £3 0 250
e £8 £4 £3 0 300
f £9 £7 £5 0 300
Demand 300 200 200 150 850
n
w e
 s

Fm \ to a b c Dummy Capacity

D 250£5£4 £3 0 250
e 50£8 200£450£3 0 300
f £9 £7 150£5150£0 300
Demand 300 200 200 150 850

NW corner method is arbitray especially if the demand and supply

constraints are not the same.

The route in the south-east corner of the matrix will always lose out
Q1. What is the economic order quantity for inventory, see class example of
a book company,
Trying to decide total cost of placing orders for books once, twice, 5, 10 and
20 times a year, then calculate the EOQ, the economic order quantity model
is frequently alleged to be Robust critically evaluate this view, valid what
right what wrong (evaluate the validity and assumption of the basic EOQ
model and all its inconsistencies.
Inventories management :

(stock of raw material, work in process, finished goods)

The economic order quantity model (EOQ) is a 2 parameters, pereto

optimization model

2. VARIABLES ARE RELEVANT

- order cost for ordering or reordering inventory
- carry cost to keep an items in stock

order cost are time and paper work associated with ordering and receiving
inventory

carry cost are cost of ”ware housing” the stock (Net transportation cost)
Order cost are assumed constant per order regardless of order size but per
unit ordered as order size increase order cost per unit reduce

THIS COMBINATION IS NOT VALID AS THE Z ARE MEASURED IN

IFFERENT UNIT E:G

Carry cost are assumed constant per unit carried and to increase directly in
proportion to quantity carried.
CONSIDER W OR OT THE EOQ IS VALID OR

Algebraically :-

Order cost = O.S/Q

Where O = order costs per order

S= demand or usage
Q=order quantity (Assumed constant)
S/Q=number of orders placed

Carry cost = C.Q/2 , where C = carry cost per unit, Q/2 average quantity
carried

Depending on certain

Depletion “assumption “ as follows

1. Inventory depletion (run down) (reduced) in a stepwise but
approximately linear fashions

2. on the same assumption Q/2 is a line of best fit

3. Inventory is replenished immediately when stocks are zero. Theer are
no “lead time” problems or carry forwards inventories”
Note unlike in the graph order cost are not “per unit” carry cost are not total
carry cost but average supportes of the model claim that it is “ robust” it
gives “reasonable” answer despite being misspecfied.

Theoretically total cost are minimized where order cost = carry cost.

o.s/q = Cq/2

the eoq is the value of Q that satisfies this equation errors multiply

2OS = C.Q2 = 2OS/C = Q2

EOQ formula = Sq. Rt 2OS/c = Q

Example

A book shop is a considering how many copies of a book to stock demand in

estimated at 5000 per year, it cost £100 to place an order for book and £1 per
bokk to carry it in stock, the book sells at £ 12.5 each and cost the book shop
at £ 10.. each

1. What are the total cost of order once, twice, 5 and 10 and 20 times a
year
3. wheat is the EOQ
4. total cost T.C = O.S/Q + C.Q/2

order once Q = 5000, , S/Q 5000/5000

T.C = £ 100 x 1 + 1.5000/2 => 100 + 2500

T.C = £ 2600

Order twice (Q=2500, S/Q = 5000/2500=2

T.C = 100x 2 + 1.2500/2 = 200 + 1250 = 1450

Order 5 times t.c. 5000/5 = Q 1000, S/Q = 5000/1000 = 5

£ 100.5 + 1.1000/2 = 500+500 = £ 1000

Order 10 times Q 5000/10 = 500, S/Q 5000/500 = 10

100 x 10 + 1.500/2 = 1000+250 = 1250

Order 20 times T.C Q 5000/20 = 250 S/Q = 5000/250 = 20

T.C. 100 x 20 + 1. 250/2

£ 2000 + 125 = £2125

(ii)

E.o.Q = Sq. Rt 2SO/C

Sq. Rt 2x5000x100/1 = Sq. Rt1,000,000 = 1000 Books

Order cost – Up

Carry Cost – Reduce

Variation on the EOQ model

The main variation are

Safety stock and buffer stock models where inventores is not permitted to
reach zero

The eoq formula is not changed there is only an additional to the value of
carry cost

Reorder point / lead time

time

This leads to the idea / concept that time rather then costs is the most
important factor.
Q4. A queueing theory problems. What are the assumption and charteristics
of simple queueies
• explain the significance of (Lambda), Mu and Pie and how they
interrelates
• using queueing formulae given in the exam paper calculate the use
rate of the system average time in the system, number of items in the
system at a given time.
• Probabilities of different numbers of items in the system at a given
time.

Queuing system

A car mechnic in stalls exhaust pipes, he is able to do this at a rate of 3 per

hour (one in every 20 minutes) all simple queue assumption are met if L
(arrival rate) is 2 cars per hours M (service rate) is 3 cars per hours.

Then
1. Numbers of cars in system

L/M-L = 2/3-2 = 2/1 = 2 cars

2. Waiting time 1/M-L = 1/3-2 = 1/1 = 1 hour

3. Average number cars waiting on line

L sq / M(M-L) = 2 sq/3(3-2) = 4/3 = 1.333 cars

4. Avg. waiting time per car

L/m(m-L) = 2/3(3-2) = 2/3 = 0.66 = 40 minutes

5. Traffic intensity P = L/M = 2/3 = 0.66

Probability of 0 cars on the system = 1-P = 0.33

One these charteristics are established for a system it is important to evaluate

them economically.
The owners of the garage determine that it costs in terms of customer
satisfaction and lost goodwill from queueing £ 10 per hour

The avg car has a 40 minutes wait in a normal 8 hours working day 16 cars
will be services.

