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Cognizant to the above fact, we need to be well acquainted with the fundamentals of
management science as related to its business application. This unit is dedicated to
acquaint you with overview of operations research to make you a better decision maker
by learning the decision-making process. To this end, the unit is organized in to two
sections. In the first section, you will learn about definition of operations research, history
of operations research, basic features and significance of operations research. The second
section is devoted to quantitative analysis & decision making process, models and model
building, and operations research major techniques.
The Industrial Revolution of the 19th century probably did more to shape life in the
modern industrialized world than any event in history. Large factories with mass
production created a need for managing them effectively and efficiently. The field of
Decision Science (DS) also known as Management Science (MS), Operations Research
(OR) in a more general sense, started with the publication of the Principles of Scientific
Management in 1911 by Frederick W. Taylor. His approach relied on the measurement of
industrial productivity and on time /motion studies in the factories. The goal of his
scientific management was to determine the best method for performing tasks in the least
amount of time, while unfortunately using the stopwatch in an inhuman manner.
1
Until the middle of the 19th century, most industrial enterprises only employed a few
workers. However, as companies expanded, it became less and less feasible for one
person to manage all of the new managerial functions of the business effectively. New
scientific methodologies were developed to provide assistance to each new type of
managerial function as it appeared. As more specialized forms of management emerged,
more specialized sub-functions, such as statistical quality control, equipment
maintenance, marketing research, and inventory control emerged. Whenever a managerial
function is broken down into a set of different sub-functions, a new task, called the
executive function of management, is created to integrate the diverse sub-functions so
that they efficiently serve the interests of the business as a whole. The executive function
evolved gradually with organizations themselves. However, increasing demands were
made on the manager who, in turn, sought aid outside the organization. This gave rise to
management consultants. What we call OR/MS/DS/SS today is, in fact, the use of
scientific tools to aid the executive.
Operation research (OR) originated in Great Britain during World War II to bring
mathematical or quantitative approaches to bear on military operations. Since then,
OR/MS/DS/SS has evolved to be applicable to the management of all aspects of a
system, product, or service, and hence is often referred to as Systems Science (SS) or
Management Science (MS). It has now become recognized as an important input to
decision-making in a wide variety of applications in business, industry, and government.
The term OR arose in the 1940's when research was carried out on the design and
analysis of mathematical models for military operations. Since that time the scope of OR
has expanded to include economics (known as econometrics), psychology
(psychometrics), sociology (socio-metrics), marketing (marketing research and marketing
science), astrology (astronomy), and corporate planning problems. The growing
complexity of management has necessitated the development of sophisticated
mathematical techniques for planning and decision-making, and the OR/MS/DS/SS
features prominently in this structured decision-making process cycle by providing a
quantitative evaluation of alternative policies, plans, and decisions. The mathematical
disciplines most widely used in OR/MS/DS/SS modeling process include mathematical
programming, probability and statistics, and computer science. Some areas of OR, such
as inventory control, production control, and scheduling theory, have grown into sub-
disciplines of their own right and have become largely indispensable in the modern
world.
Military organizations had gone through the same type of evolution as other businesses
and industries. This organizational evolution took place in the twenty-year gap between
the end of World War I and the beginning of World War II when the military leadership
had to turn to teams of scientists for aid. These teams of scientists were usually assigned
to the executive in charge of operations; hence their work came to be known as
Operational Research in the United Kingdom and by a variety of names in the United
States: Operation Research (OR), Decision Science (DS), Operational Analysis, System
Analysis (SA), Success Science (SS), and Management Science (MS). The name
Operations Research is the most widely used.
The potential of computer and information systems as new tools for management forced
the non-technically trained executives to begin to look for help in the utilization of the
computer. The emerging search for assistance was accelerated by the outbreak of the
2
Korean War. This vigorous growth of OR in the military continued to provide rapid
applicability to other industries and sectors.
1.2 Meaning and Definition of Operations Research
3
1.3 Basic Features of Operations Research
The OR/MS/DS approach to decision making includes the diagnosis of current
decision-making and the specification of changes in the decision process. Diagnosis is the
identification of problems (or opportunities for improvement) in current decision
behavior; it involves determining how decisions are currently made, specifying how
decisions should be made, and understanding why decisions are not made, as they should
be. Specification of changes in decision process involves choosing what specific
improvements in decision behavior are to be achieved and thus defining the objectives.
Nowadays, the OR/MS/DS approach has been providing assistance to managers in
developing the expertise and decision tools necessary to understand the decision
problems, put them in analytical terms and then solve them. Applied Management
Science is the science of solving business problems. The major reason that MS/OR has
evolved as quickly as it has is due to the evolution in computing power. The foundation
of OR/MS/DS/SS is built on the philosophy of knowledge, science, logic, and above all
creativity. Almost all decision problems have environments with similar components as
follows:
1. The decision-maker. The term decision-maker refers to an individual, not a group.
2. The analyst who models the problem in order to help the decision maker.
3. Controllable factors (including your personal abilities and physical resources),
4. Uncontrollable factors
5. The possible outcomes of the decision
6. The environment/structural constraints
7. Dynamic interactions among these components.
The procedure to be followed in the study of OR, generally involves the following major
phases.
1. Formulating the problem
2. Constructing a mathematical model
3. Deriving the solution from the model
4. Testing the model and its solution ( updating the model)
5. Controlling the solution
6. Implementation
1.4 Application Areas of Operations Research
There are so many application areas of operations research; to mention some of the most
widely known areas:
Forecasting Human Resource Management
Production Scheduling Advertising and sales research
Inventory Control Maintenance and Repair
Capital Budgeting Accounting procedures
Transportation Packaging
Plant location Natural Resource Management
4
Research and Development Quality Control, etc.
Health Care
1) Allocation models :
o Linear programming
o Non-linear programming
o Transportation models
o Assignment models
o Integer programming
o Goal programming
o Dynamic programming
2) Inventory models
3) Replacement models
4) Network models
5) Waiting- line models(Queuing theory)
6) Simulation
7) Sequencing models
8) Decision theory
9) Game theory
10) Markov models
11) Regression and correlation
1.7 Quantitative Analysis & the Decision Making Process
In order to understand the role of quantitative analysis in managerial type of
problems, it is better to have a look at the decision making process.
o Decision Making: is the process of selecting a feasible course of action from a set of
alternative courses of actions so as to solve problems or capitalize on opportunities.
The decision making process is initiated by a problem. The intention of the manager
making decision or selecting a course of action is to solve the problem. In doing so, the
manager first makes an analysis of the alternatives. This analysis process takes two
forms— qualitative and quantitative.
5
The following figure shows the decision Making process.
Qualitative
analysis based
upon
managerial
experience and
judgment
Quantitative
analysis based
upon
mathematical
techniques
6
Our emphasis is on the analyses approaches: qualitative and quantitative. In qualitative
analysis, intuition and the manager’s subjective judgment and experience are used. This
type of problem solving is more an art than a science.
o The qualitative approach is o The quantitative approach is used
usually used when: when:
The problem is simple The problem is complex
The problem is familiar The problem is not familiar
The costs involved are The costs involved are
not so great substantial
Immediate decisions are Enough time is available to
needed analyze the problem
Note: Both the quantitative and qualitative analyses of a problem provide important
information for the decision maker. Of course, decisions based on quantitative analysis
tend to be more objective than those based on a purely qualitative analysis. Although OR
is not entirely quantitative, its applications falls under the heading of quantitative
analysis. For this reason OR makes use of quantitative models.
To sum up, the decision making procedure as explained earlier starts with a certain
problem. The management science approach to analyze and solve the problem involves
careful definition of the problem, use of models, analysis of models (model solution), and
implementation and follow-up. (See figure 1.2)
Problem
Definition
Model
Construction
Analysis
(Model
Solution)
Implementation
& Follow-up
7
are considered as important for the problem at hand are included in the model. Thus, it is
important to carefully decide which aspects of reality to include in a model.
There are certain significant advantages gained when using a model. These are:
Problems under consideration become controllable through a model
It provides a logical and systematic approach to the problem
It provides the limitations and scope of an activity
It helps in finding useful tools that eliminate duplication of methods applied to
solve problems.
It helps in finding solutions for research and improvements in a system.
It provides an economic description and explanation of either the operation, or
the systems they represent.
1. Models by Function:
These models consist of Descriptive models, Predictive models and Normative
models
A) Descriptive Models: describe and predict facts and relationships among the
various activities of the problem. These models do not have an objective function
as a part of the model to evaluate decision alternatives. In this model, it is possible
to get information as to how one or more factors change as a result of changes in
other factors.
B) Normative or Optimization Models: they are prescriptive in nature and develop
objective decision-rule for optimum solutions.
2. Models by Structure and Abstraction :
A. Iconic or Physical Models: are pictorial representations of real systems
and have the appearance of the real thing. An iconic model is said to be
scaled down or scaled up according to the dimensions of the model which
may be smaller or greater than that of the real item. It is also called Static
Model. It is given in two or three dimensions. It is a representation of the
real object. These models are easy to observe and describe but are
difficult to manipulate.
Example:
The structure of an atom
Model of an airplane
Photograph of a machine
Layout drawing of a factory
Glob
B. Analog Models: They are more abstract than iconic models for there is no
look alike correspondence between these models and real life items. These
8
models are less specific, less concrete but easier to manipulate than iconic
models. These are abstract models mostly showing inter and intra
relationships between two or more parameters. For example: It may show
the relationship between an independent variable (input) with that of a
dependent variable (output). For instance; histogram, frequency table,
cause-effect diagram, flow charts, Gantt charts, price-demand graph,
world map and others. They are two dimensional.
C. Mathematical or Symbolic Models: They are most abstract in nature.
They employ a set of mathematical symbols to represent the components
of the real system. These variables are related together by means of
mathematical equations to describe the behavior of the system. The
symbolic model is usually the easiest to manipulate experimentally and it
is the most general and abstract. Mathematical models further classified as
Linear and Nonlinear, integer and non integer, static and dynamic models.
