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Historical development of OR

While it is difficult to mark the beginning of the operations research/management sciences, the
scientific approach to management can be traced back to the era of Industrial Revolution and
even to periods before that. But operations research, as it exists today, was born during the
Second World War when the British military management called upon a group of scientists to
examine the strategies and tactics of various military operations with the intention of efficient
allocation of scarce resources for the war effort. During this period, may new scientific and
quantitative techniques were developed to assist the military operations. The name operational
research was derived directly from the context in which it was used- research activity on
operational areas of the armed forces.

After the war, operations research was adopted by the industry and some of the techniques that
had been applied to the complex problems of war were successfully transferred and assimilated
for use in the industrialized sector.

What is Operations Research/ Management Sciences?

1. The focus of the Operations Research is on applications of mathematics and logic in research
and decision-making on operations, as well as problem solving in all types of public and private
organization business, industry, government and state enterprises in order to bring about optimal
outcomes in organizational operations.

2. “Scientific approach to decision making that involves the operations for organized systems.
O.R. is concerned with optimal decision making in and modeling of deterministic and
probabilistic systems that originate from real life,”

3. “Operations Research is the application of scientific methods to decision problems. It has

found wide use and acceptance in all areas of business, government and industry.”
Meaning of OR

1. OR is a scientific method of providing executive departments with a quantitative basis for

decision regarding the operations under their control.
2. OR is the application of scientific methods, techniques and tools to problems involving
the operations of systems so as to provide these in control of the operations with optimum
solution of the problem.
3. OR is the art of giving bad answers to problems to which otherwise worse answers are
given.
4. OR is a scientific approach to problem solving for executive management.
5. OR is the art of winning war without actually fighting it.
6. OR is an experimental and applied science devoted to observing, understanding, and
predicting the behavior of purposeful man-machine systems and OR workers are actively
engaged in applying this knowledge to practical problems in business, government and
society.
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A decision, which taking into account all the circumstances can be considered the best
one, is called an optimal decision.

Nature and Characteristics Features of OR

Operations Research is the application of scientific methods, techniques and tools to problems
involving the operations of systems so as to provide those in control of operations with optimum
solutions to the problems.

O.R. is inter-disciplinary in nature and requires a team approach to a solution of the problem.
O.R. makes use of experience and expertise of people from different disciplines for developing
new methods and procedures. O.R. is the art of winning the war without actually fighting it. O.R.
is not a science like any well-defined physical, biological, social phenomena. It is not a scientific
research into the control of operations. In fact, it is a collection of mathematical techniques and
tools which in conjunction with a system approach are applied to solve practical decision
problems of an economic nature.

The significant features of OR are given below:

1. Decision Making: OR is addressed to managerial decision making or problem

solving. A major premise of OR is that decision making, irrespective of the situation
involved, can be considered as a general systematic process that consists of the
following steps:
(a) Define the problem and establish the criterion, which will be used. The criterion
may be the maximization of profits, utility and minimization of costs and so on.
(b) Select the alternative courses of action for consideration.
(c) Determine the model to be used and the values of the parameters of the process.
(d) Evaluate the alternatives and choose the one that is optimal.

2. Imperfectness of solutions: By OR techniques, we cannot obtain perfect answers to

our problems but, only the quality of the solution is improved from worse to bad
answers.

3. Use of scientific research: OR uses techniques of scientific research to reach the

optimum solution.

4. To optimize the total output: OR tries to optimize total return by maximizing the
profit and minimizing the cost and loss.

Applications of OR
1. Finance-Budgeting and Investments
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 Cash-flow analysis, long range capital requirements, dividend policies,

investment portfolios.
 Credit policies, credit risks and delinquent account procedures.
 Claim and complaint procedures.

Operations research has a significant role to play in the world of modern finance. It has both a
support role, in providing tools from the traditional toolkit of operations research, and a main
role in shifting the risk management paradigm from a compartmentalized approach toward an
enterprise-wide view. But unlike other systems of human activity where operations research is
applied — logistics, transportation, military — there is a rich theory describing the behavior of
the financial system. Finance is a relatively new field of formal scientific inquiry. But it provides
us with a well-developed body of theory that describes the financial world, as we see it. Those
who wish to engage in intellectual arbitrage between finance and operations research should be
well versed in both areas. Otherwise they run the risk of being at the paying side of financial
arbitrage trades.