Overall customer waiting time = 16 (40 minutes) = 10 hours 40 minutes

Overall cist = 10 hours 40 minutes x £ 10 = £107/-

This can then be compound to the salary of the mechanic

Say the mechanic earn £ 7 and hour for an 8 hours day this is £ 56 per day.
The total expected daily cost is £ 107/- + 56 = £ 163 per day.

Can service times be increased to reduce total cost say by hiring another
mechanic.

The basic idea in relation to simple queuing system involved “ Pareto

optimization “

The fundamental assumption in queuing theory involves arrival rates / time

and service rates / times

It is assumed that arrivals into “ simple” queuing are random, no

simultaneous arrival are possible. Queue discipline follows a simple “first
come first served” criterion.

It is also assumed that the likely population of queuing is infinite

It is assumed that the rate of arrival can be approximated by a “Poisson”

probability distribution

This is a discreate probability distribution (dealing with discreate (Whole

number) arrival related to a continues time / intervals

Queuing line characteristics

For simple queue it is assumed that those queuing are patient and do not
back are renege on the process.

The queue discipline is assumed to be first come first served (or first in first
out in more complex system it need not be this.

Service time
This is assumed to be negative exponentially distributed

In summary the characteristics of a simple queuing are

1. arrival are FIFO every arrival waits to be served
2. arrival are independent of preceding arrival and average arrival rate
does not charge over time
3. arrival rate are approximated by a Poisson distribution and are from
one infinite or very large population
4. service time will vary from customer to customer but their average
time is known
5. service time are distributed negatively exponentially
6. service time must be faster than arrival rate “ the Greek”

let lambda = average arrival rate per unit of time

Mu = average service rate per unit of time.
Rho = traffic intensity or utilization of the system, P=lambda / mu

With simple queue usually if P>0.8 then the queue may become unstable

From this it become possible to define a number of formulae concerning

numbers, time and probability characteristics of queuing system

1. average number of unit / customers is queuing system (waiting time

and service time) lambda / mu – lambda
2. average time a unit spend in a queue = 1/mu – lambda
3. average number of unit in the queue (waiting time) lambda sq / mu
(mu-lambda)
4. average time a unit spends waiting in a queue lambda / mu (mu-
lambda)
5. utilization of queue rho = lambda / mu
6. probability of number of queue = 1-lambda / mu
7. probability of more than a given numbers of units in the system (k)
when N is the total number of units ion the system (lambda/mu) K+1
Q2. A simple linear programme problems similar to one given in a class
concerning a company making tables and chairs using 2 departments
assembly and finishing..

A company makes chairs and tables from 2 dept. the assembly and finishing
dept.

To produce a chair takes 4 hours of assembly time and 2 hours of finishing

time the corresponding time for a table it took 2 hours and 5 hours
respectively
There are 80 hours of assembly time avoidable per week and 120 hours of
finishing times

The profit contribution per chair is £30 and per table is £ 40

1. what production level per week maximize profit
2. 2. if extra finishing time can be made available using over time at £
4/- per hour over usual cost should it be used.

1.Decision variables
let
x = number of chairs produced
Y = number of tables produced

2.objective function max 30x + 40 y

corner max 30x + 40y

3.constraints
Assembly : 4x + 2yis< 80
Finishing : 2x + 5y is< 120
Corner 4x + 2yis<80
2x + 5y is< 120

Non negativity, x,y is>0

4 x + 2y = 80, if x = 0, y = 40, y=0, x=20

2x + 5y = 120, if x= = 0, y= 24
Y = 0, x = 60

At A x = 0, Y = 24 giving £ 30 (0) + £ 40(24) = £ 960

AT C x = 20, Y = 0 f=giving £ 30(20) + 40(0) = £ 600

AT B 4x + 2y = 80------1one equals
2x + 5y = 120 ---- 2two

Multiply 2two by 2
4x + 10y = 240 3three
Substarct 4x+2y=80
8y=160 = Y = 20

Subsitutute in 1one 4X+40 = 80, x = 10

Giving £ 30 (10) + £ 40 (20) = £ 300 + 800 = £ 11000

To use one unit of each finishing tie affect the answer marginally. We
add one hours to the available time

2x + 5y = 21

At A if x = 0, Y= 24.2

At C X=20, Y=0, = £ 30 (20) + 40 (0) = £ 600

AT B 4x + 2y = 80, equal , 2x + 5y = 121,

Multyply 2two by 2 = 4x + 10y = 242

Substarct 1one 4x + 2y = 80 = 8y = 162 = 20.25

Susbsitutate in 1One

4x + 40.5 = 80 = 4x = 39.50

X = 9.88

Giving £ 30 (9.88) + £ 40 (20.25)

= 296.25 + 810 = £ 1106.25

Profit is increased by £ 6.25 for each hours of overtiome in the finishing

dept. at the cost of £ 4 per hour, so yes over time should be used.
This val;lue of £ 6.25 is known as a dual value or shadow price it is the
amount of increase in the value of the objective function given by adding
one unit of availability of the constraints function