Example:
1. ( x y ) 2 x 2 2 xy y 2
Max. Z 3000 x1 2500 x 2
2. subject to :
2 x1 x2 40
x1 x2 45
x1 12
x1 , x2 0
x1 and x2 , are decision variables.
9
UNIT TWO
LINEAR PROGRAMMING
Unit Introduction:
A large number of decision problems faced by a business manager
involve allocation of resources to various activities, with the objective of
increasing profits or decreasing cost. Normally, the resources are scarce
and performance of number of activities within the constraints of limited
resources is the challenge. A manager is, therefore, required to decide as
to how best to allocate resources among the various activities.
10
then it is referred as linear programming. A LP problem can be described as
follow:
optimize Z C1 x1 C 2 x 2 ... C n x n (1)
Subject to
a11 x1 a12 x 2 ... a1n ( / / )b1
a 21 x1 a 22 x 2 a 2 n x n ( / / )b2
... ... ... ... (2)
a m1 x1 a m 2 x 2 a mn x n ( / / )bm
xi 0, i 1,2,..., n
Where,
o (< = >) means any of the three signs may be there.
o Optimize means maximize or minimize objective function
o The linear function which is to be optimized is called objective
function
o All constraints are equations except for non-negativity
restrictions which are inequalities.
o The RHS of each constraints is non-negative
o All variables are non-negative
o Inequality constraints can be changed to equations by adding or
subtracting LHS of each constraint by non-negative variable (ie
a slack variable S1 is added to LHS of constraint with the sign <
and a surplus variable S2 is subtracted on the LHS of constraint
with the sign >)
o aij and bm are known coefficients and xj is unknown variable.
Components of LP Models
1. Objective Function: it is the mathematical or quantitative expression of
the objective of the model. Equation (1)
2. The Decision Variables: represent unknown quantities to be solved for.
3. The Constraints: as has been laid, another component of the linear
programming is that the resources must be in limited supply.(2)
4. Parameters: are numerical or fixed values that specify the impact that one
unit of each decision variable will have on the objective and on any
constraint it pertains to as well as to the numerical value of each
constraint.
2.2 Requirements For Application Of Linear Programming
1. The aim or object should be clearly identifiable and definable in
mathematical terms. For example, it would be optimization of either cost
or profits or time etc.
2. The activities involved should be distinct and measurable in
quantitative terms such as products involved in a production planning
problem.
3. The resources to be allocated should be measurable quantitatively.
Limited availability/ constraints should be clearly spelt out.
11
4. The relationships representing the objective function as also the
resource limitation consideration must be linear in nature.
5. There should be a series of feasible alternative courses of action
available to the decision makers that are determined by the resources
constraints.
Example 1.
Maximize 4 x1 7 x 2 5 x3 ( profit ) Objective function
Subject to
1. 2 x1 3x 2 6 x3 300 labor hours
2. 5 x1 4 x3 200 raw mt. A System Constra int s
3. 3 x1 5 x 2 2 x3 360 raw mt. B
4. x1 30 units
Individual Constra int
5. x2 40 units
x1 , x 2 , and , x3 0 non negativity Constra int
System constraints involve more than one decision variables. Individual constraints
involve only one decision variable. Non-negativity constraints specify that no variable
will be allowed to take on negative values. The non negativity constraints typically apply
in an LP model, whether they are explicitly stated or not.
12
a. The total profit in the objective function is determined by
the sum of profit contributed by each of the product
separately.
b. Similarly the total amount of resource used is equal to
the sum of resource values used by various resources.
13
quantify the relationship to formulate a worth-while mathematical model.
There are three basic steps in formulation of linear programming model.
Example 1
An electronic firm is undecided at the most profitable mix for its
products. The products manufactured are transistors, resistors and
carbon tubes with a profit of (per 100 units) US $ 10, $6 and $4
respectively. To produce a shipment of transistors containing 100 units
requires 1 hour of engineering, 10 hours of direct labor and 2 hours of
administrative service. To produce 100 units of resistors requires 1 hour,
4 hours and 2 hours of engineering, direct labor and administrative time
respectively. For 100 unit of carbon tubes it needs 1 hour, 6 hours and 5
hours of engineering, direct labor and administrative time respectively.
There are 100 hours of engineering time, 600 hours of direct labor and
300 hours of administrative time available. Formulate the corresponding
LPP.
Solution:
Let the firm produce x1 hundred units of transistors, x2 hundred units of
resistors and x3 hundred units of carbon tubes. Then the total profit to
be maximized from this output will be
Z 10 x1 6 x 2 4 x3
Now the production of x1 hundred units of transistors, x2 hundred units
of resistors and x3 hundred units of carbon tubes will require.
x1 x 2 x3 , hours of engineering time
10 x1 4 x 2 6 x3 , hours of direct labor time and
2 x1 2 x 2 5 x3 , hours of administrative service
But the total time available for engineering, direct labor and
administrative services is 100, 600 and 300 hours respectively. Hence
the constraints are
14
Maximize Z 10 x1 6 x 2 4 x3 Objective function
Subject to
x1 x 2 x3 100
10 x1 4 x 2 6 x3 600 ( System Constra int)
2 x1 2 x 2 5 x3 300
Solution:
Let us have the manufacture of x1 and x2 units of product A and B
respectively. Then the given data indicates the relationship of decision
variables as follows:
Objective function Minimize cost =60x1 + 80x2 (production cost)
Constraints: x2> 200 (Agreement for supply)
x1 < 400 (machine hours for product A)
x1 + x2< 500 (labour hours)
x1 , x2> 0 ( non –negative constraint)
When there are only two decision variables involved, the conditions can
be placed on a graph to find the feasible region of the decision making.
15
The optimal solution is obtained by reaching the point on the feasible
region that optimizes the solution. We, then, can interpret the results
from this graph.
Solution:
Step I. Formulate LP Problem.
The information available can be put into structural matrix form as
follow.
Commodities
Requirement Total
P1 P2
Machine I 4 2 60
Machine II 2 4 48
Profit $ per unit 8 6 -
16
Let x2 be number of units to be produced for P2
X1 and X2 are unknown decision variables.
2x1 + 4x2 = 48
at x1 axes, x2 = 0 ∴ 2x1= 48 or x1 =24
at x2, axes, x1 = 0 ∴ 4x2 = 48 or x2 = 12
By these coordinates (24, 12) we get line AE in graph.
Now, any point on line BD satisfies (i) constraint and any point on line
AE satisfies (ii) constraint. The constraints cannot be violated, they must
be satisfied. Any solution which satisfies all the know constraints is
called optimal solution. Since both the constraints are of the type <
hence any point on the right hand side (RHS) of BD or AE becomes
infeasible area/solution for which we are not concerned.
17
O
30
20
A
10
B
0 C D
-10
-20
-30
0 5 10 15 20 25 30
Step IV. Evaluate the objective function Z= 8x1 + 6x2 for all points of
feasible region i.e. O, A, C, D.
At point O profit is zero ∴ Z=O
At point A x2=12, x1=0 ∴ Z=12x6=72
At point D x1=15, x2=0 ∴ Z=15x8=120
At point C x1=12, x2=6 ∴ Z=12x8+6x6=132
18
(From graph)
Step V. Z is maximizing objective function; hence the point with
maximum value of Z is the optimal solution point.
Therefore at point C (Z=132) with x1=12 and x2=6 is the optimal
point.
Solution:
The first step is skipped as LP problem is already formulated. We will
follow other steps simultaneously. In constraint (i) 2x1 –x2 > 0 there is no
constant value, hence it must pass through the origin. First convert it
into equality.
2x1 –x2 > 0 . New give x1 any arbitrary value.
When x1 =0, x2=0
x1 =1, x2=2
x1 =2, x2=4 and so on.
We draw the line with these coordinates and get line I drawn in the graph
passing through origin.
19
For feasible area we need to examine all the there constraints equations
(Note, all are > type)
In equation (ii), the feasible area should be above the line because it is
greater than the sum of x1 and x2.
Similarly in equation (iii) it is on the RHS therefore feasible area (region)
is indicated by three rows or shading and extends upto infinity.
Now we have to find out different values of Z at different corner points,
B,C,E by finding out their coordinates (x1, x2) then putting them in
objective function Z. The point which gives the minimum value is the
answer.
At corner B x1=16,x2=32 therefore Z= 1440
At corner C x1=34.4,x2=11.4 therefore Z= 1948
At corner E x1=80,x2=0 therefore Z= 4000
From the above we can see that minimum value of Z is at point B where
x1=16 and x2 =32 and hence it is the answer.
20
LPPs of any magnitude, involving two or more decision variables. In this
method, the objective function is used to control the development and
evaluation of each feasible solution of the problem.
Before using the Simplex method, let us examine and understand certain
basic terms involved in the procedure.
1. Standard Form: This has already been clarified in the initial part of
this chapter. With linear relationships of objective function and
constraints, making RHS of constraints as equal produces standard
form, whereas the inequality situation is called canonical form.
2. Slack and Artificial Variables: These have also been explained under
an appropriate heading. Their physical significance has also been
clarified. These are generally designated as S1, S2 . . . . etc. and A1, A2 etc.
respectively. Whereas the slack variables indicate spare capacity of the
constraints, artificial variables are imaginary variables added for
standard form.
21
4. Basic Solution: There may be n variables and m constraints in a linear
programming problem. When we evaluate the solution of this problem
by setting (n - m) of the variables to zero and solve the other m variable
equations, we obtain a unique solution. It is called "Basic Solution".
5. Basic Feasible Solution: When a basic solution satisfies even the non-
negativity requirement is called Basic Feasible Solution. Since it has to
be within the feasible region as explained at point 4.7 (graphical method),
a basic feasible solution corresponds to a comer point of the feasible
region.
7. Variable Mix: The values of the column that contains all the variables
in the solution.
8. Basis: The set of variables which are not set to zero and figure in the
column of "Product Mix" are said to be in the 'Basis'. Other than these
figuring in the product mix column are termed as non basic variables.
10. Cj Row: It is the row containing the coefficients of all the variables
(decision variables, slack or artificial variables) in the objective function.
13. Pivot -Column: The column with the largest positive number in Cj - Zj
row in a maximization problem or the smallest number in a minimization
problem is called Pivot column. This indicates the variable entering the
solution in the next iteration by replacing an appropriate variable.
