NAME/IPE-479

Engineering Management
Conducted by:
Captain M Muzibur Rahman, (E), psc, BN

Part-9: Quantitative Management

Capt Muzib, (E), psc, BN

 Operations Research
• Quantitative methods for decision support
• Several disciplines
– Mathematical modeling
– Optimization
– Probability theory
– Game theory
– Queuing theory
– Simulation
• Discrete optimization problems (DOP) are central

2
Problem Solving and Decision Making
• 7 Steps of Problem Solving
(First 5 steps are the process of decision making)
1. Identify and define the problem.
2. Determine the set of alternative solutions.
3. Determine the criteria for evaluating the
alternatives.
4. Evaluate the alternatives.
5. Choose an alternative.
6. Implement the chosen alternative.
7. Evaluate the results.
 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.
 Application Areas

• Strategic planning
• Supply chain management
• Pricing and revenue management
• Logistics and site location
• Optimization
• Marketing research
 Applications Areas (cont.)
• Scheduling
• Portfolio management
• Inventory analysis
• Forecasting
• Sales analysis
• Auctioning
• Risk analysis
 Optimization

• Optimization is derived from the Latin

word “optimus”, the best.

• Optimization characterizes the activities

involved to find “the best”.

• People have been “optimizing” forever,

but the roots for modern day
optimization can be traced to the Second
10 World War.
 Types of
Optimization
• Note: There are MANY different optimization methods/algorithms
• However, they are can be grouped by fundamental principles of:
– model, or
– solution method/algorithm

Do not forget:
Optimization methods fall in the category of
“decision support systems/methods”
Question: What are some other means for decision support?

11
• Linear Programming:
• This is a constrained optimization technique, which optimize some criterion within some constraints. In
• Linear programming the objective function (profit, loss or return on investment) and constraints are
• linear. There are different methods available to solve linear programming.
• Game Theory:
• This is used for making decisions under conflicting situations where there are one or more
• players/opponents. In this the motive of the players are dichotomized. The success of one player tends to
• be at the cost of other players and hence they are in conflict.
• Decision Theory:
• Decision theory is concerned with making decisions under conditions of complete certainty about the
• future outcomes and under conditions such that we can make some probability about what will happen
• in future.
• Queuing Theory:This is used in situations where the queue is formed (for example customers waiting for service, aircrafts
• waiting for landing, jobs waiting for processing in the computer system, etc). The objective here is
• minimizing the cost of waiting without increasing the cost of servicing.
• Inventory Models:
• Inventory model make a decisions that minimize total inventory cost. This model successfully reduces
• the total cost of purchasing, carrying, and out of stock inventory.
• Simulation:
• Simulation is a procedure that studies a problem by creating a model of the process involved in the
• problem and then through a series of organized trials and error solutions attempt to determine the best
• solution. Some times this is a difficult/time consuming procedure. Simulation is used when actual
• experimentation is not feasible or solution of model is not possible.
• Network Scheduling:
• This technique is used extensively to plan, schedule, and monitor large projects
(for example computer
• system installation, R & D design, construction, maintenance, etc.). The aim of this
technique is
• minimize trouble spots (such as delays, interruption, production bottlenecks, etc.)
by identifying the
• critical factors. The different activities and their relationships of the entire project
are represented
• diagrammatically with the help of networks and arrows, which is used for
identifying critical activities
• and path. There are two main types of technique in network scheduling, they are:
• Program Evaluation and Review Technique (PERT) – is used when activities time is
not known
• accurately/ only probabilistic estimate of time is available.
• Critical Path Method (CPM) – is used when activities time is know accurately.
 Quantitative Methods
…employ mathematical models to reach a wide variety
of business decisions.
– They give modern managers a competitive edge
– Managers do not need to have great mathematical skills
– Familiarity allows one to:
• Ask the right questions
• Recognize when additional analysis is necessary
• Evaluate potential solutions
• Make informed decisions
 Introduction to
Linear Programming
 Mathematical Programming
…is the development of modeling and solution
procedures which employ mathematical
techniques to optimize the goals and
objectives of the decision-maker.
Programming problems determine the
optimal allocation of scarce resources to meet
certain objectives.
 Linear Programming Problems
…are mathematical programming problems
where all of the relationships amongst the
variables are linear.
 Components of a LP Formulation
1) Decision Variables
2) Objective Function
3) Constraints
4) Non-negativity Conditions
 Decision Variables
…represent unknown quantities. The solution
for these terms are what we would like to
optimize.
 Objective Function
…states the goal of the decision-maker. There
are two types of objectives:
– Maximization, or
– Minimization
 Constraints
…put limitations on the possible solutions of the
problem. The availability of scarce resources
may be expressed as equations or inequalities
which rule out certain combinations of
variable values as feasible solutions.
 Non-negativity Conditions
…are special constraints which require all
variables to be either zero or positive.
 Special Terms
1) Parameters
2) RHS
3) Objective Coefficients
4) Technological Coefficients
5) Canonical Form
6) Standard Form
 Parameters
…are the constant terms. These are neither
variables, nor their coefficients. In canonical
form the parameters always appear on the
right-hand side of the constraints.
 Right-Hand Side (RHS)
…are the numbers (parameters) located on the
right-hand side of the constraints. In a
production problem these parameters
typically indicate the amount, or quantity, of
resources available. In the conventional
literature these are known as the “b”s.
 Objective Coefficients
…are the coefficients of the variables in the
objective function. In a production problem
these typically represent unit profit or unit
cost. In the conventional literature these are
known as the “c”s.
 Technological Coefficients
…also known as “exchange coefficients,” these
are the coefficients of the variables in the
constraints. In a production problem these
typically represent the unit resource
requirements. In the conventional literature
these are known as the “a”s.
 Canonical Form
…refers to an LP problem with an objective
function, all of the variables are non-negative
and where all of the variables and their
coefficients are on the left-hand sides of the
constraints, and all of the parameters are on
the right-hand sides of the constraints.
 Standard Form
…refers to an LP problem in canonical form. In
addition, all of the constraints are expressed
as equalities and every variable is represented
in the same order of sequence on every line of
the linear programming problem.
Redwood Furniture Company
Resource Unit Requirements Amount
Available
Table Chair

