Chapter 1

Introduction to Operations Research

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 Introduction
• Operations Research is an Art and Science

• It had its early roots in World War II and is

flourishing in business and industry with the aid
of computer
• Primary applications areas of Operations
Research include forecasting, production
scheduling, inventory control, capital budgeting,
and transportation.
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 What is Operations Research?
Operations
The activities carried out in an organization.

Research
The process of observation and testing
characterized by the scientific method.
Situation, problem statement, model
construction, validation, experimentation,
candidate solutions.

Operations Research is a quantitative approach to

decision making based on the scientific method of problem
solving. 3
 What is Operations Research?
• Operations Research is the scientific
approach to execute decision making, which
consists of:
– The art of mathematical modeling of
complex situations
– The science of the development of solution
techniques used to solve these models
– The ability to effectively communicate the
results to the decision maker
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 What Do We do
1. OR professionals aim to provide rational bases for
decision making by seeking to understand and
structure complex situations and to use this
understanding to predict system behavior and
improve system performance.

2. Much of this work is done using analytical and

numerical techniques to develop and manipulate
mathematical and computer models of
organizational systems composed of people,
machines, and procedures.

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 Terminology
• The British/Europeans refer to “Operational Research", the
Americans to “Operations Research" - but both are often
shortened to just "OR".

• Another term used for this field is “Management Science"

("MS"). In U.S. OR and MS are combined together to form
"OR/MS" or "ORMS".

• Yet other terms sometimes used are “Industrial Engineering"

("IE") and “Decision Science" ("DS").

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 Operations Research Models

Deterministic Models Stochastic Models

• Linear Programming • Discrete-Time Markov Chains
• Network Optimization • Continuous-Time Markov Chains
• Integer Programming • Queuing Theory (waiting lines)
• Nonlinear Programming • Decision Analysis
• Inventory Models Game Theory
Inventory models
Simulation
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 Deterministic vs. Stochastic Models
Deterministic models
assume all data are known with certainty

Stochastic models
explicitly represent uncertain data via
random variables or stochastic processes.

Deterministic models involve optimization

Stochastic models
characterize / estimate system performance.

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 History of OR
• OR is a relatively new discipline.
• 70 years ago it would have been possible
to study mathematics, physics or
engineering at university it would not have
been possible to study OR.
• It was really only in the late 1930's that
operationas research began in a systematic
way.
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Problem Solving and Decision Making
• 7 Steps of Problem Solving
(First 5 steps are the process of decision making)
– Identify and define the problem.
– Determine the set of alternative solutions.
– Determine the criteria for evaluating the alternatives.
– Evaluate the alternatives.
– Choose an alternative.
---------------------------------------------------------------
– Implement the chosen alternative.
– Evaluate the results. 10
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.

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 Problem Solving Process
Formulate the
Problem
Situation Problem
Implement a Solution Statement
Goal: solve a problem
• Model must be valid
Data
• Model must be Construct
a Model
tractable
Implement
• Solution must be the Solution

useful Model

Solution
Find
a Solution
Establish
a Procedure

Test the Model

and the Solution Solution Tools
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 The Situation
• May involve current operations
or proposed expansions due to
expected market shifts
Situation
• May become apparent through
consumer complaints or through
employee suggestions
Data • May be a conscious effort to
improve efficiency or response to
an unexpected crisis.

Example: Internal nursing staff not happy with their schedules;

hospital using too many external nurses.
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 Problem Formulation
Formulate the
Problem
Situation Problem
Statement

Data

• Describe system • Define variables

• Define boundaries • Define constraints
• State assumptions • Data requirements
• Select performance measures

Example: Maximize individual nurse preferences

subject to demand requirements. 14
 Data Preparation
• Data preparation is not a trivial step, due to the
time required and the possibility of data
collection errors.
• A model with 50 decision variables and 25
constraints could have over 1300 data
elements!
• Often, a fairly large data base is needed.
• Information systems specialists might be
needed.
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 Constructing a Model
Situation Problem
• Problem must be translated Formulate the
statement

from verbal, qualitative terms to Problem

logical, quantitative terms Data

Construct
• A logical model is a series of a Model
rules, usually embodied in a
computer program
Model
• A mathematical model is a collection of
functional relationships by which allowable
actions are delimited and evaluated.

Example: Define relationships between individual nurse assignments

and preference violations; define tradeoffs between the use of
internal and external nursing resources. 16
 Model Development
• Models are representations of real objects or
situations.
• Three forms of models are iconic, analog, and
mathematical.
– Iconic models are physical replicas (scalar
representations) of real objects.
– Analog models are 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.
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 Advantages of Models
• Generally, experimenting with models
(compared to experimenting with the real
situation):
– requires less time
– is less expensive
– involves less risk

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 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.