14. Pivot Row: When we work out the ratio of quantities bi's and the
elements of the Pivot column, we get the last column of the simplex table.
The outgoing variable to be replaced by the entering variable (decided by
22
the key row) would be the one with the smallest positive value of the ratio
column.
15. Pivot Element: The element at the point of intersection of the key
column and the key row is called the Pivot element.
When the constraints are of the type < bi, then to convert the it into
equality we need adding some variable (not constant) this is normally
done by adding variables such as S1, S2. . . ., Sn, which are called slack
variables. In physical sense, these slack variables represent unused
resources, the slack variables contribute nothing towards the objective
function and hence their coefficients in the objective function are to be
23
zeros.
Standardization/Tableau Form/
Types of constraint Standard form
≤ Add a slack variable
= Add an artificial variable
≥ subtract a surplus variable and add an artificial variable
The artificial variables in a maximization problem will appear in the objective function
with a large negative coefficient so that they are quickly eliminated as we proceed with
the solution.
In a maximization problem with all less than or equal to constraints, we have an initial
feasible solution. With mixed constraints, we do not have initial feasible solution but only
initial solution which is not feasible.
24
iii. Add two columns to the left side of the tableau. The first column is a
list of variables called Basis.
iv. The C at the top second column indicates that the values in that
column and the values in the top row are objective function
coefficients.
v. The last column at the right is called the quantity column. It refers to
the right hand side values (RHS) of the constraints.
vi. There are two more rows at the bottom of the tableau. The first raw is
a Z-row. For each column the Z – value is obtained by multiplying
each of the number of the column by their respective row coefficient in
column C. The last raw is Cj-Z row.
The values in this row are also calculated column by column. For each Column, the
value in row Z is subtracted from the C value in the top row.
3. Interpreting the initial simplex tableau
4. Determining the entering variable: For a maximization problem; the
entering variable is identified as the one which has the largest positive value
in Cj-Z row. The column which corresponds to the entering variable in the
simplex tableau is called pivot column.
In a minimization problem, the entering variable is identified as the one which
has the largest negative Cj-Z row value in the simplex tableau.
5. Determining the leaving variable: the leaving variable is identified as the one
with the smallest non-negativity ratio for quantity divided by respective
positive pivot columnar entries. The row of the leaving variable is pivot row.
6. Make the entering variable basic and the leaving non-basic by applying
elementary row operations of matrix algebra.
25
The Simplex solution for a minimization problem is optimal if Cj-Z row contains
only zero and positive values (Cj-Z ≥ 0).
Note that: if the solution is not optimal the steps will be repeated again and again until
the optimal solution is obtained!
26
written as: Max. Z = 30x1 + 40x2 + 0.S2 + 0.S2 + 0.S3
Now there are five variables and three equations and hence to obtain
the solution, any two variables will have to be assigned zero value.
Moreover, to get a feasible solution, all the constraints must be satisfied.
To start with, let us assign x1 = 0; x2 = 0 (Both decision variables are
assigned zero values) Hence, S1 = 12,000
S2 = 600
S3 = 500 and Z=0
This can be written as initial simplex table 1
Key Row
Key Column
Entering variable
Since Cj - Zj is maximum at + 40, i.e., profit is more for each unit for
x2 variable, we introduce x2 into the solution. It is the marked as key
column and x2 becomes the entering variable. Dividing Quantities (bi's)
by the corresponding key elements of each row, we obtain the ratio
(bi/aij) column such as for row S1, it is 12,000 ÷ 120 = 100.
Leaving variable
For each unit of x2, 120 units of S1, 5 units of S2 and 4 units of S3 will
have to be utilized. Minimum unutilized capacity of material is 100, it
becomes outgoing variable. (This is required to be the least positive value
of ratio, which is obtained by dividing the values in bi column by the
corresponding elements in the key column). Here Key element
corresponds to x2 and S1 and its value is 120, The least ratio being 100
corresponding to S1, it becomes the' outgoing variable, replaced by x2.
Now each of the elements of the Key row is divided by Key element to get
x2 row in the new table. Thus we get the key row as follows:
27
In order to obtain the corresponding values of the table, we follow the
relationship as follows:
Iteration 2
Key column being that for xl and key row for S2 we get the key element as
11/2 and by dividing S2 row by the Key element, we get xl row in the new
table as follows:
REVISED SIMPLEX TABLE III
Other rows are correspondingly obtained as in table I.Since all the values
of Cj - Zj are either negative or zeros, it is an optimal solution. Hence, the
optimal mix would be:
28
Quantity of item 1 (x1) = 200/11
Quantity of item 2 (x2) = 1,000/11
Total profit = 46, 000/11
By this iterative process, we obtain optimal solution of a maximising
problem and iteration stops when values of Cj - Zj < 0. This optimality
test is carried out at every stage to reach optimal solution.
Solution:
Adding slack variables and arranging in the simplex table, we get
Simplex Initial Table
SIMPLEX TABLE II
.
SIMPLEX TABLE III
29
Now, all the values of ∆j being zero or negative, suggesting that the
solution is optimal and Z = 2,400 for x1 = 50 and x2 = 125. S1
indicates surplus.
30
i.e, ∑ aij xj > bi when xj > 0
j=1
31
in each Cj - Zj values is negative, the LP problem has no solution.
This basic solution will be treated as degenerate.
It at least one artificial variable is present in the basis with
positive value, and coefficient of M in each Cj - Zj values is non-
negative, then LP problem has no optimal basic feasible solution.
It is cal1ed pseudo-optimum solution. The Big M-method has
been demonstrated by solving Illustration 22.
Example 1
SIMPLEX TABLE I
Cj 60 80 0 0 M M Quantity Ration
Zj
Variables x1 x2 S1 S2 A1 A2 bi Bi/aij
M A1 20 30 -1 0 1 0 900 45
M A2 40 30 0 -1 0 1 1,200 30
∆j 60-60m 80-60m M M 0 0
SIMPLEX TABLE II
32
From the table it can be seen that x2 becomes the entering variable and
A1 the leaving variable. The modified simplex table can be written as:
SIMPLEX TABLE III
Since all the values of ∆j are non-negative, we have reached the optimal
solution of the problem.
1. An unbounded solution:
The solution for a Simplex procedure is unbounded if there are no non-negative ratios for
the quantity divided by substitution rates, i.e. Ratio .
With simplex this condition can be detected by examining the C-Z row of the final
tableau. If a zero appears in the column of a non-basic variable; i.e., a variable that is not
in solution; it can be concluded that an alternative solution occurs.
3. Degeneracy:
In some cases there will be a tie for the lowest non-negative ratio for quantity divided by
substitution rate. Such an occurrence is referred to as degeneracy because it is
theoretically possible for subsequent solutions to cycle (i.e., return to the pervious
solution). It will usually suffice to simply select one variable arbitrarily and proceed with
computations. But there are ways of dealing with ties in a specific fashion.
4. Case of infeasibility:
33
In the simplex approach, infeasibility can be recognized by the presence of an artificial
variable with a non-zero value in a solution that appears optimal (i.e., a tableau in which
the signs of the values in row C-Z indicate optimality).
UNIT THREE
TRANSPORTATION AND ASSIGNMENT PROBLEMS
Transportation Problems
INTRODUCTION
A scooter production company produces scooters at the units situated at various places
(called origins) and supplies them to the places where the depot (called destination) are
situated. Here the availability as well as requirements of the various depots are finite and
constitute the limited resources. This type of problem is known as distribution or
transportation problem in which the key idea is to minimize the cost or the time of
transportation. In previous lessons we have considered a number of specific linear
programming problems. Transportation problems are also linear programming problems
and can be solved by simplex method but because of practical significance the
transportation problems are of special interest and it is tedious to solve them through
simplex method. Is there any alternative method to solve such problems?
The transportation model is a special class of linear programming that deals with
shipping a commodity from sources (e.g factories) to destinations (e.g warehouses). The
objective is to determine the transportation schedule that minimizes the total
transportation cost while satisfying supply and demand limits.
34
The Company distributes the product through three distribution centers located in Addis
Ababa, Gondar and Jijiga. A monthly forecast of demand for these distribution centers is
as follows:
Destination Distribution Center Monthly demand forecast
(units)
1 Addis Ababa 4500
2 Gondar 3500
3 Jijiga 1500
Total=9500 units
The following table indicates transportation cost (in Br.) per unit of the good from each
source to each destination along with the supply capacity and demand of the origins and
destinations:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3* 2 5 3000
The company would like to determine how much product should be shipped from each
source to each destination in such a way that the demand of each destination is satisfied
with the available production at each source and the overall transportation cost is
minimized. Note that total demand and total supply are equal: 9500 units.
A general linear programming approach can be used to solve the above problem. Let us
see how the LP model can be developed for the problem. We will use double-subscripted
decision variables, with x11 denoting the number of units shipped from origin 1 (Mekele)
to destination 1 (Addis Ababa), x12 denoting the number of units shipped from origin
1(Mekele) to destination 2 (Gondar), and so on. In general the decision variables for a
transportation problem having m origins and n destinations are written as follows:
35
Since the objective of the transportation problem is to minimize the total transportation
cost, we can use the transportation cost data provided in the above table to develop the
following cost expressions:
Transportation cost for units shipped from Mekele = 3x11 + 2x12 +5x13.
Transportation cost for units shipped from Hawasa = x21 + 3x22 +4x23
Transportation cost for units shipped from Gambela=4x31 + 5x32 +6x33.
