UNIT ONE

INTRODUCTION TO OPERATIONS RESEARCH

Unit Introduction
Many people still remain in the bondage of self-incurred tutelage. Tutelage is a person's
inability to make his/her own decisions. Self-incurred is this tutelage when its cause lies
not in lack of reason but in lack of resolution and courage to use it without wishing to
have been told what to do by something or somebody else. The difficulty in life is the
choice. Good decision-making brings about a better life. A bad decision may force you to
make another one. A good decision is never an accident; it is always the result of high
intention, sincere effort, intelligent direction and skillful execution; it represents the wise
choice of many alternatives. One must appreciate the difference between a decision and
an objective. A good decision is the process of optimally achieving a given objective.
When decision-making is too complex or the interests at stake are too important, quite
often we do not know or are not sure what to decide. In many instances, we resort to
informal decision support techniques such as tossing a coin, asking an oracle, visiting an
astrologer, etc. However formal decision support from an expert has many advantages.
Management Science focuses on the formal model-driven decision support techniques
such as mathematical programs for optimization, and decision tree analysis for risky
decisions. Such techniques are now part of our everyday life. In decision-making we may
start the process of consideration. It is best to learn the decision-making process for
complex, important and critical decisions.

Cognizant to the above fact, we need to be well acquainted with the fundamentals of
management science as related to its business application. This unit is dedicated to
acquaint you with overview of operations research to make you a better decision maker
by learning the decision-making process. To this end, the unit is organized in to two
sections. In the first section, you will learn about definition of operations research, history
of operations research, basic features and significance of operations research. The second
section is devoted to quantitative analysis & decision making process, models and model
building, and operations research major techniques.

1.1 History of Operations Research

The Industrial Revolution of the 19th century probably did more to shape life in the
modern industrialized world than any event in history. Large factories with mass
production created a need for managing them effectively and efficiently. The field of
Decision Science (DS) also known as Management Science (MS), Operations Research
(OR) in a more general sense, started with the publication of the Principles of Scientific
Management in 1911 by Frederick W. Taylor. His approach relied on the measurement of
industrial productivity and on time /motion studies in the factories. The goal of his
scientific management was to determine the best method for performing tasks in the least
amount of time, while unfortunately using the stopwatch in an inhuman manner.

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Until the middle of the 19th century, most industrial enterprises only employed a few
workers. However, as companies expanded, it became less and less feasible for one
person to manage all of the new managerial functions of the business effectively. New
scientific methodologies were developed to provide assistance to each new type of
managerial function as it appeared. As more specialized forms of management emerged,
more specialized sub-functions, such as statistical quality control, equipment
maintenance, marketing research, and inventory control emerged. Whenever a managerial
function is broken down into a set of different sub-functions, a new task, called the
executive function of management, is created to integrate the diverse sub-functions so
that they efficiently serve the interests of the business as a whole. The executive function
evolved gradually with organizations themselves. However, increasing demands were
made on the manager who, in turn, sought aid outside the organization. This gave rise to
management consultants. What we call OR/MS/DS/SS today is, in fact, the use of
scientific tools to aid the executive.
Operation research (OR) originated in Great Britain during World War II to bring
mathematical or quantitative approaches to bear on military operations. Since then,
OR/MS/DS/SS has evolved to be applicable to the management of all aspects of a
system, product, or service, and hence is often referred to as Systems Science (SS) or
Management Science (MS). It has now become recognized as an important input to
decision-making in a wide variety of applications in business, industry, and government.
The term OR arose in the 1940's when research was carried out on the design and
analysis of mathematical models for military operations. Since that time the scope of OR
has expanded to include economics (known as econometrics), psychology
(psychometrics), sociology (socio-metrics), marketing (marketing research and marketing
science), astrology (astronomy), and corporate planning problems. The growing
complexity of management has necessitated the development of sophisticated
mathematical techniques for planning and decision-making, and the OR/MS/DS/SS
features prominently in this structured decision-making process cycle by providing a
quantitative evaluation of alternative policies, plans, and decisions. The mathematical
disciplines most widely used in OR/MS/DS/SS modeling process include mathematical
programming, probability and statistics, and computer science. Some areas of OR, such
as inventory control, production control, and scheduling theory, have grown into sub-
disciplines of their own right and have become largely indispensable in the modern
world.
Military organizations had gone through the same type of evolution as other businesses
and industries. This organizational evolution took place in the twenty-year gap between
the end of World War I and the beginning of World War II when the military leadership
had to turn to teams of scientists for aid. These teams of scientists were usually assigned
to the executive in charge of operations; hence their work came to be known as
Operational Research in the United Kingdom and by a variety of names in the United
States: Operation Research (OR), Decision Science (DS), Operational Analysis, System
Analysis (SA), Success Science (SS), and Management Science (MS). The name
Operations Research is the most widely used.
The potential of computer and information systems as new tools for management forced
the non-technically trained executives to begin to look for help in the utilization of the
computer. The emerging search for assistance was accelerated by the outbreak of the

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Korean War. This vigorous growth of OR in the military continued to provide rapid
applicability to other industries and sectors.
1.2 Meaning and Definition of Operations Research

Many definitions of OR/MS/DS/SS have been offered, as well as many arguments as to

why it cannot be defined. The following definitions provide a useful basis for an initial
understanding of the nature of OR/MS:
 A scientific method of providing executive management with a quantitative base for
decisions regarding operations under their control (Mores-Kimball 1943).
 Scientific approach to problem solving for executive management (Wagner, 1969).
 Optimal decision-making in, and modeling of, deterministic and probabilistic
systems that originate from real life. These applications, which occur in
government, business, engineering, economics, and the natural and social sciences,
are largely characterized by the need to allocate limited resources. In these
situations, considerable insight can be obtained from scientific analysis, such as that
provided by OR/MS/DS/SS (Hiller & Lieberman, 1974).
 A branch of applied mathematics wherein the application is to the decision-making
process (Gross, 1979).
Comparing definitions given by More-Kimball and Gross, the divergence is notable after
almost 40 years: in one case, OR/MS/DS/SS is defined as scientific method, while in the
other it is seen as a branch of mathematics.
In examining these definitions, it should be noted that neither the old and well-established
scientific discipline nor science itself has ever been defined in a way that is acceptable to
most practitioners.
Operations Research is defined by different scholars from different perspectives. But, the
most important comprehensive definition is given as follows.
-Operations Research (OR): is the application of scientific methods by inter-disciplinary
teams to problems involving the control of organized man-machine systems so as to
provide solutions which best serve the purposes of the organization as a whole (Ackoff-
Sasieni 1968).
From the concepts and definition given above, Operations Research is:
1. The application of scientific methods, techniques and tools to a problem to find an
answer.
2. A management tool in the hands of a manager to take a decision.
3. A scientific approach to decision-making process.
4. An “applied research” aiming at finding a solution for an immediate problem facing a
society, industry or a business enterprise. This is not “fundamental research”.
5. A decision-oriented research, using scientific methods, for providing management a
quantitative basis for taking decision regarding operations under his/her control.
6. Applied decision theory. It uses scientific, mathematical and logical means to take
decisions.

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1.3 Basic Features of Operations Research
The OR/MS/DS approach to decision making includes the diagnosis of current
decision-making and the specification of changes in the decision process. Diagnosis is the
identification of problems (or opportunities for improvement) in current decision
behavior; it involves determining how decisions are currently made, specifying how
decisions should be made, and understanding why decisions are not made, as they should
be. Specification of changes in decision process involves choosing what specific
improvements in decision behavior are to be achieved and thus defining the objectives.
Nowadays, the OR/MS/DS approach has been providing assistance to managers in
developing the expertise and decision tools necessary to understand the decision
problems, put them in analytical terms and then solve them. Applied Management
Science is the science of solving business problems. The major reason that MS/OR has
evolved as quickly as it has is due to the evolution in computing power. The foundation
of OR/MS/DS/SS is built on the philosophy of knowledge, science, logic, and above all
creativity. Almost all decision problems have environments with similar components as
follows:
1. The decision-maker. The term decision-maker refers to an individual, not a group.
2. The analyst who models the problem in order to help the decision maker.
3. Controllable factors (including your personal abilities and physical resources),
4. Uncontrollable factors
5. The possible outcomes of the decision
6. The environment/structural constraints
7. Dynamic interactions among these components.
The procedure to be followed in the study of OR, generally involves the following major
phases.
1. Formulating the problem
2. Constructing a mathematical model
3. Deriving the solution from the model
4. Testing the model and its solution ( updating the model)
5. Controlling the solution
6. Implementation
1.4 Application Areas of Operations Research
There are so many application areas of operations research; to mention some of the most
widely known areas:
 Forecasting  Human Resource Management
 Production Scheduling  Advertising and sales research
 Inventory Control  Maintenance and Repair
 Capital Budgeting  Accounting procedures
 Transportation  Packaging
 Plant location  Natural Resource Management

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  Research and Development  Quality Control, etc.
 Health Care

1.5 Significance of Operations Research

Broadly speaking, application of operations research techniques is vital for efficiency in
operations. Typical instances include;
 Annual saving increments for many companies
 Improvement in response time of customers
 Increased traffic citation revenues
 Optimizing refinery revenues
 Optimal overbooking discount fairs
 Improving the efficiency of a production line
 Helpful in establishing a long-range corporate strategy, etc.