Wood 30 20 300
Labor 5 10 110
Unit 6 8
Profit
Redwood Problem Formulation
Let: XT = number of tables produced
XC = number of chairs produced

MAX Z = 6 XT + 8 XC
s.t. 30 XT + 20 XC < 300
5 XT + 10 XC < 110
where: XT, XC > 0
 Graphical LP Solution Procedure
1) Formulate the LP problem
2) Plot the constraints on a graph
3) Identify the feasible solution region
4) Plot two objective function lines
5) Determine the direction of improvement
6) Find the most attractive corner
7) Determine the coordinates of the MAC
8) Find the value of the objective function
Redwood Furniture Problem

XT = 4 tables
XC = 9 chairs

P = 6(4) + 8(9) = 96
dollars
 Exercises:
Use the graphical solution procedure to
determine the optimal solutions for the
following linear programming problems. For
each, show the feasible solution region, the
direction of improvement, the most attractive
corner, and solve for the decision variables
and the objective function.
 Problem #1
MIN Z = 3A – 2B
s.t. 5A + 5B > 25
A=2
3A < 30 B=3
6B < 18 Z=0
3A + 9B < 36
where: A, B > 0
 Problem #2
MAX Z = 6X – 3Y
s.t. 2X + 2Y < 20
X = 19/4
6X > 12 Y=1
4Y > 4 Z = 51/2
4X + Y < 20
where: X, Y > 0
 Problem #3
MAX Z = 5S – 5T
s.t. 3T < 18
4S + 4T < 40 S=7
2S < 14 T = 4/5
6S - 15T < 30 Z = 31
3S > 9
where: S, T > 0
 Special LP Cases
For each of the following problems use the
graphical solution procedure to try to
determine the optimal solutions. You may
find it difficult to proceed in some cases, and
in all cases the results are interesting. In each
case proceed as far as you can.
 Special Case #1
MAX Z = 4X1 + 3X2
s.t. 5X1 + 5X2 < 25
X2 > 6
X2 < 8
where: X1, X2 > 0

INFEASIBLE Problem
 Special Case #2
MAX Z = 4X1 + 3X2
s.t. 5X1 + 5X2 > 25
X2 < 6
Redundant
X2 < 8 Constraint

where: X1, X2 > 0

UNBOUNDED Problem
 Special Case #3
MAX Z = 4X1 + 4X2 X1= 3
X2 = 2
s.t. 5X1 + 5X2 < 25 Z = 20
X2 < 4
X1= 1
X1 < 3 X2 = 4
where: X1, X2 > 0 Z = 20