The sum of the above cost expressions provides the objective function showing the total
transportation cost for ABC Company. Accordingly, the objective function is:
Min Z= 3x11 + 2x12 +5x13 + x21 + 3x22 +4x23 + 4x31 + 5x32 + 6x33
Similarly, the supply constraints of the Hawasa and Gambela plants can be written as:
x21 + x22 + x23 = 4000 Hawasa supply
x31 + x32 +x33 = 2500 Gambela supply
The same approach is used to develop the demand constraints. The demand at Addis
Ababa distribution center is 4500 units. This demand is satisfied with the goods shipped
from Mekele (x11 ), Hawasa (x21 ), and Gambela (x31 ) . Therefore the demand constraint
for Addis Ababa distribution center is:
Similarly, the demand constraints of Gondar and Jijiga distribution centers are:
Combining the objective function and constraints into one model results in the following
9-variable, 6-constraint linear programming model for the ABC transportation problem:
Min Z= 3x11 + 2x12 +5x13 + x21 + 3x22 +4x23 + 4x31 + 5x32 + 6x33
Subject to:
x11 + x12 +x13 = 3000
x21 + x22 + x23 = 4000
x31 + x32 +x33 = 2500
x11 + x21 + x31 = 4500
x12 + x22 + x32 = 3500
x13 + x23 + x33 = 1500
xij ≥0, for i= 1,2,3 and j= 1,2,3
36
Dear learner! Once the LPM is developed as above, it can be solved with the simplex
method we discussed in the previous chapter. However, as you can imagine, solving the
above model, without the help of a computer, will be very cumbersome and time
consuming to say the least. What is more striking is the fact that the transportation
problem we are dealing with is relatively small in comparison to most of the
transportation problems you will face in the real business world. You may be wondering
“So how can we solve a large-size transportation problem involving, say 10 warehouses
(sources) and 15 retail shops (destinations), with the simplex approach?” Well, don’t
worry about that! What is expected of you (a human decision maker) is just to develop
the linear programming model using the approach we saw above. Thanks to technology,
highly efficient computer spreadsheets, like Microsoft Excel, which are widely available
these days, can be used to solve the LPM. We will not, however, discuss them here. We
suggest that you refer to reference books attached at the end of this chapter to familiarise
yourself with the use of MS Excel in solving LPM’s. By the way a 10-source, 15-
destination transportation problem will have 150 variables and 25 constraints!
In the next section, we will discuss the transportation algorithm which will enable us to
solve ABC Company’s transportation problem more easily than the general LPM
approach.
37
a) Northwest-corner method
The northwest-corner method starts at the northwest-corner cell (variable x11 , Mekele-
Addis Ababa route). Follow the following steps:
Step 1. Allocate as many units as possible to the selected cell. The allocated number of
units will be equal to the lower of the row supply and column demand since we cannot
assign more than what is demanded or what can be supplied.
Accordingly, 3000 units is assigned to cell11 (Mekele-A/Ababa cell) because 3000 is the
lower of the row supply (i.e 3000 units from Mekele) and the column demand (4500 units
of the A/Ababa distribution center). Step 1 results in the following changes in the
original table.
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
Step 2. Adjust the associated amounts of supply and demand by subtracting the allocated
amount (i.e 3000 units). Now, after the allocation, A/Ababa’s demand will be left with
1500 units (i.e 4500-3000) and the Mekele’s supply capacity will be zero (i.e 3000-3000).
Substitute the original supply and demand amounts by crossing out and replacing with
the adjusted amounts. Thus 4500 is crossed out (cancelled) and replaced with 1500.
Similarly 3000 is crossed out, the new supply amount will be 0, thus you don’t need to
write it. The following change is made as a result of step 2:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
38
Step 3: If exactly one supply and demand amount remains nonzero, make the allocation
to the cell at the intersection of the remaining supply and demand and finish. Otherwise,
move to the cell to the right ( if there is supply) or below (if there is demand) and repeat
step 1 and step 2 until exactly one nonzero supply or demand remains.
In our problem, there are still 3 nonzero demand amounts (the 3 distribution centers) and
2 nonzero supply amounts (Hawasa and Gambela). Therefore, we have to make the next
allocation to the cell below cell11, that is to the nonzero demand direction. Accordingly,
the next allocation will be to cell21 (Hawasa-A/Ababa route). Again, we adjust the
supply and demand amounts. This results in the following changes:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
1500 2500
Now the A/Ababa demand is zero, and the Hawasa supply remains 2500 units.
Thnext allocation will be made to the right of cell21, that is to cell22, resulting in the
following changes:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
1500 2500 2500
The next allocation will be made below cell22 , to cell32. After making the
necessary adjustments the following changes occur on the table:
Destination
39
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
1500 2500 2500
Finally, exactly one nonzero demand and supply amount remains (i.e the Jijiga
demand and the Gambela supply). Thus we make allocation to the cell at the
intersection of the remaining supply and demand amounts (cell33 ). Since both
supply and demand amounts are 1500 units, we can allocate 1500 units and finish.
The following table is the northwest-corner initial solution. The direction of the
arrows indicate the summary of the steps we followed.
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
1500 2500 2500
Initial total cost: To find the total transportation cost, multiply transportation cost per
unit and the number of units in occupied cells, and add the results of all products.
40
effort to produce an initial solution that has a lower total cost. Hopefully, fewer
computations will then be required to find the problem’s optimal solution.
To find the initial solution by using this method, follow the following steps:
Step 1: find the cell with the smallest shipping cost and assign as many units as possible. The
number of units that can be assigned is the lower of the row supply and column demand
amounts. If there are many (more than one) cells with the same lowest cost, first assign to the
cell in which the largest number of units can be assigned, then to the cell where the next
largest number of units can be made and so on.
In our problem, the minimum transportation cost per unit is Br.1, and the cell with that cost
is cell21 (i.e Hawasa-A/Ababa route).
Step 2. As in the northwest corner method adjust the associated amounts of supply and
demand by subtracting the allocated amount (i.e 4000 units).
The above two steps result in the following changes on the transportation table:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
Step 3: Then choose the cell with the lowest cost from the cells that do not lie in a zero
supply row or demand column with the minimum shipping cost and repeat step 1 and step 2.
Continue until there is only one cell that can be chosen. In other words, if exactly one supply
and demand amount remains nonzero, make the allocation to the cell at the intersection
of the remaining supply and demand and finish.
Now, since there are more than one nonzero demand and supply amounts left, we
should identify the next smallest cost. It is Br.2 (at cell12 ). 3000 units can be allocated,
resulting in the following changes after adjustment:
Destination
Origin Addis Gondar Jijiga Supply
Ababa (1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
4000
41
Gambela (3) 3 5 6 2500
The next smallest cost is Br.3 (at cell11 , cell22 , and cell31 ). However, we cannot
allocate to cell11 and cell22 .
Dear student! Why do you think we cannot make the allocation to those cells?
____________________________________________________________________
______________________________________________________________
Allocation cannot be made to cell11 and cell22 because the supply amounts (i.e the
Mekele and Hawasa supplies) are zero, thus there is no supply. Therefore, we have
to allocate to cell31. 500 units can be allocated, resulting in the following changes
after adjustment:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
4000
Gambela (3) 3 5 6 2500
500 2000
Demand 4500 3500 1500 9500
500 500
The next smallest cost is Br.4 (at cell23). However, we cannot allocate to the
cell since there is no supply.
Birr 5 is the next smallest cost. There are two candidate cells, cell13 and cell32.
However we cannot allocate to cell13 as there is no supply left. Therefore we
make the allocation to cell32 , resulting in the following changes after
adjustments:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
4000
Gambela (3) 3 5 6 2500
500 500 2000
42
1500
Finally, exactly one nonzero demand and supply amount remains (i.e the Jijiga
demand and the Gambela supply). Thus, 1500 units is allocated to cell33 and the
initial solution is as follows:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
4000
Gambela (3) 3 5 6 2500
500 500 1500 2000
1500
Demand 4500 3500 1500 9500
500 500
Dear distance learner! As you can note from the results of the initial solutions found
using the two methods, the initial total cost found using the least-cost method is lower
than the one found using the northwest-corner method. Thus the least-cost method
generally provides a lower cost which is a better starting solution. However, this might
not be the case in all transportation problems.
43
Note that in our example, the number of occupied cells =m+n-1 (i.e 5=3+3-1).
Therefore, it is possible to evaluate both the northwest-corner and stepping-stone initial
solutions.
We illustrate the two methods by taking the northwest-corner initial solution of ABC
Company’s transportation problem. The following table shows the northwest-corner
initial solution we found above.
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
1500 2500
Gambela (3) 3 5 6 2500
1000 1500
Demand 4500 3500 1500 9500
The stepping-stone method gets its name from the analogy that you need a stepping-
stone to put your feet on when you cross a swampy area. Similarly, when we
evaluate each empty cell by using this method we will use occupied cells as stepping-
stones.
2. Trace a closed path (closed loop) that starts and ends in the empty cell being
evaluated. You can follow either clock-wise or anti-clock wise direction to form the
path.
3. Place alternating ‘+’s and ‘-’s on this path. Start by placing a plus (+) sign on the
empty cell being evaluated. Place plus and minus signs only on occupied cells except the
empty cell being evaluated. The ‘+’s indicate that certain amount of goods will be added
to that cell. ‘-’s indicate that certain units will be subtracted from that occupied cell.
N.B. There must be equal number of ‘+’s and ‘-’s in every row and column of
the transportation table. This is to ensure that each row supply and column
demand amount remains intact (unaffected).
44
ii. Add the cell cost of occupied cells with ‘-’ signs
iii. Calculate the difference between (i) and (ii) to find the net cell evaluation
result.
A negative cell evaluation result indicates the possible decrease the
current total transportation cost for each unit of a product
transferred to that cell. Therefore, negative cell evaluation results
are favorable.
A positive cell evaluation result indicates the possible increase the
current total transportation cost for each unit of a product
transferred to that cell. Positive cell evaluation results are
unfavorable.
5. Repeat step 1-step 4 for each empty cell in the transportation tableau. If all cell
evaluation results are positive, stop; optimality condition is satisfied. Otherwise
proceed to step 6. Optimal solution in a transportation problem is reached when there is
no any further improvement potential. That means, the minimum-cost transportation
schedule is found.
6. Reallocate to the cell with the largest improvement potential: To make the
reallocation, first identify empty cells with net negative cell evaluation result and
compare their cell evaluation value. The cell with the largest negative net cell
evaluation result is said to have the largest improvement potential. That is, reallocation
to that cell will lead to the largest reduction in the total transportation cost.