1.6 Operations Research Techniques

The commonly used techniques include:

1) Allocation models :
o Linear programming
o Non-linear programming
o Transportation models
o Assignment models
o Integer programming
o Goal programming
o Dynamic programming
2) Inventory models
3) Replacement models
4) Network models
5) Waiting- line models(Queuing theory)
6) Simulation
7) Sequencing models
8) Decision theory
9) Game theory
10) Markov models
11) Regression and correlation
1.7 Quantitative Analysis & the Decision Making Process
In order to understand the role of quantitative analysis in managerial type of
problems, it is better to have a look at the decision making process.

o Decision Making: is the process of selecting a feasible course of action from a set of
alternative courses of actions so as to solve problems or capitalize on opportunities.
The decision making process is initiated by a problem. The intention of the manager
making decision or selecting a course of action is to solve the problem. In doing so, the
manager first makes an analysis of the alternatives. This analysis process takes two
forms— qualitative and quantitative.

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The following figure shows the decision Making process.
Qualitative
analysis based
upon
managerial
experience and
judgment

Managerial Summary &

Problem evaluation Decision

Quantitative
analysis based
upon
mathematical
techniques

Figure 1.1 The Decision Making Process

(Source: Anderson, Sweeny, and Williams (2003))
The above figure shows the brief procedures in the decision making process. The steps in
the rational decision making process includes:
1. Identify and define the problem;
A problem is a necessary condition for a decision, i.e. there would be no need for
decisions if problems did not exist.
2. Determine the set of alternative solutions;
3. Determine the criteria to evaluate alternatives;
=>Identifying those characteristics that are important in making the decision.
4. Analyze the alternatives;
=>Based on the advantages and disadvantages of each alternative and using qualitative
and quantitative approaches, analysis of the identified alternatives is crucial in the
decision process.
5. Select the best alternative/make the decision;
=> Select the best alternative that suits to solve our decision problem. In selecting the
best alternative, factors such as risk, timing and limiting factors should be considered
adequately.
6. Implementing the solution;
=> Putting the decision into action. Deciding or making a selection is not an end, we
have to implement it.
7. Establishing a control, follow up and evaluation system;
=>Ongoing actions need to be monitored.
=>Follow up of the decision made for any adjustments and feedbacks to be
incorporated.
=>Evaluate the results and determine if a satisfactory solution has been obtained. This
is to assure the achievement of the goal-solving the problem.

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Our emphasis is on the analyses approaches: qualitative and quantitative. In qualitative
analysis, intuition and the manager’s subjective judgment and experience are used. This
type of problem solving is more an art than a science.
o The qualitative approach is o The quantitative approach is used
usually used when: when:
 The problem is simple  The problem is complex
 The problem is familiar  The problem is not familiar
 The costs involved are  The costs involved are
not so great substantial
 Immediate decisions are  Enough time is available to
needed analyze the problem
Note: Both the quantitative and qualitative analyses of a problem provide important
information for the decision maker. Of course, decisions based on quantitative analysis
tend to be more objective than those based on a purely qualitative analysis. Although OR
is not entirely quantitative, its applications falls under the heading of quantitative
analysis. For this reason OR makes use of quantitative models.
To sum up, the decision making procedure as explained earlier starts with a certain
problem. The management science approach to analyze and solve the problem involves
careful definition of the problem, use of models, analysis of models (model solution), and
implementation and follow-up. (See figure 1.2)

Problem
Definition

Model
Construction

Analysis
(Model
Solution)

Implementation
& Follow-up

Figure 1.2 The management science approach

1.8 Models and Model Building

A model is a selective abstraction of reality. It is a simplified and often idealized
representation of real world problems. A good model should capture the important details
of reality without including minor details that would obscure rather than illuminate. In
this sense, a model can be taken as a selective abstraction because only those details that

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are considered as important for the problem at hand are included in the model. Thus, it is
important to carefully decide which aspects of reality to include in a model.
There are certain significant advantages gained when using a model. These are:
 Problems under consideration become controllable through a model
 It provides a logical and systematic approach to the problem
 It provides the limitations and scope of an activity
 It helps in finding useful tools that eliminate duplication of methods applied to
solve problems.
 It helps in finding solutions for research and improvements in a system.
 It provides an economic description and explanation of either the operation, or
the systems they represent.

1.8.1 Classification of Models

The classification of models is a subjective problem. They may be distinguished as
follows:
1. Models by degree of abstraction
2. Models by function
3. Models by structure
4. Models by nature of an environment
5. Models by the extent of generality

1. Models by Function:
These models consist of Descriptive models, Predictive models and Normative
models
A) Descriptive Models: describe and predict facts and relationships among the
various activities of the problem. These models do not have an objective function
as a part of the model to evaluate decision alternatives. In this model, it is possible
to get information as to how one or more factors change as a result of changes in
other factors.
B) Normative or Optimization Models: they are prescriptive in nature and develop
objective decision-rule for optimum solutions.
2. Models by Structure and Abstraction :
A. Iconic or Physical Models: are pictorial representations of real systems
and have the appearance of the real thing. An iconic model is said to be
scaled down or scaled up according to the dimensions of the model which
may be smaller or greater than that of the real item. It is also called Static
Model. It is given in two or three dimensions. It is a representation of the
real object. These models are easy to observe and describe but are
difficult to manipulate.
Example:
 The structure of an atom
 Model of an airplane
 Photograph of a machine
 Layout drawing of a factory
 Glob
B. Analog Models: They are more abstract than iconic models for there is no
look alike correspondence between these models and real life items. These

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 models are less specific, less concrete but easier to manipulate than iconic
models. These are abstract models mostly showing inter and intra
relationships between two or more parameters. For example: It may show
the relationship between an independent variable (input) with that of a
dependent variable (output). For instance; histogram, frequency table,
cause-effect diagram, flow charts, Gantt charts, price-demand graph,
world map and others. They are two dimensional.
C. Mathematical or Symbolic Models: They are most abstract in nature.
They employ a set of mathematical symbols to represent the components
of the real system. These variables are related together by means of
mathematical equations to describe the behavior of the system. The
symbolic model is usually the easiest to manipulate experimentally and it
is the most general and abstract. Mathematical models further classified as
Linear and Nonlinear, integer and non integer, static and dynamic models.
Example:
1. ( x  y ) 2  x 2  2 xy  y 2
Max. Z  3000 x1  2500 x 2
2. subject to :
2 x1  x2  40
x1  x2  45
x1  12
x1 , x2 0
x1 and x2 , are decision variables.

3. Models by Nature of an Environment :

Depending on the degree of uncertainty we have about a problem, we can classify models
as Deterministic and Probabilistic/Predictive/Stochastic models.
 Deterministic models: represent problems of decision making under conditions of
certainty. That is to say, we use deterministic models when we know all the numerical
values in the model certainly. For example; if we are going to decide on the size of a
warehouse to be constructed, our model will be deterministic if we know the exact
amount of demand (quantity of commodity to be stored in the warehouse). In
deterministic models, all uncontrollable inputs to a model are known and cannot vary.
 Probabilistic/stochastic models: deal with problems of decision making under
uncertainty or risk and the probabilities of the alternative states of nature are known.
Unlike the deterministic models; here, any of the uncontrollable inputs are uncertain
and subject to variation.
4. Models by Extent of Generality : These models can be categorized in to:
A. Specific Models: when a model presents a system at some specific time it
is known as a specific model.
B. General Models: are models applicable to all situations without time
bound. Simulation and Heuristic models fall under this category.

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 UNIT TWO
LINEAR PROGRAMMING

Unit Introduction:
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 cost. Normally, the resources are scarce
and performance of number of activities within the constraints of limited
resources is the challenge. A manager is, therefore, required to decide as
to how best to allocate resources among the various activities.

The mathematical programming involves optimization of a certain

function, called objective function, subject to the given limitations or
constraints. A manager may be faced with the problem of deciding the
appropriate product mix taking the objective function as the maximizing
of profits obtainable from the mix, keeping in view various constraints
such as availability of raw materials, position of labor supply, market
consumption etc.
The linear programming method is a technique of choosing the best
alternative from a set of feasible alternatives in situations in which the
objective function as well as constraints can be expressed as linear
mathematical function.