Business globalization, rapid technological changes and increased volatility in the financial
markets change dramatically the risk profiles of many companies. Firms are responding by
embracing the concept of enterprise-wide risk management. Today it is widespread corporate
practice to take steps in understanding the firm's risk exposure in a global economy, and take
active measures to neutralize undesirable risk exposures

Some more applications:

 Integer programming for budgetary planning

 Linear programming for break-even analysis

 Integer programming for investment options selection Credit policy analysis.

 Cash flow analysis.

 Dividend policies.

 Investment portfolios.

 Credit policy analysis.

 Cash flow analysis.
 Dividend policies.

2. Purchasing, Procurement and Exploration

 Rules for buying, supplies and stable or varying prices.
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 Determination of quantities and timing of purchases.

 Bidding policies.
 Strategies for exploration and exploitation of raw material sources.
 Replacement policies.

3. Production Management
 Location and size of warehouses, distribution centers and retail outlets.
 Distribution Policy.
 Maintenance policies and preventive maintenance.
 Maintenance crew sizes.
 Numbers and location of factories, warehouses, hospitals etc.

4. Marketing
 Product selection, timing, competitive maintenance.
 Advertising media with respect to cost and time.
 Number of salesman, frequency of calling on accounts percent of time spent
on prospects.

5. Personnel Management
 Selection of suitable personnel on minimum salary.
 Mixes of age and skills.
 Recruitment policies and assignment of jobs.

6. Research and Development

 Determination of the areas of concentration of research and development.
 Project selection.
 Determination of time cost trade-off and control of development projects.
 Reliability and alternative design.

DECISION MAKING

Decision making can be regarded as the mental processes resulting in the selection of a course of
action among several alternative scenarios. Every decision making process produces a final
choice.[1] The output can be an action or an opinion of choice. Human performance in decision
terms has been the subject of active research from several perspectives. From a psychological
perspective, it is necessary to examine individual decisions in the context of a set of needs,
preferences an individual has and values they seek.
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Operation Research is used for analyzing problems of decision making in a superior fashion. The
organization can decide on factors such as sequencing of jobs, production scheduling and
replacements. Also the organization can take a call on whether or not to introduce new products

APPLICATIONS OF O.R. IN PRODUCTION MANAGEMENT

Operations RESEARCH is an area of management concerned with overseeing designing, and

redesigning business operations in the production of goods and/or services.
It involves the responsibility of ensuring that business operations are efficient in terms of using
as little resources as needed, and effective in terms of meeting customer requirements.
It is concerned with managing the process that converts inputs (in the forms of materials, labor,
and energy) into outputs (in the form of goods and/or services).

Operations research traditionally refers to the production of goods two main types of
operations is increasingly difficult to make as manufacturers tend to merge product and service
offerings. More generally, operations management aims to increase the content of value-added
activities in any given process. Fundamentally, these value-adding creative activities should be
aligned with market opportunity (through marketing) for optimal enterprise performance.

Operation research plays very important role in production management. or is applicable in to

two various areas in production management

 PROJECT PLANNING
 MANUFACTURING AND FACILITY PLANNING

 PROJECT PLANNING
o Location and size of warehouses distribution centers retail outlets etc.
o Distribution policy

 MANUFACTURING AND FACILITY PLANNING

o Production scheduling and sequencing.
o Project scheduling and allocation of resources.
o Selection and location of factories, warehouse and their sizes.
o Determining the optimal production mix.
o Maintenance crew sizes.
o Scheduling and sequencing the production run by proper allocation of machines.
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Applications of management science

Applications of management science are abundant in industry as airlines, manufacturing

companies, service organizations, military branches, and in government. The range of problems
and issues to which management science has contributed insights and solutions is vast. It
includes:

 scheduling airlines, including both planes and crew,

 deciding the appropriate place to site new facilities such as a warehouse, factory or fire
station,

 managing the flow of water from reservoirs,

 identifying possible future development paths for parts of the telecommunications

industry,

 establishing the information needs and appropriate systems to supply them within the
health service, and

 identifying and understanding the strategies adopted by companies for their information
systems