Multiple Optimal Solutions

 Formulating LP Problems
As is true with most forms of decision modeling,
the most difficult aspect is defining the
problem. Once the problem is defined the
rest of the decision process follows relatively
easily. Formulate the following as linear
programming problems:
 Problem #1
Acme Widgets produces four products: A, B, C and D. Each unit of product
A requires 2 hours of milling, one hour of assembly and $2 worth of in-
process inventory. Each unit of product B requires one hour of milling, 3
hours of assembly and $5 worth of in-process inventory. Each unit of
product C requires 2 1/2 hours of milling, 3 1/2 hours of assembly and
$4 worth of in-process inventory. Finally, each unit of product D
requires 5 hours of milling, no assembly time and $16 worth of in-
process inventory. The firm has 1,200 hours of milling time and 1,300
hours of assembly time available. Each unit of product A returns a
profit of $40; each unit of B has a profit of $36; each unit of product C
has a profit of $24; and each unit of product D has a profit of $48. Not
more than 120 units of product A can be sold and not more than 96
units of product C can be sold. Any number of units of products B and D
may be sold. However, at least 100 units of product D must be
produced and sold to satisfy a contract requirement. It is otherwise
assumed that whatever is produced can be sold. Formulate the above
as a linear programming problem to maximize profits to the firm.
 Problem #2
The Thrifty Loan Company is planning its operations for the next year. The
company makes five types of loans. The loans are listed along with the
annual return on the loans:

Type of Loan Annual Return (%)

Signature Loans 18
Furniture Loans 16
Automobile Loans 11
2nd Mortgages 10
1st Mortgages 9
Legal requirements and company policy place the following limits upon
the various types of loans:
Signature loans cannot exceed 10% of the total amount of loans. The
amount of signature and furniture loans together cannot exceed 20% of
the total amount of loans. First mortgages must be at least 40% of the
total mortgages and at least 20% of the total amount of loans. Second
mortgages may not exceed 25% of the total amount of loans. The firm
can lend a maximum of $1.5 million.
Formulate the above as a linear programming problem to maximize the
revenues from loans.
 Problem #3
Roscoe owns a used furniture store. He has 500 square feet of floor
space available for new purchases. The following pieces of
furniture are available to him:

Type Sq. Ft. per Item Selling Price ($) Cost per Item ($)
Sofa 45 95 45
Bed 60 45 25
Dining Set 75 110 35
Chest 15 15 5
Patio Set 95 55 30

Roscoe does not want to stock more sofas than beds. For
each patio set stocked he wants to have at least one of
everything else. He has $450 allocated for these purchases.
Formulate the above as a linear programming problem to
maximize Joe's profit from his purchases.
 Problem #4
The marketing department for Omni World Enterprises would like to allocate next year's
advertising budget among the various media to maximize the return to the firm. The
year's expenditures for advertising are not to exceed $2 million, with not more than
$1.1 million spent during the first six months. The media used are newspapers,
magazines, radio and television. Spending on the different media is restricted by the
following company policies:
1. At least $200,000 is to be spent on newspapers and magazines combined in each
half of the year.
2. At most, 80% of the advertising expenditures are to be spent on television in each
six-month period.
3. At least $50,000 is to be spent on radio for the year.
4. At least 25% of the advertising expenditures on television are to be spent in the
second six-month period.
Returns from a dollar spent on advertising in each medium are as follows:
Medium Return ($)
Radio 5
Television 20
Newspapers 10
Magazines 15
Formulate a linear programming problem for Omni's advertising budget.
Capt Muzib, (E), psc, BN
Capt Muzib, (E), psc, BN
Capt Muzib, (E), psc, BN
Capt Muzib, (E), psc, BN
Capt Muzib, (E), psc, BN
Capt Muzib, (E), psc, BN
Capt Muzib, (E), psc, BN
Benefits of well worded vision statement

– It makes clear the senior executive’s own

views about the firm’s long term direction.
– It reduces the risk of rudderless decision
making.
– It conveys organizational purpose that can
motivate its members.
– It helps an organization prepare for the
future.

Capt Muzib, (E), psc, BN

Guidelines for setting mission statement

1. The mission is not to make a profit.

2. Incorporating what, who, and how into the
mission statement
3. A broad or narrow business definition and
mission
4. Mission statements for functional
departments

Capt Muzib, (E), psc, BN

 The Mission is not to make Profit
This is a misconception to set mission for
seeking profit. Profit is more correctly an
objective and a result of what the company
does. Mission based on making a profit do not
allow us to distinguish one type of profit –
seeking enterprise from another.
For Example – the business to Toyota is totally
different from McDonalds, even though both
endeavor to earn profit.

Capt Muzib, (E), psc, BN