Section One: Linear Programming Problem Formulation

Introduction:
Programming in American term is another name of planning. Planning of
resource is necessary because resources are scare and they are capable
of alternative uses. The word ‘Linear’ means that the relationship
handled are those represented by straight lines i.e. the relationships are
of the form Y= a+bx, and the word ‘programming’ means taking decisions
systematically. This section deals with description of LP problem, basic
assumptions and how to formulate a business problem of resource
allocation in form of LP problem.

2.1. Description Of LP Problem

Optimal allocation problems require optimization of a desired objective

function, such as, minimization of cost or maximization of profit under certain
constraints. Objective function is expressed in the form of real function
f ( x1 , x 2 ,..., x n ) and the constraints take the form of a ij x j  or  or  0, where
i  1,2,..., m j  1,2,..., n, since problems are referred as mathematical programming
problem. It is applicable to the class of programming problems in which all the
functions of unknown are linear. Whenever objective function is a linear
function of controllable variable and is subjected to equations of linear function

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then it is referred as linear programming. A LP problem can be described as
follow:
optimize Z  C1 x1  C 2 x 2  ...  C n x n (1)
Subject to
a11 x1  a12 x 2  ...  a1n ( /  / )b1
a 21 x1  a 22 x 2  a 2 n x n ( /  / )b2
... ... ... ... (2)
a m1 x1  a m 2 x 2  a mn x n ( /  / )bm
xi  0, i  1,2,..., n

Where,
o (< = >) means any of the three signs may be there.
o Optimize means maximize or minimize objective function
o The linear function which is to be optimized is called objective
function
o All constraints are equations except for non-negativity
restrictions which are inequalities.
o The RHS of each constraints is non-negative
o All variables are non-negative
o Inequality constraints can be changed to equations by adding or
subtracting LHS of each constraint by non-negative variable (ie
a slack variable S1 is added to LHS of constraint with the sign <
and a surplus variable S2 is subtracted on the LHS of constraint
with the sign >)
o aij and bm are known coefficients and xj is unknown variable.
Components of LP Models
1. Objective Function: it is the mathematical or quantitative expression of
the objective of the model. Equation (1)
2. The Decision Variables: represent unknown quantities to be solved for.
3. The Constraints: as has been laid, another component of the linear
programming is that the resources must be in limited supply.(2)

4. Parameters: are numerical or fixed values that specify the impact that one
unit of each decision variable will have on the objective and on any
constraint it pertains to as well as to the numerical value of each
constraint.
2.2 Requirements For Application Of Linear Programming
1. The aim or object should be clearly identifiable and definable in
mathematical terms. For example, it would be optimization of either cost
or profits or time etc.
2. The activities involved should be distinct and measurable in
quantitative terms such as products involved in a production planning
problem.
3. The resources to be allocated should be measurable quantitatively.
Limited availability/ constraints should be clearly spelt out.

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4. The relationships representing the objective function as also the
resource limitation consideration must be linear in nature.
5. There should be a series of feasible alternative courses of action
available to the decision makers that are determined by the resources
constraints.
Example 1.
Maximize 4 x1  7 x 2  5 x3 ( profit ) Objective function
Subject to
1. 2 x1  3x 2  6 x3  300 labor hours 

2. 5 x1  4 x3  200 raw mt. A  System Constra int s
3. 3 x1  5 x 2  2 x3  360 raw mt. B 
4. x1  30 units 
 Individual Constra int
5. x2  40 units 
x1 , x 2 , and , x3  0 non negativity Constra int
System constraints involve more than one decision variables. Individual constraints
involve only one decision variable. Non-negativity constraints specify that no variable
will be allowed to take on negative values. The non negativity constraints typically apply
in an LP model, whether they are explicitly stated or not.

2.3 ASSUMPTIONS UNDERLYING LINEAR PROGRAMMING

1. Proportionality – Basic assumption of LP is that proportionality

exists in the objective function and the constraints inequalities. This
means that the amount of each resource used and associated
contribution to profit or cost in the objective function should be optimal,
proportional to the value of each decision variable. If we increase the
production quantity, the resources requirement should also be increased
in the same proportion.
Example:
a. Eg. If the product is assumed to contribute 10 Birr
towards the profit, the total contribution would be 10x.
b. If one unit 2 hours of labour of certain type 10 units
would require 20 hours

2. Additivity – It indicates that in the objective function and constraint

inequalities both, the total of all the activities is given by the sum total of
each activity conducted separately. Thus total profitability and sum total
of all resources required should be equal to the sum of the individual
amounts.
Example:

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 a. The total profit in the objective function is determined by
the sum of profit contributed by each of the product
separately.
b. Similarly the total amount of resource used is equal to
the sum of resource values used by various resources.

3. Continuity – It is also an assumption of a linear programming model

that the decision variables are continuous. As a consequence,
combinations of output with fractional values, in the context of
production problems, are possible and obtained frequently. Normally
we deal with integer values, but even fractional values can be
utilized. Fractional values should be considered only for one time
decision problems.

4. Certainty – Various parameters namely the objective function

coefficients, the coefficients of inequality/equality constraints and
the constraints (resource) values are known with certainty. Hence,
linear programming is deterministic in nature.

5. Finite choices – A linear programming model also assumes that a

limited number of choices are available to the decision maker and the
decision variables can also assume negative values.
6. Non-negativity- The decision variables in LPM are not allowed to
assume negative values in reality.
2.4. ADVANTAGES OF LINEAR PROGRAMMING

1. Linear programming is a useful technique to obtain optimum use of

productive resources. It helps a decision maker to ensure effective use of
scarce resources by their proper deployment.
2. Due to its structured form, linear programming techniques improve
the quality of decision making.
3. It generates large number of alternate solutions and hence it helps in
reaching practical solutions at optimum working level. It also permits
modifications of the mathematical model to suit the decision makers’
requirement.
4. This technique also indicates ideal capacity of machines or materials
in a production process. In fact it helps decision maker to decide whether
his resources can be intentionally kept idle in order to work on optimal
level of objective, if certain constraints demand so.
5. This technique can also cater for changing situations. The changed
conditions can be used to readjust the plan decided for execution.

2.5. FORMULATION OF LP PROBLEMS

From the above, we can establish a vast area of applicability of the LP

technique. But to get the best advantage out of the process, we have to
clearly identify objective function, decision variables and constraints and

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quantify the relationship to formulate a worth-while mathematical model.
There are three basic steps in formulation of linear programming model.

Step 1 : Identify the unknown decision variables to be determined.

These should be brought into algebraic relation form for
utilization.
Step 2 : Clearly define all the limitations for a given situation. These
limitations or constraints also need to be expressed in
algebraic form either as linear equations or inequalities in
terms of the decision variables so identified in step 1.
Step 3 : Identify the objective to be optimized and it also should be
expressed in terms of linear function of decision variables.
The formation of the problem now can be achieved in a very structured
form by bringing in all related combinations.

Example 1
An electronic firm is undecided at the most profitable mix for its
products. The products manufactured are transistors, resistors and
carbon tubes with a profit of (per 100 units) US $ 10, $6 and $4
respectively. To produce a shipment of transistors containing 100 units
requires 1 hour of engineering, 10 hours of direct labor and 2 hours of
administrative service. To produce 100 units of resistors requires 1 hour,
4 hours and 2 hours of engineering, direct labor and administrative time
respectively. For 100 unit of carbon tubes it needs 1 hour, 6 hours and 5
hours of engineering, direct labor and administrative time respectively.
There are 100 hours of engineering time, 600 hours of direct labor and
300 hours of administrative time available. Formulate the corresponding
LPP.

Solution:
Let the firm produce x1 hundred units of transistors, x2 hundred units of
resistors and x3 hundred units of carbon tubes. Then the total profit to
be maximized from this output will be

Z  10 x1  6 x 2  4 x3
Now the production of x1 hundred units of transistors, x2 hundred units
of resistors and x3 hundred units of carbon tubes will require.
x1  x 2  x3 , hours of engineering time
10 x1  4 x 2  6 x3 , hours of direct labor time and
2 x1  2 x 2  5 x3 , hours of administrative service
But the total time available for engineering, direct labor and
administrative services is 100, 600 and 300 hours respectively. Hence
the constraints are

Thus formulated LPP is

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Maximize Z  10 x1  6 x 2  4 x3 Objective function
Subject to
x1  x 2  x3  100 

10 x1  4 x 2  6 x3  600  ( System Constra int)
2 x1  2 x 2  5 x3  300 

x1 , x 2 , and , x3  0 non negativity Constra int

Example 2: A company is making two products A and B. The cost of

producing one unit of product A and B is $ 60 and $ 80 respectively. As
per the agreement, the company has to supply at least 200 units of
product B to its regular customers. One unit of product A requires one
machine hours whereas product B has machine hours available
abundantly within the company. Total machine hours available for
product A are 400 hours. One unit of each product A and B requires one
labor hour each and total of 500 labor hours are available. The company
wants to minimize the cost of production by satisfying the given
requirement. Formulate the problem as a linear programming problem.