Applications of Operations Research

Successful OR applications can be found in a broad array of industries dealing with challenges
such as planning, routing, scheduling, forecasting, process analysis and decision analysis. OR is
also contributing greatly to healthcare services such as surgical and bed scheduling, portering
operations, emergency transport, accident trend analysis and treatment optimization. In the
service sector, OR techniques have been found especially helpful when dealing with variability
in service delivery such as call centres, queues for service and medical wait times.

A sampler of typical OR applications includes:

• Optimization of LTL trucking (Yellow Freight)

• Rail Car Optimization (CP Rail)
• Optimal package designs (Domtar Packaging, Ltd)
• Manpower planning models (Treasury Board Secretariat)
• Aircraft operations (Delta Airlines)
• Routing of Waste Trucks (Waste Management Inc.)
• Surgical bed optimization (Fraser Health Authority)
• Pre-board passenger screening (Vancouver International Airport )
• Resource allocation in a mental health hospital (Douglas Hospital)
• Switching network studies (Bell-Northern Research, Ltd)
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• Maintenance Strategies for the US Coast Guard

• Revenue Management (American Airlines)

OR has been applied in many industry sectors including the following:

Transport and Travel. OR techniques are used by airlines and rail companies to offer varying
fares and make higher revenues by filling more seats at different prices - an OR technique known
as Yield Management. All airlines depend on the effective use of OR techniques to make them
operate at a profit.

Retailing. In supermarkets, data from store loyalty card schemes is analyzed by OR groups to
advise on merchandising policies and profitability improvement. OR methods are also used to
decide when and where new store developments should be made.

Health. Hospital managers use OR to make decisions such as determining the optimal utilization
of operating rooms and personnel, assessing the risks posed by patients with various medical
conditions, and deciding necessary levels of perishable medicine in stock.

Financial Services. OR practitioners address issues such as portfolio and risk management,
planning and analysis of customer service. They are widely employed in Credit Risk
Management—a vital area for lenders needing to ensure that they find the optimum balance of
risk and revenue.

Government. OR is a key contributor in modernizing government services and making them

more efficient.
Some OR marketing applications include modeling the impact of performance related pay for
teachers, evaluating government call-centers, projecting the size of the prison population, and
national defense.

MODELLING IN OPERATIONS RESEARCH

A model in the sense used in OR is defined as a representative of an actual object or situation. It
shows the relationships (direct or indirect) and interrelationships of action and reaction in terms
of cause and effect.
Models can be classified according to following characteristics:
1. Classification by Structure
(a) Iconic models: Iconic models represent the system as it is by scaling it up or down. (i.e.
by enlarging or reducing the size). In other words, it is an image.
For example, a toy airplane is an iconic model of a real one. Others are photographs,
maps, drawings etc.

(b) Analogue models: The models, in which one set of properties is used to represent
another set of properties, are called analogue models.
For example, graphs are very simple analogues because distance is used to represent the
properties such as time, number, age etc.
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(c) Symbolic models: The symbolic model is one which employs a set of mathematical
symbols (i.e. letters, numbers etc) to represent the decision variables of the system.
These variables are related together by means of a mathematical equation or a set of
equations to describe the behavior of the system.

2. Classification by purpose
(a) Descriptive models: A descriptive model simply describes some aspects of a
situation based on observations, survey, questionnaire results or available data.

(b) Predictive models: Such models can answer ‘what if’ type of questions, i.e. they can
make predictions regarding certain events. For example, based on the survey results,
television networks such models attempt to explain and predict the election results
before all the votes are actually counted.
(c) Prescriptive models: Finally, when a predictive model has been repeatedly
successful, it can be used to prescribe a source of action. For example, linear
programming is a prescriptive model because it prescribes what the managers ought
to do.

3. Classification by Nature of Environment

(a) Deterministic models: Such models assume conditions of complete certainty and
perfect knowledge. For example, linear programming, transportation and assignment
models are deterministic type of models.