The number of units that can be reallocated is equal to the smallest of the number of
units in the occupied cells which are on the corners of the closed path used to evaluate
the cell with the largest improvement potential. If n=the number of units that can be
reallocated, make the following changes on cells at corners of the closed path of the
current table and draw the next table:
i. Add n to cells with ‘+’ sign
ii. Subtract n from those cells with ‘-‘sign
iii. Leave other cells as they are.
Let us apply the above steps in our example and evaluate the 4 empty cells one by one:
1) cell12 (C12 In short) : We start by placing a ‘+’ sign at C12. Since we have one ‘+’
sign in the first row, there must be one ‘_’ sign in the same row. The minus sign can
be placed only on occupied cell in the row, cell11. The next plus sign should be
placed at c21 since c21 is the only other occupied cell in the first row (other than
c11). Finally the minus sign should be placed at C22 to form the closed path.
45
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) _ 3 + 2 5 3000
3000
Hawasa (2) + 1 _ 3 4 4000
1500 2500
Gambela (3) 3 5 6 2500
1000 1500
Demand 4500 3500 1500 9500
2 3
1 3
Note that: Except c21 all plus and minus signs are placed on occupied
cells
: There are equal number of plus and minus signs in all rows and
columns. That is: Row 1 (1 plus, 1 minus), Row 2 (1 plus, 1 minus), Row 3
(0 plus, 0 minus). Column 1 (1 plus 1 minus), Column 2 (1 plus, 1 minus),
Column 3 ( 0 plus, 0 minus)
2) Cell13:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) _ 3 2 + 5 3000
3000
Hawasa (2) + 1 _ 3 4 4000
1500 2500
Gambela (3) 3 + 5 _ 6 2500
1000 1500
Demand 4500 3500 1500 9500
46
Cell evaluation (c13 ) + -
5 6
5 3
1 3
3) Cell23 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 _ 3 + 4 4000
1500 2500
Gambela (3) 3 + 5 _ 6 2500
1000 1500
Demand 4500 3500 1500 9500
4 6
5 3
4) Cell31 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
47
Hawasa (2) _ 1 + 3 4 4000
1500 2500
Gambela (3) + 3 _ 5 6 2500
1000 1500
Demand 4500 3500 1500 9500
3 5
3 1
To summarize, the cell evaluation results of the four empty cells- C12, C13, C23,
C31- are -3, -1, -1, and 0; respectively. This means each unit of the product that is
reallocated to the four cells will decrease the initial total cost (i.e Br. 32,000) by
Br. 3, 1,1,and Br.0, respectively. Since our objective is to minimize the total
transportation cost, C12 is the most favorable one. It has the largest
improvement potential.
To determine the number of units that can be reallocated to C12, look at the
closed path we use to evaluate this cell. In the path, the occupied cells with the
negative sign attached to them are C11 and C22. From these 2 cells, C22 has the
lower number of units in it (2500 units Versus 3000 for C11 ). Therefore, we add
2500 units to cells with a plus sign (i.e C12 and C21 ) and subtract 2500 units from
those cells with a negative sign (i.e C11 and C22). Keeping other cells as they are,
the following table (Table II) is drawn:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 2 5 3000
(1) 500 2500
Hawasa 1 3 4 4000
(2) 4000
Gambela 3 5 6 2500
(3) 1000 1500
Demand 4500 3500 1500 9500
48
=Initial cost-(cell evaluation*number reallocated units)
=Br. 32,000-(3*2500)
=Br.32, 000-Br.7500
As we have said earlier, each unit of good reallocated to C12 reduces the initial
cost by Br.3 (the -3 cell evaluation result indicates this). Now, we have
reallocated 2500 units, resulting in a Br.7,500 (i.e 3*2500) cost reduction.
But we did not yet know whether the solution we have found is optimal. The new
solution should be evaluated again. So we should evaluate each empty cell in the table-
Cell13, Cell22, Cell23, and Cell31- one by one.
1) Cell13 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 _ 2 + 5 3000
500 2500
Hawasa (2) 1 3 4 4000
4000
Gambela (3) 3 + 5 _ 6 2500
1000 1500
Demand 4500 3500 1500 9500
5 2
5 6
2) Cell22 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) + 3 _ 2 5 3000
500 2500
Hawasa (2) _ 1 +3 4 4000
4000
49
Gambela (3) 3 5 6 2500
1000 1500
Demand 4500 3500 1500 9500
3 2
3 1
3) Cell23 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) + 3 _ 2 5 3000
500 2500
Hawasa (2) _ 1 3 +4 4000
4000
Gambela (3) 3 + 5 _ 6 2500
1000 1500
Demand 4500 3500 1500 9500
4 6
5 2
3 1
4) Cell31 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) _ 3 + 2 5 3000
500 2500
Hawasa (2) 1 3 4 4000
4000
50
Gambela (3) + 3 _ 5 6 2500
1000 1500
Demand 4500 3500 1500 9500
3 5
2 3
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 2 5 3000
(1) 3000
Hawasa 1 3 4 4000
(2) 4000
Gambela 3 5 6 2500
(3) 500 500 1500
Demand 4500 3500 1500 9500
1) Cell11:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele + 3 _ 2 5 3000
(1) 3000
Hawasa 1 3 4 4000
(2) 4000
51
Gambela _ 3 + 5 6 2500
(3) 500 500 1500
Demand 4500 3500 1500 9500
5 2
3 3
2) Cell13 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 _ 2 + 5 3000
(1) 3000
Hawasa 1 3 4 4000
(2) 4000
Gambela 3 + 5 _ 6 2500
(3) 500 500 1500
Demand 4500 3500 1500 9500
5 6
5 2
3) Cell22 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 2 5 3000
(1) 3000
Hawasa _ 1 + 3 4 4000
(2) 4000
52
Gambela + 3 _ 5 6 2500
(3) 500 500 1500
Demand 4500 3500 1500 9500
3 5
3 1
4) Cell23 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 2 5 3000
(1) 3000
Hawasa _ 1 3 + 4 4000
(2) 4000
Gambela + 3 5 _ 6 2500
(3) 500 500 1500
Demand 4500 3500 1500 9500
4 6
3 1
Dear distance learner! As you can observe the optimal solution (Table III) and
the least-cost initial solution are the same. But this occurs just by chance in our
specific example. You should not assume that the least-cost initial solution will
always be the same to the final solution. Infact, the two are different in most
problems.
53
2.) The MODI ( MOdified DIstribution) Method of Evaluation
The MODI method requires that we define an index ui for each row of the tableau and an
index vj for each column of the tableau. Computing these row and column indices
requires that the cost coefficient for each occupied cell equal ui + vj . Thus, if Cij the cost
per unit from origin i to destination j, we have Cij = ui + vj for each occupied cell.
Steps in MODI method:
(i). Develop an initial feasible solution using one of the two methods- NWC or Least-cost
(ii). Setting the row index of the first row equal to zero: ul= 0. Compute successive ui
and vj values for each row and column such that ui + vj = Cij for each occupied cell.
(iii). Compute the net cell evaluation result (eij ) as cij – ui – vj for each empty cell. eij is
called net evaluation index.
(iv). Allocate as much as possible to the empty cell that has the largest improvement
potential. Allocate according to the stepping-stone path for the selected cell and develop
the next table.
(v). Repeat steps (ii) to (iv) in successive tables until all cell evaluation results (eij ) are
greater than or equal to zero; that is until there is no further improvement potential.
Let us return to the initial solution for ABC Company which we found using the
northwest-corner method and use MODI to evaluate it for further improvement potential.
The table, along with row and column indices, is repeated below for easy reference:
Step ii. Calculating row and column indices (ui and vj):
Requiring that ui + vj = Cij for all occupied cells in the initial solution leads to a system
of 5 equations and 6 indices, or variables:
Mekele-A/Ababa u1 + v1 = 3
Hawasa-A/Ababa u2 + v1 = 1
54
Hawasa-Gondar u2 + v2 = 3
Gambela-Gondar u3 + v2 = 5
Gambela-Jijiga u3 + v3 = 6
With one more index (variable) available than equation in this system, we can freely
choose a value for one of the indices and then solve for others. We will always choose u1
= 0 and then solve for the values of the other indices. Setting u1 = 0, we obtain
0 + v1 = 3…v1=3
u2 + 3 = 1… u2 = -2
-2 + v2 = 3… v2 = 5
u3 + 5 = 5... u3 =0
0 + v3 = 6… v3 =6
The above row and column indices are indicated in the table.
Step iii. Calculating net evaluation index (eij )
Dear student! Before we continue further, have you observed that the net evaluation
results we found above using MODI method for each empty cell are exactly the same to
those we found using the stepping-stone method? Go back to page 17 and compare the
results. When we are evaluating one table using the stepping-stone method and MODI
method the net evaluation results will ALWAYS be the same for each empty cell evaluated.
Cell12 has the highest improvement potential. Therefore, we have to reallocate to Cell12 .
How many units should be reallocated to it? We use the stepping-stone method, only for
Cell12, to determine the number of units that can be reallocated. The path is indicated in the
above table. 2500 units (i.e the lower of 2500 and 3000) can be reallocated, resulting in the
next table after adjustments.
Exercise: Calculate row and column indices. Check your answer in the following table.
55
(ui )
Mekele _ 3 + 2 5 3000 0
(1) 500 2500
Hawasa 1 3 4 4000 -2
(2) 4000
Gambela + 3 _ 5 6 2500 3
(3) 1000 1500
Demand 4500 3500 1500 9500 -
Column 3 2 3 - -
indices (vj )
Origin Addis Ababa Gondar (2) Jijiga (3) Supply Row indices
(1) (ui )
Mekele (1) 3 2 5 3000 0
3000
Hawasa(2) 1 3 4 4000 1
4000
Gambela(3) 3 5 6 2500 3
500 500 1500
56
Demand 4500 3500 1500 9500 -
Column indices(vj) 0 2 3 - -
Table III. ABC Company’s NWC initial Solution -MODI Evaluation, optimum solution
57
If the total supply is not equal to the total demand then the problem is known as
unbalanced transportation problem. If the total supply is more than the total demand,
we introduce an additional column, called dummy column, which will indicate the
surplus supply with transportation cost zero.