Solution:
Let us have the manufacture of x1 and x2 units of product A and B
respectively. Then the given data indicates the relationship of decision
variables as follows:
Objective function Minimize cost =60x1 + 80x2 (production cost)
Constraints: x2> 200 (Agreement for supply)
x1 < 400 (machine hours for product A)
x1 + x2< 500 (labour hours)
x1 , x2> 0 ( non –negative constraint)

Solution of Linear Programming Problems

Introduction:

Now after formulating the LP problem based on the assumptions that

constraints are expressible in quantitative terms, relationships expressed
by constraints and objective function are linear, the linear programming
problems can be solved to determine optimum strategy by two methods-
Graphical and Simplex.

2.6 GRAPHICAL METHOD

When there are only two decision variables involved, the conditions can
be placed on a graph to find the feasible region of the decision making.

15
The optimal solution is obtained by reaching the point on the feasible
region that optimizes the solution. We, then, can interpret the results
from this graph.

STEPS IN GRAPHICAL METHOD

Step I. Formulate the LP Problem.

Step II. Convert the inequalities in to equalities to obtain graphical form
of the constraints. Draw the line of each constraint, first putting x1=0 to
find the value of x2 and then putting x2=0 to find the value of
x1. Then draw the line for the values of x1 and x2 which represents that
particular constraint. Once the lines are drawn for all the constraints,
identify the feasible polygon (area) by shading the area below the line
for the constraint < and shading above the line for the constraint >
type.
Step III. Identify the extreme points of the feasible polygon and name the
corners.
Step IV. Evaluate the objective function Z for all points of feasible region.
Step V. In case of maximizing objective function Z, the corner point of
feasible region giving the maximum value of Z becomes the
value of decision variables. Similarly in minimizing case, the
point of minimum value of Z gives the answer.

To explain the steps above, let us take examples.

Example 1 (Problem of Maximizing Z)

Two commodities P1 and P2 are to be produced. The profit Margin on P1 is
$ 8 and on P2 is $ 6. Both the commodities are required to be processed
through two different machines. Sixty hours of time are available on I
machine and forty eight hours of time are available on II machine. One
unit of P1 requires 4 hours of time in machine I and 2 hours of time on
machine II. Similarly, one unit of P2 requires 2 hours of time on machine
I and 4 hours of time on machine II. Determine the number of units of P1
and P2 to be produced in order to maximize the profits using graphical
method?

Solution:
Step I. Formulate LP Problem.
The information available can be put into structural matrix form as
follow.
Commodities
Requirement Total
P1 P2
Machine I 4 2 60
Machine II 2 4 48
Profit $ per unit 8 6 -

Let x1 be number of units to be produced for P1

16
Let x2 be number of units to be produced for P2
X1 and X2 are unknown decision variables.

Objective function is profit maximization and can be expressed as.

Max Z= 8x1 + 6x2
The given constraints are time and machine and can be converted into
linear relations as follow:
4x1 + 2x2 < 60 (i)
2x1 + 4x2 < 48 (ii)
Where x1, x2 > 0 non-negativity condition.

Step II. Convert constraint inequalities in to equalities, draw respective

lines and determine feasible polygon (area).

Taking constraint (i)

4x1 + 2x2 = 60
at x1 axes, x2 = 0 ∴ 4x1= 60 or x1 =15
at x2, axes, x1 = 0 ∴ 2x2 = 60 or x2 = 30
By these coordinates (15,30) we get line BD in graph. Similarly, taking
constraint (ii).

2x1 + 4x2 = 48
at x1 axes, x2 = 0 ∴ 2x1= 48 or x1 =24
at x2, axes, x1 = 0 ∴ 4x2 = 48 or x2 = 12
By these coordinates (24, 12) we get line AE in graph.
Now, any point on line BD satisfies (i) constraint and any point on line
AE satisfies (ii) constraint. The constraints cannot be violated, they must
be satisfied. Any solution which satisfies all the know constraints is
called optimal solution. Since both the constraints are of the type <
hence any point on the right hand side (RHS) of BD or AE becomes
infeasible area/solution for which we are not concerned.

17
O

30

20

A
10
B

0 C D

-10

-20

-30
0 5 10 15 20 25 30

Step III. Both the constraints are to be satisfied simultaneously,

therefore, OABO becomes the region of feasible solution. This is also
known as feasible polygon. Any point in this feasible polygon will also
give rise to optimal solution which we are in need. There are infinite
numbers of points in this feasible area to be examined. Let us take any
point in feasible region. Its movement is possible in two directions, either
towards origin or away from it. OA, AC, CD, OD are bounding lines of
feasible area and hence optimal solution must lie on any boundary line.
On line OA, point A give maximum profit, on line OD, point D gives
maximum profit.

Step IV. Evaluate the objective function Z= 8x1 + 6x2 for all points of
feasible region i.e. O, A, C, D.
At point O profit is zero ∴ Z=O
At point A x2=12, x1=0 ∴ Z=12x6=72
At point D x1=15, x2=0 ∴ Z=15x8=120
At point C x1=12, x2=6 ∴ Z=12x8+6x6=132

18
 (From graph)
Step V. Z is maximizing objective function; hence the point with
maximum value of Z is the optimal solution point.
Therefore at point C (Z=132) with x1=12 and x2=6 is the optimal
point.

Example 2 (Problem of Minimizing Z)

Minimize Z= 50x1 + 20x2
Subject to 2x1 – x2> 0 (i)
x1 + 4x2 > 80 (ii)
0.9x1 + 0.8x2 >40 (iii)
Where x1 ,x2 > 0 non- negativity condition.

Solution:
The first step is skipped as LP problem is already formulated. We will
follow other steps simultaneously. In constraint (i) 2x1 –x2 > 0 there is no
constant value, hence it must pass through the origin. First convert it
into equality.
2x1 –x2 > 0 . New give x1 any arbitrary value.
When x1 =0, x2=0
x1 =1, x2=2
x1 =2, x2=4 and so on.

We draw the line with these coordinates and get line I drawn in the graph
passing through origin.

Now, convert constraint (ii) in equality

x1 + 4x2 = 80
When x1 =0, x2=20
X2 =0, x1=80
We draw the line II (80, 20) as shown in graph.
Now, convert constraint (iii) in equality
0.9x1 + 0.8x2 =40
When x1 =0, x2=50
X2 =0, x1=44.4
We draw line III (44.4, 50) as shown in graph.

19
For feasible area we need to examine all the there constraints equations
(Note, all are > type)

In equation (i) if we move vertically upward, meaning x1=o and x2

increasing, the equation becomes negative or less than, which is not
permitted. Hence feasible area should be on RHS.

In equation (ii), the feasible area should be above the line because it is
greater than the sum of x1 and x2.
Similarly in equation (iii) it is on the RHS therefore feasible area (region)
is indicated by three rows or shading and extends upto infinity.
Now we have to find out different values of Z at different corner points,
B,C,E by finding out their coordinates (x1, x2) then putting them in
objective function Z. The point which gives the minimum value is the
answer.
At corner B x1=16,x2=32 therefore Z= 1440
At corner C x1=34.4,x2=11.4 therefore Z= 1948
At corner E x1=80,x2=0 therefore Z= 4000
From the above we can see that minimum value of Z is at point B where
x1=16 and x2 =32 and hence it is the answer.

2.7 Simplex Method of Solving LPM

When a large number of variables (more than 2) are involved in a

problem, the solution by graphical method is not possible. The Simplex
method provides an efficient technique which can be applied for solving

20
LPPs of any magnitude, involving two or more decision variables. In this
method, the objective function is used to control the development and
evaluation of each feasible solution of the problem.

The simplex Algorithm is an iterative procedure for finding, in a

systematic manner, the optimal solution that comes from the corner
points of the feasible region. Simplex algorithm considers only those
feasible solutions which are provided by the corner points and that too
not all of them. It is very efficient algorithm. The technique also has the
merit to indicate whether a given solution is optimal or not. This method
was formulated by G.B. Dantzig in 1947.

For application of simplex method, following conditions must be

satisfied.
a. Right Hand Side (RHS) of each constraint should be non-
negative. In case of negative RHS, the whole solution
(inequality) to be multiplied by-1.
b. Each of the decision variables of the problem should be
non-negative. In case of ‘unrestricted’ variables it is treated
as the difference of two non-negative variables-such as xl, x2
> 0, x3 unrestricted can be written as xl, x2, x4, x5 > 0, where
x3 = x4 –x5 , After the solution is reached, we substitute
difference of x4 and x5 as x3.