(b) Probabilistic or Stochastic models: These types of models usually handle such
situations in which the consequences cannot be predicted with certainty. For example,
insurance companies are willing to insure against risk of fire, accidents, and sickness and
so on.

4. Classification by Behaviour
(a) Statistic models: These models do not consider the impact of changes that takes place
during the planning horizon, i.e. they are independent of time.

(b) Dynamic models: In these models, time is considered as one of the important variables
and admits the impact of changes generated by time. Also, in dynamic models, not only
one but a series of interdependent decisions is required during the planning horizon.
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Linear Programming

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 costs, or
both. Mathematical programming involves optimization of a certain function, called the
objective function, subject to certain constraints. For example, a manager may be faced with the
problem of deciding the appropriate product mix of the four products. With the profitability of
the products along with their requirements of raw materials, labour etc. known, his problem can
be formulated as a mathematical programming problem taking the objective function as the
maximization of profits obtainable from the mix.

Linear programming deals with the optimization (maximization or minimization) of linear

functions subject to linear constraints. This technique has found its applications to important
areas of product mix, blending problems and diet problems. Oil refineries, chemical industries,
steel industries and food processing industry are also using linear programming with
considerable success.

The LP method is a technique for choosing the best alternative from a set of feasible alternatives,
in situations in which the objective function as well as the constraints can be expressed as linear
mathematical functions.

Que: A manufacturer produces two types of models M1 and M2. Each M1 model requires 4
hours of grinding and 2 hours of polishing; whereas each M2 model requires 2 hours of grinding
and 5 hours of polishing. The manufacturer has 2 grinders and 3 polishers. Each grinder works
for40 hours a week and each polisher works for 60 hours a week. Profit on each M1 model is Rs.
3 and on an M2 model is Rs. 4. Whatever is produced in a week is sold in the market. How
should the manufacturer allocate his production capacity to the two types of models so that he
may make the maximum profit in a week?

Linear programming (LP, or linear optimization) is a mathematical method for determining a

way to achieve the best outcome (such as maximum profit or lowest cost) in a given
mathematical model for some list of requirements represented as linear relationships. Linear
programming is a specific case of mathematical programming (mathematical optimization).

Linear programs are problems that can be expressed in canonical form:

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Graphical Method:

Linear Programming problems involving only two variables can be effectively solved by a
graphical technique which provides a pictorial representation of the solution and one gets insight
into the basic concepts used in solving large L.P.P.

Working procedure to solve a linear programming problem graphically:

Step 1. Formulate the given problem as a linear programming problem.

Step 2. Plot the given constraints as equalities on x1-x2 coordinate plane and determine the
convex region formed by them. (A region or set of points is called convex if the line joining any
two of its points lies completely in the region.)

Step 3. Determine the vertices of the convex region and find the value of the objective function
at each vertex. The vertex which gives the optimal (maximum or minimum) value of the
objective function gives the desired optimal solution to the problem.

Definitions:

A set of values x1, x2, x3,…………………….,xn which satisfies the constraints of the LPP is
called its solution.

Any solution to a LPP which satisfies the non-negativity restrictions of the problem is called its
feasible solution.

Any feasible solution which maximizes (or minimizes) the objective function of the LPP is
called its optimal solution.

A basic feasible solution is a basic solution which also satisfies the non-negativity restrictions,
that is, all basic variables are non-negative.

Uses of Linear Programming Problem

Linear programming is a considerable field of optimization for several reasons. Many practical
problems in operations research can be expressed as linear programming problems. Certain
special cases of linear programming, such as network flow problems and multicommodity flow
problems are considered important enough to have generated much research on specialized
algorithms for their solution. A number of algorithms for other types of optimization problems
work by solving LP problems as sub-problems. Historically, ideas from linear programming have
inspired many of the central concepts of optimization theory, such as duality,decomposition, and
the importance of convexity and its generalizations. Likewise, linear programming is heavily
used in microeconomics and company management, such as planning, production, transportation,
technology and other issues. Although the modern management issues are ever-changing, most
companies would like to maximize profits or minimize costs with limited resources. Therefore,
many issues can be characterized as linear programming problems.
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The Importance of Linear Programming:

– There are efficient solution techniques that solve linear programming models.