Similarly, if the total demand is more than the total supply, an additional row, called
dummy row, which represents unsatisfied demand with transportation cost zero, is
introduced in the table.
After introducing a dummy row or column, the problem is solved just like other
‘normal’ transportation problems.
Required:
a.) Show that the transportation problem is unbalanced and draw a transportation tableau
for the corresponding balanced problem.
b.) Find the initial solution using northwest-corner (NWC) method and, by using MODI
method of evaluation, find the optimal solution.
Solution
Total demand ≠ Total supply. Therefore the problem is unbalanced. The problem
should be converted into a balanced one before solving it. Since demand is greater
than supply, dummy row (i.e dummy plant) should be added to the table to balance
the problem. The dummy row’s amount=140-110=30 units. The balanced
transportation table should be as follows:
Table I
58
To Warehouse Warehouse Warehouse Supply
I II III
From
Plant I 7 8 10 50
Plant II 9 7 8 60
Dummy row 0 0 0 30
Demand 70 30 40 140
Now the problem is balanced since total demand (140)=total supply (140). Note
that transportation costs in the dummy row are zero(0) because there will not be
an actual shipment of goods from the dummy row. The purpose of the dummy
row here is to balance the problem and know the demand of which warehouse will
not be partially or completely satisfied at the optimal solution..
Plant II 9 7 8 60 40 10
20 30 10
Dummy row 0 0 0 30
30
Demand 70 20 30 40 30 140
=Birr 820
i. Cell12
59
Plant II + 9 _ 7 8 60 40 10
20 30 10
Dummy row 0 0 0 30
30
Demand 70 20 30 40 30 140
8 7
9 7
ii. Cell13
Plant II + 9 7 _ 8 60 40 10
20 30 10
Dummy row 0 0 0 30
30
Demand 70 20 30 40 30 140
10 8
9 7
iii. Cell31
60
Plant I 7 50 8 10 50
Plant II _ 9 7 +8 60 40 10
20 30 10
Dummy row + 0 0 _ 0 30
30
Demand 70 20 30 40 30 140
0 0
8 9
iv. Cell32
Plant II 9 _ 7 +8 60 40 10
20 30 10
Dummy row 0 + 0 _0 30
30
Demand 70 20 30 40 30 140
0 0
8 7
Cell31 is the only cell with an improvement potential. 20 units (the lower of 20 and
30) can be reallocated, resulting in the following table after reallocation:
61
To Warehouse I Warehouse Warehouse Supply
II III
From
Plant I 7 8 10 50
50
Plant II 9 7 8 60
30 30
Dummy row 0 0 0 30
20 10
Demand 70 30 40 140
i. Cell12
To Warehouse I Warehouse Warehouse Supply
II III
From
Plant I _ 7 + 8 10 50
50
Plant II 9 _ 7 + 8 60
30 30
Dummy row + 0 0 _ 0 30
20 10
Demand 70 30 40 140
Optimal Cost=7*50+7*30+8*30+0*20+0*30
=Birr 800
8 7
8 0
0 7
ii. Cell13
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To Warehouse Warehouse Warehouse Supply
I II III
From
Plant I _ 7 8 +10 50
50
Plant II 9 7 8 60
30 30
Dummy row + 0 0 _ 0 30
20 10
Demand 70 30 40 140
10 0
0 7
iii. Cell21
To Warehouse I Warehouse Warehouse Supply
II III
From
Plant I 7 8 10 50
50
Plant II + 9 7 _ 8 60
30 30
Dummy row _ 0 0 + 0 30
20 10
Demand 70 30 40 140
9 8
0 0
iv. Cell34
63
To Warehouse Warehouse Warehouse Supply
I II III
From
Plant I 7 8 10 50
50
Plant II 9 _ 7 + 8 60
30 30
Dummy row 0 + 0 _ 0 30
20 10
Demand 70 30 40 140
0 0
8 7
This case occurs when there are more than one (multiple) optimal solutions. This
would be indicated when at one or more unoccupied (empty) cells have zero value
for the net evaluation result in the optimum solution.
Thus a reallocation to cell having a net cost change equal to zero will have no effect
on transportation cost. This reallocation will provide another solution with same
transportation cost, but the routes employed will be different from those for the
original optimal solution. This is important because they provide management with
added flexibility in decision making.
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Let us take the optimum solution table and make reallocation to Cell23 to see the
effect. The required stepping-stone path is indicated in the table below:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 2 5 3000
(1) 3000
Hawasa _ 1 3 + 4 4000
(2) 4000
Gambela + 3 5 _ 6 2500
(3) 500 500 1500
Demand 4500 3500 1500 9500
As you can see from the table, 1500 units (i.e the lower of 1500 and 4000) can be
reallocated. After the reallocation, the table will look as follows:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 2 5 3000
(1) 3000
Hawasa 1 3 4 4000
(2) 2500 1500
Gambela 3 5 6 2500
(3) 2000 500
Demand 4500 3500 1500 9500
=Br. 23,000
The total cost is after the reallocation is the same, indicating that the problem is
optimal.
Exercise: Show that reallocation to Cell22 will not result in any change in the total
transportation cost.
65
1. At the initial solution
Factory I 5 4 12 500
Factory II 8 6 10 600
Required:
Find the optimum transportation schedule by using NWC method for initial solution and
MODI for evaluation purpose. Assume that unit transportation costs are in Birr per ton of
a product.
Solution
66
To Town A Town B Town C Supply (in Row index
tons) (Ui)
From
300
200
Factory II 8 6 10 250 2
X 250
Factory III 3 7 5 400 ?
400
Demand (in tons) 300 450 250 400 1500 -
Column index 5 4 ? - -
(Vj)
The number of occupied cell is fewer than m+n-1. The number of sources (i.e m)=3;
the number of destinations (i.e n)=3. Thus, m+n-1 is 3+3-1=5. Normally the number of
occupied cell should be 5. But it is only 4 in our case, indicating that the problem is
degenerate.
The degeneracy arises because in making our third allocation, 250 units in Cell22 ,
both the supply from Factory II AND the demand of Town B are exhausted
simultaneously, leading to fewer occupied cells.
To avoid the degeneracy, we should place Δ in one of the empty cells. Dear student!
Which of the empty cells do you think is/are the appropriate place(s) for Δ? Well, you
may find the right place through trial-and-error. But there is a better way than trial-and-
error:
First, try to calculate Ui’s and Vj ‘s by using the current occupied cells. Remember
our formula: Cij = ui + vj., where Cij is the cost of occupied cells. By using the three
occupied cells, we can find the following indices:
U1 (which is 0 by default),
V1 (5-0=5)
V2 (4-0=4)
U2 (6-4=2)
We cannot find U3 and V3 currently (indicated by ? in the above table). Now, Δ can be
placed in any one of the empty cells in the column/row containing the question mark (?).
Accordingly, only the empty cell marked X (see the table above) is the wrong place for Δ.
Exercise: Place Δ in any one of the 4 appropriate cells and solve the problem like any
other nondegenerate, ‘normal problem’
67
To Town A Town B Town C Supply
(in tons)
From
300 200
Factory II 8 6 10 250
250
Factory III 3 7 5 400
400
Demand (in tons) 300 450 250 400 1500
Dear learner! Our discussion of transportation problems has so far been based on the
assumption that all routes from sources to destinations can be used. However in the
real world a situation such as road hazards (snow, floods, etc), traffic regulation, road
maintenance, safety problems etc may arise. In such situations it is not possible to
transport goods from certain sources to certain destinations. In this case, the
restricted cell may either be completely crossed out or a very large per unit
transportation cost (M ) is assigned to it. After placing M to the prohibited cell, ignore
that cell from further analysis.
Exercise: Take ABC Company’s transportation problem. But, now assume that it is
not possible to transport the product from Gambela to Addis Ababa directly because
the route is not operational due to road maintenance taking place.
Required: Solve the transportation problem by using least-cost method for initial
solution and stepping method for evaluation. Check your answer below:
Solution
68
Least-cost initial solution
Note that Addis Ababa’s demand is not fully satisfied (is short of 500 units)
because of the restriction. The 500 units are retained by the Gambela plant.
The problem is degenerate case.
Hawasa 1 3 4 4000
(2) 4000
Gambela M 5 6 2500
(3) 500 1500
Although transportation model is usually used to minimize transportation cost, it can also
be used to get a solution with an objective of maximizing the total value or returns. Since
the criterion of optimality is maximization, the converse of the rule for minimization will
be used. The rule is: A solution is optimal if all opportunity costs for the unoccupied cell
are zero or positive.
69
The only difference between maximization and minimization transportation problems is
the addition of one initial step in the process of finding the solution. That is, we must first
convert the maximization table into its equivalent minimization opportunity cost table.
This is done by subtracting every number in the maximization table from the largest
number in the table. The resulting table is called opportunity cost table.
Once the opportunity table is developed exactly the same methods of finding the initial
solution and evaluation are carried out on the opportunity cost table.
Example: Assume that Trans Ethiopia provides transportation service to three factories-
X, Y and Z- to transport their goods to four dealers spread all over the country. The
production capacities of these factories and the demand of the four dealers are given
below. Also given in the table are the transportation fees (in Br./quintal) Trans charges
for its service.
Factory X 2 3 1 4 3000
Factory Y 5 4 3 4 2000
Factory Z 3 2 1 2 5000
Required: Develop the opportunity cost table for Trans’s problem and find the
northwest-corner initial solution.
Solution
Develop opportunity cost table by minimizing every number in the table from the largest
number (5 in our example). The NWC initial solution is also indicated in the table below.
70
To Dealer I Dealer II Dealer III Dealer IV Supply (in
quintals)
From
Factory X 3 2 4 1 3000
3000
Factory Y 0 1 2 1 2000
Exercise: Use MODI method for evaluation purpose and find the minimum
opportunity-cost (i.e maximum revenue) for Trans. Check your answer below
Factory X 3 2 4 1 3000
500 2500
Factory Y 0 2 1 2000
2000
Factory Z 2 3 4 3 5000
Minimum opportunity cost=Br.18500. To find the maximum revenue, use the original revenue figures, not
the opportunity costs.