2.7.1 Basic Definitions

Before using the Simplex method, let us examine and understand certain
basic terms involved in the procedure.
1. Standard Form: This has already been clarified in the initial part of
this chapter. With linear relationships of objective function and
constraints, making RHS of constraints as equal produces standard
form, whereas the inequality situation is called canonical form.

2. Slack and Artificial Variables: These have also been explained under
an appropriate heading. Their physical significance has also been
clarified. These are generally designated as S1, S2 . . . . etc. and A1, A2 etc.
respectively. Whereas the slack variables indicate spare capacity of the
constraints, artificial variables are imaginary variables added for
standard form.

3. Surplus Variable: A variable subtracted from the left hand side of a

greater than or equal to constraint to convert the constraint into
equality. Physical sense or interpretation of the surplus variable is that
it is amount of resource over and above the minimum required level. In
case the constraint inequality is of the type "less than or equal to", then
it is called slack variable.

21
4. Basic Solution: There may be n variables and m constraints in a linear
programming problem. When we evaluate the solution of this problem
by setting (n - m) of the variables to zero and solve the other m variable
equations, we obtain a unique solution. It is called "Basic Solution".

5. Basic Feasible Solution: When a basic solution satisfies even the non-
negativity requirement is called Basic Feasible Solution. Since it has to
be within the feasible region as explained at point 4.7 (graphical method),
a basic feasible solution corresponds to a comer point of the feasible
region.

6. Simplex Table: A table used for calculations during various iterations

of the Simplex procedure, is called Simplex table.

7. Variable Mix: The values of the column that contains all the variables
in the solution.

8. Basis: The set of variables which are not set to zero and figure in the
column of "Product Mix" are said to be in the 'Basis'. Other than these
figuring in the product mix column are termed as non basic variables.

9. Iteration: Since the Simplex procedure is that of constant improvement

type from one basic feasible solution to another, these steps of moving
from one solution to another to reach optimal solution are called
Iterations.

10. Cj Row: It is the row containing the coefficients of all the variables
(decision variables, slack or artificial variables) in the objective function.

11. Constraints: Restrictions on the problem solution arising from limited

resources.

12. Cj - Zj = ∆j or Index Row: The row containing net profit or loss

resulting from introducing one unit of the variable in that column in the
solution. A positive number in the ∆j row would indicate an algebraic
reduction or increment in the objective function if one unit of the variable
of that column is introduced in the basis.

13. Pivot -Column: The column with the largest positive number in Cj - Zj
row in a maximization problem or the smallest number in a minimization
problem is called Pivot column. This indicates the variable entering the
solution in the next iteration by replacing an appropriate variable.

14. Pivot Row: When we work out the ratio of quantities bi's and the
elements of the Pivot column, we get the last column of the simplex table.
The outgoing variable to be replaced by the entering variable (decided by

22
the key row) would be the one with the smallest positive value of the ratio
column.

15. Pivot Element: The element at the point of intersection of the key
column and the key row is called the Pivot element.

16: Optimal Solution: The best of all feasible solutions.

17: Linear Function: A mathematical expression in which a linear
relationship exists amongst various variables.

2.7.2 Standard form of LP Problem:

In order to develop a general procedure for solving any linear

programming (LP) problem, we first introduce the standard form. Let us
assume the decision variables as x1, x2, x3 . . . xn such that the objective
function (Linear) of these variables assumes an optimum value, when
operated under the given constraint of resources. Thus, the standard
form of LPP can be written as follows.
Objective function
optimize Z  C1 x1  C 2 x 2  ...  C n x n (1)
Subject to
a11 x1  a12 x 2  ...  a1n ( /  / )b1
a 21 x1  a 22 x 2  a 2 n x n ( /  / )b2
(2)
... ... ... ...
a m1 x1  a m 2 x 2  a mn x n ( /  / )bm

Also, x1, x2…………... xn > 0 (non-negative constraint)

The decision variables are required to be non-negative so that they

can contribute towards the optimum objective function, which is either
maximization or minimization type.

Slack and Artificial variables :

Normally constraints are in the form of inequalities or equalities, when

constraints are in the inequality form, we use imaginary variables to
remove these inequalities and convert the constraint to equation form to
bring in deterministic nature of resources.

When the constraints are of the type < bi, then to convert the it into
equality we need adding some variable (not constant) this is normally
done by adding variables such as S1, S2. . . ., Sn, which are called slack
variables. In physical sense, these slack variables represent unused
resources, the slack variables contribute nothing towards the objective
function and hence their coefficients in the objective function are to be

23
zeros.

Thus, to illustrate the above concept,

1 .

Constraints ailxl + ai2x2+…+ainxn < bi ; i = 1,2,. . . . .m(Standard form)

Can be written as ail x1.....: . ain xn + Si = bi ; i = 1,2,. . . . . . . m(Canonical
form)
And the objective function can be written as
Max. or Min. Z = c1 x1 + c2 x2 + . . . . . cn xn + 0S1 + 0S2 + ......
Similarly for the constraints of the type ≥, the addition of slack variables
has to be in the form of subtraction. Thus, equation of constraints can be
written as
ai1 x1 + ai2 x2 + ... ain xn - Si = b I ; i = 1,2, .. …….m
To bring it to the standard form, we add another variable called artificial
variable (Ai), as follows:
ai1 x1 + ai2 x2 +…+ainxn- Si + Ai = bi ; i = 1, 2, 3,. . . . . . . . m
This is done to achieve unit matrix for the constraints. But
artificial variables cannot figure in the solution as there are artificially
added variables and have no significance for the objective function. These
variables, therefore, are to be removed from the solution.

Standardization/Tableau Form/
Types of constraint Standard form
≤ Add a slack variable
= Add an artificial variable
≥ subtract a surplus variable and add an artificial variable
The artificial variables in a maximization problem will appear in the objective function
with a large negative coefficient so that they are quickly eliminated as we proceed with
the solution.
In a maximization problem with all less than or equal to constraints, we have an initial
feasible solution. With mixed constraints, we do not have initial feasible solution but only
initial solution which is not feasible.

2.7.3 Steps in Simplex Method

1. Write the problem in standard form:

Characteristics:
 All constraints are expressed in the form of equalities or equations.
 All right hand sides are non-negative
 All variables are non-negative
2. Develop an initial simplex tableau
Steps in developing initial simplex tableau:
i. List the variables in the model across the top of the tableau
ii. Next fill-in the parameters of the model in the appropriate rows and
columns

24
 iii. Add two columns to the left side of the tableau. The first column is a
list of variables called Basis.
iv. The C at the top second column indicates that the values in that
column and the values in the top row are objective function
coefficients.
v. The last column at the right is called the quantity column. It refers to
the right hand side values (RHS) of the constraints.
vi. There are two more rows at the bottom of the tableau. The first raw is
a Z-row. For each column the Z – value is obtained by multiplying
each of the number of the column by their respective row coefficient in
column C. The last raw is Cj-Z row.
The values in this row are also calculated column by column. For each Column, the
value in row Z is subtracted from the C value in the top row.
3. Interpreting the initial simplex tableau
4. Determining the entering variable: For a maximization problem; the
entering variable is identified as the one which has the largest positive value
in Cj-Z row. The column which corresponds to the entering variable in the
simplex tableau is called pivot column.
In a minimization problem, the entering variable is identified as the one which
has the largest negative Cj-Z row value in the simplex tableau.

5. Determining the leaving variable: the leaving variable is identified as the one
with the smallest non-negativity ratio for quantity divided by respective
positive pivot columnar entries. The row of the leaving variable is pivot row.
6. Make the entering variable basic and the leaving non-basic by applying
elementary row operations of matrix algebra.

7. Iteration for improved solution:

(a) Replace outgoing variable with the entering variable and enter
relevant coefficients in Zj column.
(b) Compute the, Pivot row with reference to the newly entered
variable by dividing the old row quantities by the key element.
(c) New values for the other rows. In the revised simplex table, all
the other rows are recalculated as follows.
New row elements= Elements in the old row - [corresponding key
column element multiplied by the corresponding new element of the
revised row at (b) above.]

(d) The same procedure is followed for modification to bi column also.

(e) Having obtained the revised simplex table, evaluate ∆j = Cj -Zj and
test for optimality as per step 3 above.
8. Check for optimality
Remark: A Simplex solution for a maximization problem is optimal if and
only if cj – z row contains only zeros and negative value (i.e. if there are no
positive values in the cj – z row).

25
 The Simplex solution for a minimization problem is optimal if Cj-Z row contains
only zero and positive values (Cj-Z ≥ 0).