– The output generated from linear programming packages provides useful “what
if” analysis.

– Many real static problems lend themselves to linear programming formulations.

– Many real problems can be approximated by linear models.

The output generated by linear programs provides useful “what’s best” and “what-
if” information.

Assumptions of the linear programming :

– The parameter values are known with certainty.

– The objective function and constraints exhibit constant returns to scale.

– There are no interactions between the decision variables (the additivity

assumption).

– The Continuity assumption: Variables can take on any value within a given
feasible range.

ADVANTAGES AND DISADVANTAGES OF LINEAR PROGRAMMING:

Linear programming has become nowadays, the mathematical technique most used in solving a
variety of far larger problems related with management, from scheduling, media selection,
financial planning to capital budgeting, transportation and many others, with the special
characteristic that linear programming expect always to maximise or minimise some quantiy.

ADVANTAGES:

 The linear programming technique helps to make the best possible use of available
productive resources (such as time, machines etc.)

 In a production process, bottle necks may occur. For example, in a factory some
machines may be in great demand while others may lie idle for some time. A significant
advantage of linear programming is highlighting of such bottle necks.
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 The quality of decision making is improved by this technique because the decisions are
made objectively and not subjectively.

 By using this technique, wastage of resources like time and money

may be avoided.

DISADVANTAGES:

 Linear programming is applicable only to problems where the constraints and objective
function are linear i.e., where they can be expressed as equations which represent straight
lines. In real life situations, when constraints or objective functions are not linear, this
technique cannot be used.

 Factors such as uncertainty, weather conditions etc. are not taken into consideration.

 There may not be an integer as the solution, e.g., the number of men required may be a
fraction and the nearest integer may not be the optimal solution.

 i.e., Linear programming techniques may give practical valued answer which is not
desirable.

 Only one single objective is dealt with while in real life situations, problems come with
multi-objectives.

 Parameters are assumed to be constants but in reality they may not be so.

APPLICATIONS OF LINEAR PROGRAMMING:

1 The Diet Problem

Find the cheapest combination of foods that will satisfy all your nutritional requirements.

• For the results of an experiment with this, see the next sheet.

• Practical considerations — what about taste, variety?

2 Portfolio Optimization

Minimize the risk in your investment portfolio subject to achieving a certain return. Can also be
accessed from the NEOS
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Many investment companies are now using optimization and linear programming extensively to
decide how to allocate assets. The increase in the speed of computers has enabled the solution of
far larger problems.

3 Crew scheduling

An airline has to assign crews to its flights.

• Make sure that each flight is covered.

• Meet regulations, eg, each pilot can only fly a certain amount each day.

• Minimize costs, eg: accommodation for crews staying overnight out of town, crews
deadheading.

• Would like a robust schedule.

The airlines run on small profit margins, so saving a few percent through good scheduling can
make an enormous difference in terms of profitability.

They also use linear programming for yield management.

4 Manufacturing and transportation

For example, an oil company has oil fields in Saudi Arabia and Borneo, refineries in Japan and
Australia, and customers in the US and New Zealand.

The fields produce different qualities of oil, which is refined and combined into different grades
of gasoline. What raw oil should be shipped to which refinery? How much of each type of
gasoline should each refinery produce?

5 Telecommunications

Call routing: Many telephone calls from New York to Los Angeles, from Houston to Atlanta, etc.
How should these calls be routed through the telephone network?

Network design: If we need to build extra capacity, which links should we concentrate on?
Should we build new switching stations?

Internet traffic: For example, there was a great deal of construction of new networks for carrying
internet traffic a few years ago.

6 Traveling Salesman Problem

Given a set of cities, find the shortest route that visits each city exactly once and returns to the
home city.
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Applications include:

• Vehicle routing — eg, how do we route school buses to pick up children, how do Federal
Express and UPS assign packages to trucks?

• VLSI chip board manufacturing: holes need to be drilled on the board. How do we route the
drill to visit all these holes so it takes the shortest possible route?