MaximumRevenue=3*500+4*2500+5*2000+3*2000+2*1000+1*2000 Birr
31,500
71
ASSIGNMENT PROBLEMS
Example: Assume that a production manager wants to assign 3 jobs (m=3) to 3 machines (n=3).
Processing costs of each job in each machine is given below. For example, it costs Br.5 to process job
1 in machine 1, Br. 7 to process job 1 in machine 2…Br.16 to process job 3 in machine 3.
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Required:
Solution
Objective function:
Minimize Z= Min Z= 5x11 + 7x12 +9x13 +14x21 + 10x22 +12x23 + 15x31 + 13x32 + 16x33
Subject to:
x11 + x12 +x13 = 1
x21 + x22 + x23 = 1
x31 + x32 +x33 = 1
x11 + x21 + x31 = 1
x12 + x22 + x32 = 1
x13 + x23 + x33 = 1
xij ≥0, for i= 1,2,3 and j= 1,2,3
Once this problem is developed the problem can be solved with simplex approach, just
like transportation problems. The optimal solution to each decision variable in the above
assignment model will be as follows:
Xij= 0, if the job i is not assigned to machine j
1, if the job i is assigned to machine j
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Even if assignment problems can be solved with the general LPM approach, the solution
will be found out using a more convenient algorithm called Hungarian method which
will be illustrated with our example.
Step 1: Row Reduction: Select the smallest value in each row. Subtract this value
from each value in that row and develop a new table. The new table is called row
reduction table.
In our example the smallest numbers in Row 1,Row 2 and Row 3 are 5,10, and
13;respectively.
Step 2: Column Reduction: In the row reduction table, select the smallest value in each
column (0, 0, and 2, respectively in our example). Subtract this value from each value in
that column and develop a new table. The new table is called column reduction table.
74
Step 3: On the column reduction table, draw a minimum number of horizontal and
vertical lines through some of the rows and columns, such that all zero values are
crossed out.
3.1) If the minimum number of lines required to cover all zeros is equal to the
number of rows, stop. Optimality condition is satisfied. Make the optimal assignment
as follows:
i. First count the number of zero’s in each row. If there is a row with only one zero,
encircle that zero and cancel all other zero’s in the encircled zero’s column. If all
assignments cannot be made in this way, proceed to ii
ii. Count the number of zero’s in each column. If there is a column with only one
zero, encircle that zero and cancel all other zero’s in the encircled zero’s row.
N.B: The number of encircled zero’s must be equal to the number of rows/columns,
that is, all jobs must be assigned to all machines by assigning one job to one
machine.
3.2) If the minimum number of lines required covering all zeros is not equal to the
number of rows identify the smallest number from the uncovered numbers. If there are
more than one smallest numbers, just select any one of them. Let θ be the smallest
number. Make the following changes on the column reduction table and draw a new
table.
i. Add θ to those numbers at the intersection of two lines (i.e numbers covered by a
vertical and horizontal line)
ii. Subtract θ from the uncovered numbers
iii. Leave numbers that are crossed out by only one line as they are.
Step 4: Repeat Step 3 in subsequent tables until the optimality condition is satisfied.
In our example, the minimum number of lines required to cover all the zero’s in the
column reduction table is 3 which is equal to the number of rows. Therefore, optimal
assignment can be made (indicated by the bold 0’s in the column reduction table above)
as follows:
75
We assign job 1 to machine 1; job 2 to machine 3, and job 3 to machine 2.
Total cost is 5+12+13 = 30.
Table 0
Machines
Jobs 1 2 3 4 Row
minimum
A 1 4 6 3 1
B 9 7 10 9 7
C 4 5 11 7 4
D 8 7 8 5 5
Required: Find the optimum assignment schedule by using the Hungarian method
Solution
Machines
Jobs 1 2 3 4
A 0 3 5 2
B 2 0 3 2
C 0 1 7 3
D 3 2 3 0
Column 0 0 3 0
Minimum
76
Machines
Jobs 1 2 3 4
A 0 3 2 2
B 2 0 0 2
C 0 1 4 3
D 3 2 0 0
θ= 1
The minimum number of lines required to cover all the 4 zero’s in the column
reduction table is 3, which is less than 4 (i.e the number of rows). Thus a
feasible assignment is not possible at this moment.
Apply step 3.2 in the column reduction table. The minimum uncovered
number (θ) is 1. After applying step 3.2 the following table results
Table 3
Machines
Jobs 1 2 3 4
A 0 2 1 1
B 3 0xx 0 2
C 0x 0 3 2
D 4 2 0xxx 0
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Dear learner! Like transportation problems assignment problems can have the following
special cases:
Programs
Programmer 1 2 3 4
John 4 1.5 2 3
Kumar 2 2 1 3
Tut 2.5 3 1.5 1
Required: Find the optimum assignment schedule by using the Hungarian method.
Solution.
Programs
Programmer 1 2 3 4
John 4 1.5 2 3
Kumar 2 2 1 3
78
Tut 2.5 3 1.5 1
Dummy 0 0 0 0
Programs
Programmer 1 2 3 4
John 2.5 0 0.5 1.5
Kumar 1 1 0 2
Tut 1.5 2 0.5 0
Dummy 0 0 0 0
Programs
Programmer 1 2 3 4
John 2.5 0 0.5 1.5
Kumar 1 1 0 2
Tut 1.5 2 0.5 0
Dummy 0 0 0 0
Example: Solve the following assignment problem by the Hungarian method and show
that it has multiple solutions. Check your answer below. Processing time (hours) of jobs
in machines is given.
Machines
79
Jobs 1 2 3
A 2 4 6
B 5 3 3
C 3 2 2
Solution
Machines
Jobs 1 2 3
A 0 2 4
B 2 0 0
C 1 0 0
Machines
Jobs 1 2 3
A 0 2 4
B 2 0 0
C 1 0 0
In the optimal table, there are two 0’s in two rows (Row 2 and Row 3) and two
columns (Column 2 and Column 3) at the same time, indicating that the problem
has multiple solutions. There are two possible assignments in this case.
Optimal Assignment I:
In certain instances, it may happen that a particular match or pairing may be either
undesirable or otherwise unacceptable. For example, an employee may not have the
skills necessary to perform a particular job or a machine may not be equipped to handle a
particular operation. In such cases, the cost of performing that particular activity by a
80
particular resource is considered to be very large (written as M or ) so as to prohibit
the entry of this pair of employee-job into the final solution.
When such a restriction is present, a letter (M) is often placed in the table in the
that contains M is ignored throughout the analysis. That is, M is not used in any
reductions, nor is any value added to it or subtracted from it during the course of
the analysis.
Departments
Employee Assembly Quality Packaging
control
Alemayehu 50 45 48
Tigist M 46 50
Tiruwork 55 52 50
Solution
Step 1. Row reduction table…Table I
Departments
Employee Assembly Quality Packaging
control
Alemayehu 5 0 3
Tigist M 0 4
Tiruwork 5 2 0
81
A minimum of 3 lines, which is equal to the number of rows, are required to
cover all 0’s . Therefore, optimal assignment can be made.
Optimal assignment: Alemayehu to Assembly, Tigist to quality control, and
Tiruwork to packaging.
: Minimum daily wage (for the 3 workers)= 50+46+50= 146
Birr.
There may arise situations when the assignment problem calls for maximization of profit,
revenue, etc as the objective function. Such problem may be solved by converting the
given maximization problem into a minimization problem by the following procedure:
i. Find the largest number (profit, revenue, etc) in the entire table.
ii. Subtract each entry in the original table from the largest profit coefficient and
develop opportunity cost table.
The transformed assignment problem so obtained can be solved by using the Hungarian
method.
Example: Assume that the head of management department wants to assign 3 instructors
to 3 courses. From previous studies, the department head determines that average score of
students taking the 3 courses offered by the instructors are as given in the table below.
Required: Find the optimal assignment schedule that maximizes the average score of
students in the 3 courses
Course
Instructor 1 2 3
A 60 65 75
B 80 70 67
C 67 82 73
ii. Subtract each entry in the original table from the largest score (from 82) and
develop “ opportunity cost” table.
Course
Instructor 1 2 3
A 22 17 7
82
B 2 12 15
C 15 0 9
Course
Instructor 1 2 3
A 15 10 0
B 0 10 13
C 15 0 9
Course
Instructor 1 2 3
A 15 10 0
B 0 10 13
C 15 0 9
A minimum of 3 lines are required to cover all zero’s, indicating that optimal
assignment can be made.
83
UNIT SIX
GAME THEORY
UNIT OBJECTIVES
After a thorough study of this unit, you will be able to:
Define strategy
Understand the nature of game theory
Develop acquaintance with types of games
Define saddle point
Explain pure strategies
Comprehend mixed strategies
understand dominance property
UNIT INTRODUCTION
Decision makers are often faced with situations of conflict and competition which
involve two or more rational opponents. Their results are not solely dependent on their
own decisions but are influenced by what the rival does. War between nations, sports
competitions, market rivalry and competition, negotiations between trade unions and the
management and so on are typical of such situations. The aim of each participant in such
conflicts would be to ascertain what each one can expect to gain in view of the opposing
interests. The theory of games provides an insight in to such problems.
Cognizant to the above fact, we need to be well acquainted with the fundamentals of
game theory in making winning decisions in case of conflicting situations in the business
environment. This unit is devoted to explain game theory to make you a better decision
maker by being watchdog of competitions. To this end, the unit is organized in to two
sections. In the first section, you will learn about assumptions, definitions and
classifications of games; pure strategies and saddle points. The second section is devoted
to mixed strategies & the rule of dominance.
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6.1 Assumptions and Definitions of Games
Competition is the watch word of modern of life. We say that a competitive solution
exists if two or more individuals make decision in a situation that involves conflicting
interest in which the outcome is controlled by the decision of all the concerned parties. A
competitive solution is called a game. The term game represents a conflict between two
or more parties. A situation is called a game when it possesses the following properties:
I. The number of competitors is finite.
II. There is a conflict in interests between the participants.
III. Each of the participants has a finite set of possible courses of action.
IV. The rules governing these choices are specified and known to all players, a play of
the game results when each of the players chooses a single course of action from the
courses available to him/her.
