Linear programming

Linear programming models are used to find an optimal solution for optimization
problems. Linear programming models are composed of decision variables and numerical
values that are arranged into a linear objective function and a set of linear constraints. The
variables are not allowed to be negative.
Linear programming models are widely used. Among applications of these models there
are problems that involve product mix, portfolio selection, distribution and so on.
Two variable problems can be approached using graphical techniques.
The general method for obtaining solutions to linear programming problems is the
simplex algorithm. The simplex procedure involves developing a series of tables, each of
which describes the solution at a corner point of the feasible solution space, beginning with
the origin. Each solution is progressively better than the previous one. The process is
continued until no further improvement can be realized, at which time the optimal solution
can be identified.

Transportation and assignment problems

The transportation model is usually applied to distribution type problems, in which

supplies of goods that are held at various locations are distributed to other receiving locations.
The purpose of using a linear programming model is identification of a distribution plan that
would minimize the cost of transporting the goods, for example from warehouses to a retail
store. It is necessary to take into account supplies, demands and transportation costs.
Assignment type problems involve the matching or pairing of two sets of items. Such
problems have different costs for different distribution alternatives or different pairings, and
the objective is to identify the plan which minimizes total cost. Linear programming is
possible to use for solving these problems.

Decision theory

Decision theory is a general approach to decision making. It is very useful for a decision
maker who must choose from a list of alternatives, knowing that one of a number of possible
future states of nature will occur and that this will have an impact on the payoff realized by a
particular alternative.
Decision theory problems are characterized by a list of alternatives, a list of possible
future states of nature, payoffs associated with each alternative/state of nature combination, an
assessment of the degree of certainty of possible future events, and a decision criterion.
Decision models can be categorized according to the degree of uncertainty that exists
relative to the occurrence of the states of nature (decision under certainty, decision under risk
and decision under uncertainty).
Problems that involve a single decision are usually best handled through payoff tables,
whereas problems that involve a sequence of decisions are usually best handled using tree
diagrams.

Networks (the shortest route problem, minimum spanning tree problem, the maximal
flow problem)

Network models are an important approach for solving location allocation problems.
The shortest route algorithm is useful for determining the shortest distance, cost etc. from an
origin to a destination through a network. The minimum spanning tree algorithm is useful in
determining the minimum distance, cost, time etc. needed to connect a set of locations into a
single system. A maximal flow algorithm is useful in determining the greatest amount of flow
that can be transmitted through a system in which various branches, or connections, have
capacity limitations.

Network analysis (project management)

The basic word in the term project management is project. A project may be defined
as a series of jobs that are connected together chronologically and technologically. The most
widely used techniques are Critical Path Method (CPM) and Program Evaluation and Review
Technique (PERT). The main difference between these two methods is that CPM requires a
uniquely determined time for every job, whereas PERT includes three estimates of activity
time (optimistic, pessimistic and most likely time). In other words, CPM is used for
deterministic projects and PERT for stochastic projects.
CPM and PERT allow answers to questions such as, for instance: How long will the
project take? When will we able to start a particular activity? How long can any activity be
delayed without lengthening the project? Do I have enough resources for project realization?
Can I reduce the total project cost?
Another way to describe and calculate stochastic network models is to simulate them.

Queuing models

Waiting line problems represent an important part of operational research. Waiting lines
are commonly found in a wide range of production and service systems which encounter
variable arrival and service rates.
Queuing models are predictive models of the expected behaviour of a system in which
waiting lines form. The most common goal is to design systems that minimize the combined
costs of providing capacity and customer waiting. The other goal is to design systems that
attain specific performance criteria (for example, keep average waiting time under ten
minutes). Performance measures for queuing systems include the average number of
customers waiting, the average waiting time, system utilization, and the maximum number of
waiting subjects in line.

Simulation

Simulation is an important tool for decision making. The main goal of simulation is to
create a model that will reflect the behaviour of some real life system in order to be able to
observe behaviour of this system when certain inputs or parameters are changed. Simulation
models enable decision makers to compress time and to observe system behaviour under
different circumstances.
The simulations can be classified as discrete or continuous.
Simple simulations are often carried out by means of standard office software. The more
complicated problems have to be programmed (it is necessary to use specialized software, for
example @RISK).

Markov analysis

The use of Markov analysis on systems helps decision makers to understand how the
system behaves over time. Markov analysis uses tree diagrams, matrix multiplication and an
algebraic approach. The first two possibilities are useful for describing short-term systems
behaviour, whereas the third approach is more appropriate for describing long- term systems
behaviour.

Multiple criteria linear programming

The aim of linear programming is to find the optimal solution of a given problem under
several constraints. An optimal solution means a maximal or minimal value of the objective
function. In the case of multiple criteria linear programming, decision makers have to take
into account more than one objective function. In other words there is the same set of
constraints and different objective functions. Solutions under each objective are different (one
ideal solution exists for each objective function). We try to find out one compromise solution.

Multiple criteria decision-making (MCDM)

Multiple criteria decision-making (MCDM) enables making decisions in the presence of

multiple criteria. Problems for multiple criteria decision making can be found in many areas.
We need to choose one alternative from a list of possible alternatives and take into
account many criteria. The character of some criteria is to minimize (the less the better) and of
other criteria to maximize (the more the better). Sometimes, quantification of available
information is a great problem.
There are many methods for multiple criteria decision-making and each of them has
advantages and disadvantages. A certain influence of a decisionmaker`s subjective opinion is
not excluded.

Data Envelopment Analysis

Data envelopment analysis (DEA) is a linear-programming-based technique for

measuring the relative performance of organisational units where the presence of multiple
inputs and outputs makes comparisons difficult. Some of the units will be deemed to be
efficient and may be considered as representing the best practice available.
If a suitable set of measures can be defined, DEA provides an efficiency measure not
relying on the application of a common weighting of inputs and outputs. Additionally, the
method identifies peer units and target values for inefficient units.
The main benefits of DEA are two-fold: the performance is based on taking all the
available data into account, so it gives a good reflection of overall performance, and because
it is a peer based comparison the targets set for improvement are realistic.

Game theory

Game theory is a branch of applied mathematics and economics that studies situations
where players choose different actions in an attempt to maximize their returns. Game theory is
now used in many diverse academic fields, for example in biology, psychology and
philosophy. Because of games like the prisoner`s dilemma, in which rational self-interest
hurts everyone, game theory has been used in political science, ethics and philosophy. Game
theory studies decisions that are made in an environment where various players interact. In
other words, game theory studies choices of optimal behaviour when costs and benefits of
each option are not fixed, but depend upon the choices of other individuals.
Inventory models

Inventories are stores of goods held for future use. The maintenance of inventories is a
very important activity for every corporation, as well as for example, buying and selling.
Flexibility in production planning and scheduling is unavailable without appropriate inventory
management. The main questions that must be addressed in inventory management are:
When to order? and How much to order?

Renewal theory

The theory of renewal is concerned with a mathematical dependency of renewing sets

with random life spans. This theory is closely associated with reliability. One of the main
aims of the theory of renewal is to establish an optimal period of machine replacement to
minimize costs caused by system malfunction. This decision can be performed in a risk and
uncertainty environment. Nowadays, this theory can be used in physics and biology too.