(a) Obtaining Optimal Solution- If the table indicates optimality level

by examining ∆j or index row, the iteration stops at this point and
values. of bi's for corresponding variables in the product mix
column will indicate the values of the variables contributing
towards the objective function. The value of the objective function
can be then worked out by substituting these Values for
corresponding decision variables.
(b) If the solution is not optimal, proceed to Step 9.
9. Revise or improve the Solution-For this purpose, we repeat Step 4
to Step 7 till optimality conditions are fulfilled and solution is
obtained.
Rule for Ties. Whenever two similar values are encountered in index
row or ratio column, we select any column or ratio, but to reduce
computation effort, following can be helpful.
(a) For key column, select the left most tie element.
(b) For ratio, select nearest to the top.

The artificial variables in a minimization problem will be expressed in the objective

function with a large positive coefficient so that they are quickly eliminated as we
proceed with the solution.

Note that: if the solution is not optimal the steps will be repeated again and again until
the optimal solution is obtained!

A. Simplex Algorithm-Maximization Problem

In maximization case the objective function is to maximize the revenue or

profit. Here the constraints are of the < type. There may be cases when
constraints are of > and also = type.
Example 1
Maximize Z = 30x1 + 40x2
Subject to, 60x1 + 120x2 < 12,000
8x1 + 5x2 < 600
3x1 + 4x2 < 500
x1, x2 > 0
Solution:
We convert the inequality into equations by adding slack variables.
Above statements can thus be written as follows.
60x1 + 120x2 + S1 = 12,000
8x1 + 5x2 + S2 = 600
3x1 + 4x2 + S3 = 500 and
x1, x2, S1, S2, S3 > 0.
Where S1, S2, S3 are slack variables and objective function is re-

26
 written as: Max. Z = 30x1 + 40x2 + 0.S2 + 0.S2 + 0.S3
Now there are five variables and three equations and hence to obtain
the solution, any two variables will have to be assigned zero value.
Moreover, to get a feasible solution, all the constraints must be satisfied.
To start with, let us assign x1 = 0; x2 = 0 (Both decision variables are
assigned zero values) Hence, S1 = 12,000
S2 = 600
S3 = 500 and Z=0
This can be written as initial simplex table 1

Key Row

Key Column

In preparing the table, each column corresponds to one variable and

coefficients of the variables in the equations are written above. The initial
solution corresponding to unutilized resources S1, S2, S3 is shown at the
right under the column "quantity'. Since profit associated with each of
the slack variables is zero, the total profit at this stage is Zero

Entering variable
Since Cj - Zj is maximum at + 40, i.e., profit is more for each unit for
x2 variable, we introduce x2 into the solution. It is the marked as key
column and x2 becomes the entering variable. Dividing Quantities (bi's)
by the corresponding key elements of each row, we obtain the ratio
(bi/aij) column such as for row S1, it is 12,000 ÷ 120 = 100.
Leaving variable
For each unit of x2, 120 units of S1, 5 units of S2 and 4 units of S3 will
have to be utilized. Minimum unutilized capacity of material is 100, it
becomes outgoing variable. (This is required to be the least positive value
of ratio, which is obtained by dividing the values in bi column by the
corresponding elements in the key column). Here Key element
corresponds to x2 and S1 and its value is 120, The least ratio being 100
corresponding to S1, it becomes the' outgoing variable, replaced by x2.
Now each of the elements of the Key row is divided by Key element to get
x2 row in the new table. Thus we get the key row as follows:

Unit cost Variable Mix X1 x2 x1 x2 x3 bi

40 x2 60/120 120/120 1/120 0 0 12,000/120
or 40 x2 ½ 1 1/120 0 0 100

27
In order to obtain the corresponding values of the table, we follow the
relationship as follows:

Arranging these values into the simplex table, we obtain:

REVISED SIMPLEX TABLE II

Zj Cj 30 40 0 0 0 bi bi/aij
variable x1 x2 s1 s2 S3
40 x2 ½ 1 1/120 0 0 100 200
0 s2 11/2 0 -5/20 1 0 100 200/11
0 S3 1 0 -1/30 0 1 100 100
Cj-Zj 10 0 -1/3 0 0

This solution suggests that by producing 100 units of x2 variable, we get

an idle capacity of 100 units pertaining to S2 arid S3 each. Since,
Maximum positive value for Cj - Zj being 10 corresponds to x1, it becomes
the entering variable. Ratios are calculated by dividing bi by aij i.e.,
corresponding key elements and are given in the last column. The
minimum positive value of ratio being 200/11, pertaining to S2, we
replace S2 by x1.

Iteration 2
Key column being that for xl and key row for S2 we get the key element as
11/2 and by dividing S2 row by the Key element, we get xl row in the new
table as follows:
REVISED SIMPLEX TABLE III

Other rows are correspondingly obtained as in table I.Since all the values
of Cj - Zj are either negative or zeros, it is an optimal solution. Hence, the
optimal mix would be:

28
 Quantity of item 1 (x1) = 200/11
Quantity of item 2 (x2) = 1,000/11
Total profit = 46, 000/11
By this iterative process, we obtain optimal solution of a maximising
problem and iteration stops when values of Cj - Zj < 0. This optimality
test is carried out at every stage to reach optimal solution.

Since slack variable S3 remains in the solution, this indicates unutilised

resource of third constraint.
--.
Example 2
Solve the following problem by simplex method.
Max. Z = 8x 1 + 16x2
Subject to, x1 + x2 < 200
x2 < 125
3x1 + 6x2 < 900
and x1, x2 > 0

Solution:
Adding slack variables and arranging in the simplex table, we get
Simplex Initial Table

SIMPLEX TABLE II

.
SIMPLEX TABLE III

29
  Now, all the values of ∆j being zero or negative, suggesting that the
solution is optimal and Z = 2,400 for x1 = 50 and x2 = 125. S1
indicates surplus.

B. Simplex Algorithm-Minimization Problem

We have already discussed the problem of maximization of an objective

function, when constraints were of the type <. There may be cases when
constraints are of > or = type. When the objective function is of
minimization type, then simplex method needs some modification. We
have already discussed such a situation earlier, wherein use of slack and
artificial variables has been explained

Some of the important aspects of this case are enumerated below.

1. Artificial variables have no economic significance and they are
introduced only to bring in the standard form of simplex method.
These variables, therefore, need be removed from the solution as soon
as they become non-basic.

2. Since these variables are added for computation purpose only, we

have to ensure their zero value in the optional solution. This can be
done by assigning very large penalty (+M) for a minimization problem,
so that these do not enter the solution.
3. If artificial variables cannot be removed from the solution, then the
solution so obtained is said to be Non-Feasible. This would indicate
that the resources of the system are not sufficient to meet the
expected demand.
4. Equality Constraints also can be handled by using artificial variables
to obtain initial solution.

While discussing the maximization case, we could obtain the standard

form of the simplex algorithm by adding slack variables. But
difficulties would arise, when the initial basic feasible solution is not
easy to obtain. This can arise under two conditions
(i) when the constraints are of the type <
n
i.e, ∑ aij xj <bi where xj > 0
j=1
and right hand side constraints are negative i.e., bi < 0. In such cases,
even after adding non-negative slack variables Si, the initial solution so
obtained will be Si = -bi for some i. Since this violates the non-negative
conditions of the slack variables, it will not be a feasible solution.
(ii) When constraints are of the type >
n

30
 i.e, ∑ aij xj > bi when xj > 0
j=1

In such cases, we have to add negative slack variables to convert

inequalities into equalities i.e. ∑aij xj-Si = bi, and we will obtain the
initial solution as -Si = bi or Si = -bi, which again violates the non-
negative constraint of slack variables. In such a situation, we add
Artificial Variable Ai to get the initial basic feasible solution. These
variables, being of no economic consequences or significance, have
to be eliminated from the solution for obtaining optimal solution.
We use following methods for eliminating these artificial variables
from the solution.
1. Big M-method
2. Dual method
The dual method is discussed as a separate heading in the pages ahead.
However, there is also an alternative method of solving minimization
problem, initially by converting it into a maximization problem, solving it
and then reverting the answer to get the value of Z for minimizing
problem. This method is taken up here after Big M-method.
Big M-Method
In this method, we assign the coefficients of the artificial variables, as a
very large positive penalty i.e., +M for the minimization problem. This is,
therefore called Big M-method.
The Big M-method for solving LP problem can be adopted as follows:
Step 1 : The standard simplex table can be obtained by adding
slack and artificial variables. Slack variables are assigned zero
coefficients and artificial variables assigned +M coefficients in the
objective function.
Step 2: We obtain initial basic feasible solution by assigning
zero value to the decision and slack variables.