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 Mathematical Models
• Relate decision variables (controllable inputs) with fixed
or variable parameters (uncontrollable inputs).
• Frequently seek to maximize or minimize some objective
function subject to constraints.
• Are said to be stochastic if any of the uncontrollable
inputs (parameters) is subject to variation (random),
otherwise are said to be deterministic.
• Generally, stochastic models are more difficult to
analyze.
• The values of the decision variables that provide the
mathematically-best output are referred to as the optimal
solution for the model. 20
 Transforming Model Inputs into
Output
Uncontrollable Inputs
(Environmental Factors)

Controllable
Mathematical Output
Inputs
Model (Projected Results)
(Decision Variables)

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 Example: Project Scheduling
Consider a construction company building a 250-unit
apartment complex. The project consists of hundreds of
activities involving excavating, framing, wiring,
plastering, painting, landscaping, and more. Some of the
activities must be done sequentially and others can be
done simultaneously. Also, some of the activities can be
completed faster than normal by purchasing additional
resources (workers, equipment, etc.).
What is the best schedule for the activities and for
which activities should additional resources be purchased?
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 Example: Project Scheduling
• Question:
Suggest assumptions that could be made to
simplify the model.
• Answer:
Make the model deterministic by assuming
normal and expedited activity times are known
with certainty and are constant. The same
assumption might be made about the other
stochastic, uncontrollable inputs.
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 Example: Project Scheduling
• Question:
How could management science be used
to solve this problem?
• Answer:
Management science can provide a
structured, quantitative approach for
determining the minimum project
completion time based on the activities'
normal times and then based on the
activities' expedited (reduced) times. 24
Example: Project Scheduling
• Question:
What would be the uncontrollable
inputs?
• Answer:
– Normal and expedited activity completion
times
– Activity expediting costs
– Funds available for expediting
– Precedence relationships of the activities
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 Example: Project Scheduling
• Question:
What would be the decision variables of the
mathematical model? The objective function?
The constraints?
• Answer:
– Decision variables: which activities to expedite and
by how much, and when to start each activity
– Objective function: minimize project completion time
– Constraints: do not violate any activity precedence
relationships and do not expedite in excess of the
funds available. 26
 Example: Project Scheduling
• Question:
Is the model deterministic or stochastic?
• Answer:
Stochastic. Activity completion times, both
normal and expedited, are uncertain and subject
to variation. Activity expediting costs are
uncertain. The number of activities and their
precedence relationships might change before
the project is completed due to a project design
change. 27
 Solving the Mathematical Model
• Many tools are available as
Model discussed before
Find a
• Some lead to “optimal”
solution solutions (deterministic
Models)
• Others only evaluate
candidates  trial and
Solution Tools error to find “best” course
of action

Example: Read nurse profiles and demand requirements, apply

algorithm, post-processes results to get monthly
schedules. 28
 Model Solution
• Involves identifying the values of the decision
variables that provide the “best” output for the model.
• One approach is trial-and-error.
– might not provide the best solution
– inefficient (numerous calculations required)
• Special solution procedures have been developed for
specific mathematical models.
– some small models/problems can be solved by hand
calculations
– most practical applications require using a computer
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 Computer Software
• A variety of software packages are available
for solving mathematical models, some are:
– Spreadsheet packages such as Microsoft Excel
– The Management Scientist (MS)
– Quantitative system for business (QSB)
– LINDO, LINGO
– Quantitative models (QM)
– Decision Science (DS)
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 Model Testing and Validation
• Often, the goodness/accuracy of a model cannot be
assessed until solutions are generated.
• Small test problems having known, or at least expected,
solutions can be used for model testing and validation.
• If the model generates expected solutions:
– use the model on the full-scale problem.
• If inaccuracies or potential shortcomings inherent in the
model are identified, take corrective action such as:
– collection of more-accurate input data
– modification of the model
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 Implementation
• A solution to a problem usually
Situation implies changes for some
individuals in the organization
• Often there is resistance to
change, making the
Implement implementation difficult
the Procedure
• User-friendly system needed
• Those affected should go
Procedure
through training
Example: Implement nurse scheduling system in one unit at a
time. Integrate with existing HR and T&A systems.
Provide training sessions during the workday. 32
 Implementation and Follow-Up
• Successful implementation of model results is
of critical importance.
• Secure as much user involvement as possible
throughout the modeling process.
• Continue to monitor the contribution of the
model.
• It might be necessary to refine or expand the
model.

