Quantitative Methods for Decision Making

Course Credit: 3 Objective:

This course is designed to expose the students to various managerial decision making that emerge in the business and to help them understand how to structure/formulate the decision problems as well as to obtain optimum practical solutions for the same.

Topics that we will cover (refer course outline)

Linear Programming: -Formulations - Graphical Solution - Interpretation of the solution - The Simplex Method of solving Linear Programming problem -Duality and Sensitivity Analysis. Transportation and Assignment Problems Replacement Problem Decision Theory Game Theory Simulation

Operations Research
Origin During World War-II when the British Military asked Scientist to analyze military problems The applications of mathematics and scientific methods to military applications was called as Operations Research Today it is also called as Management Science

 It is a scientific approach to decision making that seeks to determine how best to design and operate a system, under conditions of allocating scarce resources. Provides a set of algorithm that act as tools for effective problem solving and decision making Used extensively by manufacturing and service industries in decision making

Analysis and Decision Making

Analysis Phase of Decision-Making Process Qualitative Analysis based largely on the managers judgment and experience includes the managers intuitive feel for the problem is more of an art than a science

Quantitative Analysis and Decision Making

Analysis Phase of Decision-Making Process Quantitative Analysis analyst will concentrate on the quantitative facts or data associated with the problem analyst will develop mathematical expressions that describe the objectives, constraints, and other relationships that exist in the problem analyst will use one or more quantitative methods to make a recommendation

Quantitative Analysis and Decision Making

Potential Reasons for a Quantitative Analysis Approach to Decision Making
The problem is complex. The problem is very important. The problem is new. The problem is repetitive.

Quantitative Analysis
Quantitative Analysis Process
Model Development Data Preparation Model Solution Report Generation

Model Development
Models are representations of real objects or situations Three forms of models are:
Iconic models - physical replicas (scalar representations) of real objects Analog models - physical in form, but do not physically resemble the object being modeled Mathematical models - represent real world problems through a system of mathematical formulas and expressions based on key assumptions, estimates, or statistical analyses

Advantages of Models
Generally, experimenting with models (compared to experimenting with the real situation):
requires less time is less expensive involves less risk

The more closely the model represents the real situation, the accurate the conclusions and predictions will be.

Mathematical Models
Objective Function a mathematical expression that describes the problems objective, such as maximizing profit or minimizing cost Constraints a set of restrictions or limitations, such as production capacities Uncontrollable Inputs environmental factors that are not under the control of the decision maker Decision Variables controllable inputs; decision alternatives specified by the decision maker, such as the number of units of Product X to produce

Mathematical Models

Deterministic Model if all uncontrollable inputs to the model are known and cannot vary Stochastic (or Probabilistic) Model if any uncontrollable are uncertain and subject to variation Stochastic models are often more difficult to analyze.

Mathematical Models

Cost/benefit considerations must be made in selecting an appropriate mathematical model. Frequently a less complicated (and perhaps less precise) model is more appropriate than a more complex and accurate one due to cost and ease of solution considerations.

Transforming Model Inputs into Output

Uncontrollable Inputs (Environmental Factors)

Controllable Inputs (Decision Variables)

Mathematical Model

Output (Projected Results)

Linear Programming
First conceived by Dantzig in 1947 in his research paper Programming in Linear Structure Koopmans Coined the Term Linear Programming in 1948 Simplex Method was published in 1949 by Dantzig

Linear Programming Formulation

Lets take a problem (Product Mix Problem):
A firm is engaged in producing 2 types of products A & B. Each unit of product A requires 2kgs of RM and 4 LH. Each unit of product B requires 3kgs of RM and 3 LH of same type. The firm has an availability of 60kgs of RM and 96LH in a week. One unit of product A & B yields Rs. 40 and Rs. 35 as profit respectively. Formulate this problem as LPP to determine as to how many units of each of the products to be produced /week so that the firm can earn maximum profit.

Terminology
Decision Variable Objective Function (that we are supposed to be optimized) Constraints Non-negativity restrictions The process of developing algebraic representation (mathematical model) is finally called as Problem Formulation

Problem Formulation has following steps:

Identify the Decision Variable Writing the Objective Function Writing the Constraints Writing the NN Constraints In the given example the Objective Function and the Constraints are linear- so it is a linear programming model

So for a linear programming problem has - A linear Objective Function - Linear Constraints - All the decision variables are non negative

Assumptions of LP model
Proportionality or linearity Additivity Continuity or divisibility Certainty Finite choices

Linear Programming Formulation

Lets take another problem (Product Mix Problem)-Minimization Case:
A agricultural research institute suggested to a farmer to spread out at least 4800 kgs of phosphate fertilizer not less than 7200 kgs of a special nitrogen fertilizer to raise productivity. Two sources of obtaining theseMixture A & B. Both of these are available in in bags of 100 kgs and costing Rs. 40 and 24 respectively. Mixture A contains phosphate fertilizer and nitrogen fertilizer with a ratio of 20:80 while mixture B contains with a ratio of 50:50. Formulate this problem as LPP to determine as to how many bags of each type the farmer should buy in order to obtain the required fertilizer at minimum cost.