Step 3: Initial basic feasible solution is obtained in the form of the

simplex table as above and then values of ∆j = Cj - Zj are calculated. If
∆j ≥0, then the optimal solution has been obtained. If ∆j< 0, then we
select the largest negative value of ∆j and this column becomes the key
column indicating the entering variable.
Step 4: Determine the key row as in case of maximization
problem i.e., selecting the lowest positive value of the ratio bi/aij,
obtained by dividing the value of quantity bi by corresponding
element of the key column. The key element is thus the point of
intersection of the key column and key row. The variable of the key
row becomes the outgoing variable.
Step 5: Repeat steps 3 and 4 to ensure optimal solution with
no artificial variable in the solution. If at least one artificial
variable is present in the basis with zero value and coefficient of M

31
 in each Cj - Zj values is negative, the LP problem has no solution.
This basic solution will be treated as degenerate.
It at least one artificial variable is present in the basis with
positive value, and coefficient of M in each Cj - Zj values is non-
negative, then LP problem has no optimal basic feasible solution.
It is cal1ed pseudo-optimum solution. The Big M-method has
been demonstrated by solving Illustration 22.

Example 1

Food A contains 20 units of vitamin X and 40 units of vitamin Y per

gram. Food B contains 30 units each of vitamin X and Y. The daily
minimum human requirements of vitamin X and Y are 900 and
1200units respectively. How many grams of each type of food should be
consumed so as to minimize the cost, if food A costs 60 cents per gram
and food B costs 80 cents per gram.
Solution:
LPP formulation is as follows
Min. Z = 60x1+ 80x2 (Total Cost)
Subject to, 20x1 + 30x2 > 900 (Vitamin X Constraint)
40x1 + 30x2 > 1,200 (Vitamin Y Constraint)
and x1, x2 > 0
Adding slack and artificial variables, we get

Min. Z = 60x1 + 80x2 + 0.S1 + 0.S2 + M.A1 + M.A2

Subject to, 20x1 + 30x2 – S1 + A1 = 900
40x1 + 30x2 - S2 + A2 = 1,200
and x1, x2, S1, S2, A1, A2 > 0
Initial non-optimal solution is written as follows:

SIMPLEX TABLE I
Cj 60 80 0 0 M M Quantity Ration
Zj
Variables x1 x2 S1 S2 A1 A2 bi Bi/aij
M A1 20 30 -1 0 1 0 900 45
M A2 40 30 0 -1 0 1 1,200 30
∆j 60-60m 80-60m M M 0 0

Since ∆j = 60 - 6m is the lowest, x1 becomes the entering variable,

similarly Ratio bi/aij = 30 is lowest positive value, hence it goes out.

SIMPLEX TABLE II

32
From the table it can be seen that x2 becomes the entering variable and
A1 the leaving variable. The modified simplex table can be written as:
SIMPLEX TABLE III

Since all the values of ∆j are non-negative, we have reached the optimal
solution of the problem.

Hence the optimal solution is given by

x1 = 15 and x2= 20
and Minimum Z = 2,500.

2.8 Special Issues in Linear Programming

1. An unbounded solution:
The solution for a Simplex procedure is unbounded if there are no non-negative ratios for
the quantity divided by substitution rates, i.e. Ratio .

2. A multiple optimal solution:

Is identified where the objective function is parallel to one of the constraints.

With simplex this condition can be detected by examining the C-Z row of the final
tableau. If a zero appears in the column of a non-basic variable; i.e., a variable that is not
in solution; it can be concluded that an alternative solution occurs.

3. Degeneracy:
In some cases there will be a tie for the lowest non-negative ratio for quantity divided by
substitution rate. Such an occurrence is referred to as degeneracy because it is
theoretically possible for subsequent solutions to cycle (i.e., return to the pervious
solution). It will usually suffice to simply select one variable arbitrarily and proceed with
computations. But there are ways of dealing with ties in a specific fashion.
4. Case of infeasibility:

33
In the simplex approach, infeasibility can be recognized by the presence of an artificial
variable with a non-zero value in a solution that appears optimal (i.e., a tableau in which
the signs of the values in row C-Z indicate optimality).
UNIT THREE
TRANSPORTATION AND ASSIGNMENT PROBLEMS
Transportation Problems

INTRODUCTION
A scooter production company produces scooters at the units situated at various places
(called origins) and supplies them to the places where the depot (called destination) are
situated. Here the availability as well as requirements of the various depots are finite and
constitute the limited resources. This type of problem is known as distribution or
transportation problem in which the key idea is to minimize the cost or the time of
transportation. In previous lessons we have considered a number of specific linear
programming problems. Transportation problems are also linear programming problems
and can be solved by simplex method but because of practical significance the
transportation problems are of special interest and it is tedious to solve them through
simplex method. Is there any alternative method to solve such problems?

The transportation model is a special class of linear programming that deals with
shipping a commodity from sources (e.g factories) to destinations (e.g warehouses). The
objective is to determine the transportation schedule that minimizes the total
transportation cost while satisfying supply and demand limits.

3.1 Assumptions of Transportation Model

Normally, the transportation model assumes that:
i. Total supply from sources and total demand at destinations are equal
ii. Transportation cost per unit of goods are certainly known and proportional to the
number of units shipped on a given route.
iii. Goods are transported from only from sources to destinations. This means
shipments between/among the sources or destinations themselves are not allowed.
iv. The objective of the model is to minimize the total cost of transportation while
satisfying demand and supply constraints.

Illustration: Consider a transportation problem faced by ABC Company. This problem

involves the transportation of a product from three plants of the company to three
distribution centers. The company has plants in Mekelle, Hawasa and Gambela. Monthly
production capacities of a certain product at these plants are as follows:

Origin Plant Monthly production

capacity (units)
1 Mekele 3000
2 Hawasa 4000
3 Gambela 2500
Total=9500 units

34
The Company distributes the product through three distribution centers located in Addis
Ababa, Gondar and Jijiga. A monthly forecast of demand for these distribution centers is
as follows:
Destination Distribution Center Monthly demand forecast
(units)
1 Addis Ababa 4500
2 Gondar 3500
3 Jijiga 1500
Total=9500 units
The following table indicates transportation cost (in Br.) per unit of the good from each
source to each destination along with the supply capacity and demand of the origins and
destinations:

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3* 2 5 3000

Hawasa (2) 1 3 4 4000

Gambela (3) 3 5 6 2500

Demand 4500 3500 1500 9500

* N.B The numbers in the corner of each cell indicate transportation cost per unit to that
cell. e.g 3* indicates that the cost of transporting one unit of the product from Mekele to
Addis Ababa is 3 Birr.

The company would like to determine how much product should be shipped from each
source to each destination in such a way that the demand of each destination is satisfied
with the available production at each source and the overall transportation cost is
minimized. Note that total demand and total supply are equal: 9500 units.

1.1.1 General LPM Approach to Transportation Problems

A general linear programming approach can be used to solve the above problem. Let us
see how the LP model can be developed for the problem. We will use double-subscripted
decision variables, with x11 denoting the number of units shipped from origin 1 (Mekele)
to destination 1 (Addis Ababa), x12 denoting the number of units shipped from origin
1(Mekele) to destination 2 (Gondar), and so on. In general the decision variables for a
transportation problem having m origins and n destinations are written as follows:

xij= number of units shipped from origin i to destination j,

Where i= 1,2,3,…,m and j= 1,2,3,…,n

35
Since the objective of the transportation problem is to minimize the total transportation
cost, we can use the transportation cost data provided in the above table to develop the
following cost expressions:

Transportation cost for units shipped from Mekele = 3x11 + 2x12 +5x13.
Transportation cost for units shipped from Hawasa = x21 + 3x22 +4x23
Transportation cost for units shipped from Gambela=4x31 + 5x32 +6x33.

