OR/MS Methodology

amelia santoso

Learning Objective:

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Understand how systems thinking is

incorporated into the OR/MS methodology
to deal more effectively with controllable
systems where quantitative analysis is an
appropriated approach.

OR/MS = Operational
Research/Management Science

OR/MS Methodology

OR/MS Methodology
1.

2.

3.

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Formulation
a. Summarizing problem situation
b. Identifying problem for analysis
c. Describing relevant system Project Proposal
Modeling
a. Building a mathematical model
b. Finding preferred solution
c. Validation & performance testing
d. Analyzing sensitivity of solution Project Report
Implementation
a. Planning implementation
b. Establishing control over solution
c. Implementing solution Documentation & Users Manual
d. Following up solution use Solution Audit
OR/MS Methodology

The Problem Formulation Phase

1. Summarizing problem situation using a rich picture.
2. Identifying problem for analysis The rich picture helped us
in the identification of the problem.
3. Describing relevant system using a process approach to
identify the structure, transformation process(es),
components, inputs, and outputs of the relevant system,
which we then formalized by an influence diagram.

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When dealing with human activity systems, identification of

the problem and the relevant system involves an additional
dimension, namely establishing who are the various
stakeholders of the problem.
In particular, the problem owner or decision maker becomes
the core reference point of the entire analysis.
OR/MS Methodology

What is a problem?
A problem consists of four elements:
1. The decision maker who is dissatisfied with the
current state of affairs, or has some unsatisfied
need, i.e., has some goals or objectives to be
achieved.
2. The decision makers objectives.
3. The performance measure for assessing how well the
objectives have been achieves.
4. Alternatives courses of action or decision variables for
achieving the objectives.
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OR/MS Methodology

The Problem Modeling Phase

1. Expressing the systems description, as it relates to
the problem chosen for further analysis, in
quantitative terms It may be useful to translate
the influence diagram into a set of mathematical
relationships between the system variables and those
aspects of the system that measure its performance
in terms of desired system outputs.
2. Manipulating this quantitative model to explore the
response of the system performance to changes in
controllable and uncontrollable inputs, i.e., we
explore the solution space.
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OR/MS Methodology

The Problem Modeling Phase

3. Establishing the model credibility. Is it a valid
representation of reality? How well do the model
and its solution perform. What improvement in
terms of benefits or cost savings does it offer over
the current mode of operations?
The answers to these questions will determine
whether the project is abandoned, re-oriented, or
allowed to continue on its current course.
4. Consists of systematically asking what if
questions. The insights into the problem gained by
sensitivity analysis may be more valuable than
finding the optimal solution.
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OR/MS Methodology

The Implementation Phase

If the problem owner agrees that the performance standards are
likely to be met, the project enters its last phase solution
implementation.
1. Preparing a detailed plan of the various implementation tasks,
their assignment to individuals, and a schedule for their
coordination.
2. Establishing procedures for maintaining and establishing
control over the recommended solution.
3. Making the changes required to switch from the current to the
proposed mode of operation.
4. After the new solution has been in use for an appropriate length
of time, the analyst returns and performs an audit of the
solution. This consists of establishing the extent to which the
solution fulfills its promises in terms of the benefits achieved
and the cost incurred, as well as checking for continued proper
use of the solution and recommending possible changes in the
light of the practical experience gained. This may give rise to a
final project audit report.
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OR/MS Methodology

The Lubricating Oil Division A

Situation Summary

The problem deals with the operations of the Lubricating Oil Division
(LOD) of a major multi-national oil company.
The LOD is in charge of producing about 400 types of automotive
and industrial lubricating oils and greases, and storing the mixed
product in the LODs warehouse for ultimate sale to over 1000
customers wholesales, retailers, and large industrial or governmental
organizations.
The impetus for the project was a report by the firms internal auditors
to the Vice President of Finance of the company that in their
judgment the current average stock turnover of 12 times per year
achieved by the LOD on their products was well below the companys
target of 24.
The stock turnover is equal the ration of sales over the value of the
goods in stock.

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OR/MS Methodology

Detail of the Operations

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OR/MS Methodology

10

Identifying the Problem to be Analyzed

The process of scheduling production runs
(includes the coordination of mixing and
filling)
The decision of which customer order are
classified as big and which ones as small
Whether it would be advantageous to allow a
lengthening of the production lead-time from
the current 1-day period.

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OR/MS Methodology

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Problem Elements
1. The immediate decision maker: the LOD
manager;
2. The objective: keeping the cost of the LODs
operation as low as possible, subject to
maintaining the same level of customer service;
3. The performance measure for evaluating any
control policy: the total operating costs of the
LOD;
4. The alternative courses of action: the size of
stock replenishment batches and the cutoff point
for classifying customer orders as big or small.
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OR/MS Methodology

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The Components of The Stock Replenishment System in

the LOD contd
Identification of LOD system
No.

Aspect of entity

Rule used

Identification

Cutoff point for large customer orders

control input

Stock replenishment quantity

control input

Total operating costs of LOD

performance output

Warehouse space excess/shortage

global output

Mixing capacity excess/shortage

global output

Filling capacity excess/shortage

global output

Customer order size classification

decision subsystem

Stock level review

decision subsystem

Demand small customers

component

10

Demand large customers

component

11

LOD production setup (layout, sequence)

structure

12

Production process for stock replenishment

subsystem (process)

13

Production process for large customers orders

subsystem (process)

14

Batch testing process

subsystem (process)

15

Production setup cost

component

16

Total value of products produced

component

17

Warehousing

subsystem (process)

18

Stocks of filled products

component

19

Investment in stocks

component

component

20 Warehouse space use

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OR/MS Methodology

13

The Components of The Stock Replenishment

System in the LOD
Identification of LOD system

No.

Aspect of entity

Rule used

Identification

21

Stock holding cost

component

22

Product handling process

subsystem (process)

23

Product handling cost

component

24

Delivery of customer orders

ignored

25

Refinery operations

1 (remotely)

ignored

26

ase oil availability

1 (remotely)

ignored

27

Product specification

data input

28

Product cost/unit

data input

29

Customer demand pattern

data input

30

Setup and mixing time/batch

data input

31

Capacity of mixing plant

global constraint

32

Setup and filling time/batch

data input

33

Capacity of filling plant

global constraint

34

Testing cost per batch

data input

35

Container cost

data input

36

Warehouse space/stock unit

data input

37

Mix/fill setup cost per bacth

data input

38

Unit product handling costs

data input

39

Cost of funds invested

data input

40

Warehouse capacity

global constraint

41

Delivery lead time

constraint

42

Production lead time

constraint

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OR/MS Methodology

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Influence Diagram for Stock Replenishment System

Production
setup cost per
batch

Order
1
pattern by
special
production
runs
3 Annual
volume by
special
production
runs

Product
handling
cost/unit

Annual
9
handling
cost for big
customers

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Unit product
value

Cutoff for big?

Small? order

Customer
order pattern

Stock
replenishment
size

Order
pattern met
from stock

Average
stock level
5
4
Annual
number of
special
production
runs

10

Annual
setup cost
for special
production
runs

Annual
volume met
from stock

11 Annual
handling
cost for
small
customers

12

Annual
number
stock
replenishm
ent

Annual
setup cost
for stock
replenishm
ents

8
Average
stock
investment

Investment
holding cost/$

14
13

Annual
stock
holding
cost

Value of
annual
demand

15
Total annual LOD
operating cost
OR/MS Methodology

15

15

Reference
Daellenbach, H.G., 1994, Systems and
Decision Making: A Management Science
Approach, John Wiley & Sons Ltd, Chapter 5.

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