V. The outcome of the game is affected by the choices made by all the players.
VI. The outcome for all specific set of choices by all of the players is known in advance
and numerically defined.
The outcome of a play consists of a particular set of courses of action undertaken by the
competitors. Each outcome determines a set of payments (Positive, Negative or Zero) one
to each competitor.
Game theory, therefore, is theory that examines the choices of optimal strategies in
conflict situations, where it is concerned with general analysis of strategic interactions.
Economists call game theory as psychologists’ call the theory of social situations, which
is an accurate description of what game theory is about. Most researches in game theory
focuses on how groups of people interact. There are two main branches of game theory:
i.e. Co-operative and non co-operative game theory. Cooperation is more likely to occur
in repeated or many move games, which are more realistic in the real world. In such
games (repeated games) the best strategy is that of to do to your opponent what he/she
has done to you. This is begun by cooperating and continuing to cooperate as long as
your opponent cooperates. If a given firm betrays you after some time he/she agreed to
cooperate, the next time the other opponent waits to betray back. So that for any optimal
cooperation to be applied there must be a hope that cooperation will induce further
cooperation in the future. Among other conditions, it must be assumed that the game is
repeated indefinitely, or at a least a very large and uncertain number of times. If the game
is played for a finite number of times, each firm has an incentive to cooperate in the final
period because it cannot be harmed by retaliation. Each firm knows thus and will not
cooperate on the next- to- the last move. In an effort to gain a competitive advantage by
being the first to start cheating, the entire situation will be unravel (there will be no
confusion) and cheating begins from the first move.
The following conditions should be met other than infinite number of games for an
optimal cooperative game type to be applied. These are:
Stable set of players for the cooperative behavior to develop.
A small number of players to keep track of what each are doing.
Each firm can quickly detect and is willing and able to quickly retaliate for
cheating by other firms.
Demand and cost conditions are relatively stable.
85
Under conflicting situations, the theory of game generally concerned with the denial
analysis of strategic interactions where we apply it to the study of economic behavior in
different market situations like oligopolistic markets.
Non- Cooperative game theory deals largely with how intelligent enough individuals
interact with one another in an effort to achieve their own goals. Most of the time,
competitive rival industrial, manufacturing as well as service rendering firms compete
one another and try to choose their optimal strategies in non- cooperative styles and select
their optimal strategies given the strategies chosen by the competitive firms.
The term strategy is defined as a complete set of plan of actions specifying precisely
what the player will do under every possible future contingency that might occur during
the play of the game. That is, strategy of a player is the decision rule he/she uses for
making a choice from his/her list of courses of actions. Strategy can be classified as:
1. Pure strategy
2. Mixed strategy
A strategy is called pure if one knows in advance of the play that it is certain to be
adopted irrespective of the strategy the other player might choose. The optimal strategy
mixture for each player may be determined by assigning to each strategy, its probability
of being selected. These strategies so determined are called mixed strategy because they
are probabilistic combination of available choices of strategy. Mixed strategy is denoted
by the set S=(x1, x2 ….xn); where xj is probability of choosing the course j such that
xj > 0, for j=1, 2…..n and x1 + x2+…… + xn = 1.
It is evident that pure strategy is a special case of mixed strategy. In the case where all
but one xj is zero, a player may be able to choose only n pure strategy but he has an
infinite number of mixed strategies to choose from.
86
Player B
1 2 3 …….j………...n
a11 a12 a13…. .a1j….. …..a1n
Player A a21 a22 a23 …..a2j ……....a2n A’s payoff matrix
Player B
1 2 3 j n
1 -a11 - a12 a13……-a1j……..-a1
Player A 2 -a21 -a22 -a23…...-a2j… …...-a2
: : : : : ;
i -ai1 -ai2 -ai3……-ai .......-ain
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6.3 Pure Strategies: Games With saddle Point
This principle is used for the selection of optimal strategies by two players. Consider two
players A and B; A is a player who wishes to maximize his Minimum gain in the strategy
to minimize his losses. Since A would like to maximize his minimum gain, we obtain for
player A, the value called Maximin value and the corresponding strategy is called the
Maximin strategy.
On the other hand, since player B wishes to minimize his losses, a value called the
minimax value which is the minimum of the maximum losses is found. The
corresponding strategy is called the minimax strategy. When these two are equal
(Maximin value = Minimax value), the corresponding strategies are called optimal
strategy and the game is said to have saddle point. The value of the game is given by the
saddle point.
The selection of Maximin and Minimax strategies by A and B is based upon the so called
Maximin-Minimax principle which guarantees the best of the worst results.
Saddle point: a saddle point is a position in the payoff matrix where the maximum of row
minima coincides with the minimum of column maxima. The payoff at the saddle point is
called the value of the game.
We shall denote the Maximin value by ұ, the minimax value of the game by ŷ and the
value of the game by Y.
Example 6.1: Solve the game whose pay off matrix is given by:
Player B
Player A
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Solution: Player B
Row minima
Player A
Column maxima 1 5 1
Example 6.2:
Determine which of the following two people zero sum games are strictly determinable
and fair. Given; the optimum strategy for each player in the case of strictly determinable
games.
Player B
(a) Player B (b) B1 B2
B1 B2 A1 1 1
A1 -5 2 Player A
Player A
A2 -7 -4 A2 4 -3
Solution:
a)
Player B
B1 B2 Row minima
Player A A1 -5 2 -5
A2 -7 -4 -7
Column maxima -5 2
Since ұ = ŷ = -5, the game is strictly determinable, there exist a saddle point= -5. Hence
the value of the game is -5. The optimal strategy is the position of the saddle point given
by (A1, B1).
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Player B
b) B1 B2 Row minimum
A1 1 1 1
Player A
A2 4 -3 -3
Column maximum 4 1
Exercise 6-1
1. Determine which of the following two people zero sum games are strictly
determinable and fair. Give the optimum strategies for each player in the case of strictly
determinable games.
a) b)
Player B Player B
Player A 5 0 Player A 0 2
0 2 -1 4
6 4 -6
Determine the best strategies for players A and B and also the value of the game for
them. Is this game (i) fair, (ii) strictly determinable?
3. Define a game.
4. Explain a saddle point.
5. What is meant by Minimax and Maximin?
6. What is a pure strategy?
90
Section Two: Mixed Strategies and Rule of Dominance
Section Objectives:
Up on completing this section, you will be able to:
- Distinguish mixed strategies
- Identify dominance property
- Determine value of games without saddle point
Section Overview:
6.4 Mixed Strategies: Games Without saddle point
6.5 Dominance property
Example 1. Consider a 2x2 two person zero sum game without any saddle point having
the payoff matrix for player A;
B1 B2
A1 a11 a12
A2 a21 a22
The optimal mixed strategies;
SA= A1 A2 and SB =
B1 B2
P1 P2
q1 q2
Where p1 = a22 - a21 ; p1+ p2=1 → p2 = 1- p1
(a11 + a22) - (a12 + a21)
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Example 6.4:
Solve the following game and determine the value of the game.
B
4 -4
A
-4 4
Solution: It is clear that the payoff matrix does not possess any saddle point. The players
will use mixed strategies. The optimum mixed strategy for the players are :
SA= A1 A2 , P1 + P2 = 1 and SB =
B1 B2 , q1 + q2 = 1
P1 P2
q1 q2
p2 = 1 – p1 = 1 – ½ = ½
q2 = 1- q1 = 1- ½ = ½
Therefore; the optimum strategy is SA = (½, ½); SB = ( ½ , ½ )
The value of the game is y = a22 a11 - a12a21 = (4x4) – ( -4 x (-4) ) = 0
(a11 + a22) - (a12 + a21) (4 + 4) – (-4+ (-4))
Example 6.5:
In a game of matching coins with two players suppose A wins one unit of value when
there are two heads, wins nothing when there are two tails and losses ½ unit of value
when there are one head and one tail. Determine the payoff matrix, the best strategies for
each player and the value of game to A.
Solution:
The payoff matrix for the player A is given by:
Player B
H T
H 1 -1/2
Player A
T -1/2 0
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A2 a21 a22
SA= A1 A2 and SB =
B1 B2
P1 P2
q1 q2
= 0 – (- ½ )
1+ 0 – (- ½ – ½ )
= ½ /2 = ¼
q2 = 1 – q1 = 1 – ¼ = ¾
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iv) If some linear combinations if some rows dominates ith row, then the ith row
will be deleted. Similar arguments follow for column.
Example 6
Player B
3 -2 4
Player A -1 4 2
2 2 6
Solution:
In the given payoff matrix, the entire elements in the third column are greater than or
equal to the corresponding elements in the first column. Therefore, column 3 is
dominated by first column. Delete column 3. The reduced payoff matrix is given by:
Player B
3 -2
Player A -1 4
2 2
Since no row (or column) dominates another row (or column). The 3 x 2 game could now
be solved in simplest ways.
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Unit Summary
The theory of games deals with decision making under conditions of competition or
conflict. The players have the same objective but conflicting interests. In the world of
business, striving for greater market share by the different competitors is a typical game
situation. Games are classifies according to the number of players and according to
whether the gains of one player are equal to the losses of the other or not. The simplest
form of game is the two-person zero sum game , implying that there are only two
participants who may be individuals , groups or organizations, and that the gains of one
are the losses of the other.
An optimal strategy guarantees a player the best payoff regardless of the strategies
adopted by the opponent. Two-person zero sum games have pure strategies for the
players if a saddle point exists, that is a single optimal strategy for both the players.
Where no saddle point exists, players have to use mixed strategies. A strategy is said to
dominate another if the payoffs it yields are higher than the payoffs of the other strategy
no matter what strategy the opponent adopts. Dominated strategies can be eliminated
from the game.
Game theory has limited practical use at present because of the assumptions made. These
are not totally realistic. Situations are not as simplistic. When there are more than two
players, some of them may negotiate or collaborate against another player. Such
situations are complex and cannot be dealt with the game theory in its present form.
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Exercise 6-2
Player B
1 7 2
Player A 6 2 7
5 1 6
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References
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