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 Report Generation
• A managerial report, based on the results of the
model, should be prepared.
• The report should be easily understood by the
decision maker.
• The report should include:
– the recommended decision
– other pertinent information about the results (for
example, how sensitive the model solution is to the
assumptions and data used in the model)

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 Components of OR-Based
Decision Support System
• Data base (nurse profiles,
external resources, rules)
• Graphical User Interface (GUI);
web enabled using java or VBA
• Algorithms, pre- and post-
processor
• What-if analysis
• Report generators

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 Examples of OR Applications
• Rescheduling aircraft in response to groundings
and delays
• Planning production for printed circuit board
assembly
• Scheduling equipment operators in mail
processing & distribution centers
• Developing routes for propane delivery
• Adjusting nurse schedules in light of daily
fluctuations in demand
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 Example: Iron Works, Inc.
Iron Works, Inc. (IWI) manufactures two products
made from steel and just received this month's allocation of
b pounds of steel. It takes a1 pounds of steel to make a unit
of product 1 and it takes a2 pounds of steel to make a unit of
product 2.
Let x1 and x2 denote this month's production level of
product 1 and product 2, respectively. Denote by p1 and p2
the unit profits for products 1 and 2, respectively.
The manufacturer has a contract calling for at least m
units of product 1 this month. The firm's facilities are such
that at most u units of product 2 may be produced monthly.

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 Example: Iron Works, Inc.
• Mathematical Model
– The total monthly profit =
(profit per unit of product 1)
x (monthly production of product 1)
+ (profit per unit of product 2)
x (monthly production of product 2)
= p1x1 + p2x2
We want to maximize total monthly profit:
Max p1x1 + p2x2
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 Example: Iron Works, Inc.
• Mathematical Model (continued)
– The total amount of steel used during monthly
production =
(steel required per unit of product 1)
x (monthly production of product 1)
+ (steel required per unit of product 2)
x (monthly production of product 2)
= a1x1 + a2x2
This quantity must be less than or equal to the
allocated b pounds of steel:
a1x1 + a2x2 < b 39
 Example: Iron Works, Inc.
• Mathematical Model (continued)
– The monthly production level of product 1 must
be greater than or equal to m:
x1 > m
– The monthly production level of product 2 must
be less than or equal to u:
x2 < u
– However, the production level for product 2
cannot be negative:
x2 > 0
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 Example: Iron Works, Inc.
• Mathematical Model Summary

Max p1x1 + p2x2

s.t. a1x1 + a2x2 < b
x1 > m
x2 < u
x2 > 0

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 Example: Iron Works, Inc.
• Question:
Suppose b = 2000, a1 = 2, a2 = 3, m = 60, u = 720, p1 =
100, p2 = 200. Rewrite the model with these specific values for
the uncontrollable inputs.
• Answer:
Substituting, the model is:
Max 100x1 + 200x2
s.t. 2x1 + 3x2 < 2000
x1 > 60
x2 < 720
x2 > 0
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 Example: Iron Works, Inc.
• Question:
The optimal solution to the current model is x1 = 60
and x2 = 626 2/3. If the product were engines, explain
why this is not a true optimal solution for the "real-life"
problem.
• Answer:
One cannot produce and sell 2/3 of an engine. Thus
the problem is further restricted by the fact that both x1
and x2 must be integers. They could remain fractions if
it is assumed these fractions are work in progress to be
completed the next month.
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Example: Iron Works, Inc.

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 1
Problem formulation

Steps in OR
2
Study M odel building

3
Data collection

4
Data analysis

5
Coding

M odel No
6 Fine-tune
verification and model
validation

Yes

7
Experimental design

8
Analysis of results 45
Success Stories of OR

46
 Application Areas

• Strategic planning
• Supply chain management
• Pricing and revenue management
• Logistics and site location
• Optimization
• Marketing research
47
 Applications Areas (cont.)
• Scheduling
• Portfolio management
• Inventory analysis
• Forecasting
• Sales analysis
• Auctioning
• Risk analysis
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 Examples
• British Telecom used OR to schedule workforce for more than
40,000filed engineers. The system was saving $150 million a
year from 1997~ 2000. The workforce is projected to save $250
million.

• Sears Uses OR to create a Vehicle Routing and Scheduling

System which to run its delivery and home service fleet more
efficiently -- $42 million in annual savings

• UPS use O.R. to redesign its overnight delivery network, $87

million in savings obtained from 2000 ~ 2002; Another $189
million anticipated over the following decade.

• USPS uses OR to schedule the equipment and workforce in its

mail processing and distribution centers. Estimated saving in
$500 millions can be achieve. 49
 What you Should Know about
Operations Research
• How decision-making problems are
characterized
• OR terminology
• What a model is and how to assess its value
• How to go from a conceptual problem to a
quantitative solution

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