The sum of the above cost expressions provides the objective function showing the total
transportation cost for ABC Company. Accordingly, the objective function is:

Min Z= 3x11 + 2x12 +5x13 + x21 + 3x22 +4x23 + 4x31 + 5x32 + 6x33

Constraints: Transportation problems have two major categories of constraints- supply

and demand. Let us first consider supply constraints. The capacity at Mekele plant is
3000 units. Since the number of units shipped from the Mekele plant is expressed as x11 +
x12 +x13, the supply constraint for Mekele plant is:

x11 + x12 +x13 = 3000 Mekele supply

Similarly, the supply constraints of the Hawasa and Gambela plants can be written as:
x21 + x22 + x23 = 4000 Hawasa supply
x31 + x32 +x33 = 2500 Gambela supply

The same approach is used to develop the demand constraints. The demand at Addis
Ababa distribution center is 4500 units. This demand is satisfied with the goods shipped
from Mekele (x11 ), Hawasa (x21 ), and Gambela (x31 ) . Therefore the demand constraint
for Addis Ababa distribution center is:

x11 + x21 + x31 = 4500 Addis Ababa demand

Similarly, the demand constraints of Gondar and Jijiga distribution centers are:

x12 + x22 + x32 = 3500 Gondar demand

x13 + x23 + x33 = 1500 Jijiga demand

Combining the objective function and constraints into one model results in the following
9-variable, 6-constraint linear programming model for the ABC transportation problem:

Min Z= 3x11 + 2x12 +5x13 + x21 + 3x22 +4x23 + 4x31 + 5x32 + 6x33
Subject to:
x11 + x12 +x13 = 3000
x21 + x22 + x23 = 4000
x31 + x32 +x33 = 2500
x11 + x21 + x31 = 4500
x12 + x22 + x32 = 3500
x13 + x23 + x33 = 1500
xij ≥0, for i= 1,2,3 and j= 1,2,3

36
Dear learner! Once the LPM is developed as above, it can be solved with the simplex
method we discussed in the previous chapter. However, as you can imagine, solving the
above model, without the help of a computer, will be very cumbersome and time
consuming to say the least. What is more striking is the fact that the transportation
problem we are dealing with is relatively small in comparison to most of the
transportation problems you will face in the real business world. You may be wondering
“So how can we solve a large-size transportation problem involving, say 10 warehouses
(sources) and 15 retail shops (destinations), with the simplex approach?” Well, don’t
worry about that! What is expected of you (a human decision maker) is just to develop
the linear programming model using the approach we saw above. Thanks to technology,
highly efficient computer spreadsheets, like Microsoft Excel, which are widely available
these days, can be used to solve the LPM. We will not, however, discuss them here. We
suggest that you refer to reference books attached at the end of this chapter to familiarise
yourself with the use of MS Excel in solving LPM’s. By the way a 10-source, 15-
destination transportation problem will have 150 variables and 25 constraints!
In the next section, we will discuss the transportation algorithm which will enable us to
solve ABC Company’s transportation problem more easily than the general LPM
approach.

3.1.2 The Transportation Algorithm

Well, in simple terms an algorithm is a series of steps which, by applying the same
mathematical rules, gradually lead to the final solution of a problem. For instance, the
simplex method discussed in the previous chapter is an algorithm. The same rules of
performing the row operations, of determining the entering variable and the leaving
variable are applied to subsequent simplex tables. We start from the initial solution (first
table) and gradually progress to the optimal solution (final table) by repetitively applying
the rules to consecutive simplex tables.
The transportation algorithm is similar to the simplex algorithm in that it starts from an
initial solution, evaluates the initial solution for optimality and , if the initial solution is
not optimal, progresses to the next solution until optimality condition is satisfied.

3.1.1.1 Methods of finding initial solution

There are three methods of finding and initial solution for transportation problems. These
are:
a. Northwest-corner method
b. Least-cost method and
c. Vogel’s approximation method
The three methods generally differ in their complexity and the quality of the initial
solution (the transportation cost) they provide. While the north-west corner method is the
easiest one the Vogel’s approximation method is the most complex. But the Vogel’s
approximation method results in a better quality (i.e lower transportation cost) starting
solution. The least-cost method is generally mid way in both its complexity and the
quality of the starting solution it provides. However, even if you use any of the three
methods to find the initial solution, you will arrive at the same optimal solution. Thus,
for our discussion purpose, we will limit ourselves only to the first two methods: the
northwest-corner method and the least-cost method. We illustrate these methods with the
ABC Company’s transportation problem.

37
 a) Northwest-corner method
The northwest-corner method starts at the northwest-corner cell (variable x11 , Mekele-
Addis Ababa route). Follow the following steps:
Step 1. Allocate as many units as possible to the selected cell. The allocated number of
units will be equal to the lower of the row supply and column demand since we cannot
assign more than what is demanded or what can be supplied.
Accordingly, 3000 units is assigned to cell11 (Mekele-A/Ababa cell) because 3000 is the
lower of the row supply (i.e 3000 units from Mekele) and the column demand (4500 units
of the A/Ababa distribution center). Step 1 results in the following changes in the
original table.

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000

Gambela (3) 3 5 6 2500

Demand 4500 3500 1500 9500

Step 2. Adjust the associated amounts of supply and demand by subtracting the allocated
amount (i.e 3000 units). Now, after the allocation, A/Ababa’s demand will be left with
1500 units (i.e 4500-3000) and the Mekele’s supply capacity will be zero (i.e 3000-3000).
Substitute the original supply and demand amounts by crossing out and replacing with
the adjusted amounts. Thus 4500 is crossed out (cancelled) and replaced with 1500.
Similarly 3000 is crossed out, the new supply amount will be 0, thus you don’t need to
write it. The following change is made as a result of step 2:

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000

Gambela (3) 3 5 6 2500

Demand 4500 3000 1500 9500

1500

38
Step 3: If exactly one supply and demand amount remains nonzero, make the allocation
to the cell at the intersection of the remaining supply and demand and finish. Otherwise,
move to the cell to the right ( if there is supply) or below (if there is demand) and repeat
step 1 and step 2 until exactly one nonzero supply or demand remains.
In our problem, there are still 3 nonzero demand amounts (the 3 distribution centers) and
2 nonzero supply amounts (Hawasa and Gambela). Therefore, we have to make the next
allocation to the cell below cell11, that is to the nonzero demand direction. Accordingly,
the next allocation will be to cell21 (Hawasa-A/Ababa route). Again, we adjust the
supply and demand amounts. This results in the following changes:

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
1500 2500

Gambela (3) 3 5 6 2500

Demand 4500 3000 1500 9500

1500

 Now the A/Ababa demand is zero, and the Hawasa supply remains 2500 units.
Thnext allocation will be made to the right of cell21, that is to cell22, resulting in the
following changes:

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
1500 2500 2500

Gambela (3) 3 5 6 2500

Demand 4500 3500 1500 9500

1500 1000

 The next allocation will be made below cell22 , to cell32. After making the
necessary adjustments the following changes occur on the table:

Destination

39
 Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
1500 2500 2500

Gambela (3) 3 5 6 2500

1000 1500
Demand 4500 3500 1500 9500
1500 1000

 Finally, exactly one nonzero demand and supply amount remains (i.e the Jijiga
demand and the Gambela supply). Thus we make allocation to the cell at the
intersection of the remaining supply and demand amounts (cell33 ). Since both
supply and demand amounts are 1500 units, we can allocate 1500 units and finish.
The following table is the northwest-corner initial solution. The direction of the
arrows indicate the summary of the steps we followed.

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
1500 2500 2500

Gambela (3) 3 5 6 2500

1000 1500 1500
Demand 4500 3500 1500 9500
1500 1000

Initial total cost: To find the total transportation cost, multiply transportation cost per
unit and the number of units in occupied cells, and add the results of all products.

That is, initial total cost=3*3000+1*1500+3*2500+5*1000+6*1500=Birr 32,000

b) Minimum-Cost Method for Finding a Basic Feasible Solution

With this method of finding the initial solution, we start by allocating to the cell with the
lowest cost, adjust the demand and supply amounts, and continue to make allocation to
the cell with the next lowest cost and so on until all demand is satisfied with the available
supply.
The northwest corner method does not utilize shipping costs, so it can yield an initial
solution that has a very high shipping cost. Then determining an optimal solution may
require several computations. The minimum-cost method uses the shipping costs in an

40
effort to produce an initial solution that has a lower total cost. Hopefully, fewer
computations will then be required to find the problem’s optimal solution.
To find the initial solution by using this method, follow the following steps:

Step 1: find the cell with the smallest shipping cost and assign as many units as possible. The
number of units that can be assigned is the lower of the row supply and column demand
amounts. If there are many (more than one) cells with the same lowest cost, first assign to the
cell in which the largest number of units can be assigned, then to the cell where the next
largest number of units can be made and so on.
In our problem, the minimum transportation cost per unit is Br.1, and the cell with that cost
is cell21 (i.e Hawasa-A/Ababa route).

Step 2. As in the northwest corner method adjust the associated amounts of supply and
demand by subtracting the allocated amount (i.e 4000 units).
The above two steps result in the following changes on the transportation table:

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000

Hawasa (2) 1 3 4 4000

4000
Gambela (3) 3 5 6 2500

Demand 4500 3500 1500 9500

500

Step 3: Then choose the cell with the lowest cost from the cells that do not lie in a zero
supply row or demand column with the minimum shipping cost and repeat step 1 and step 2.
Continue until there is only one cell that can be chosen. In other words, if exactly one supply
and demand amount remains nonzero, make the allocation to the cell at the intersection
of the remaining supply and demand and finish.

 Now, since there are more than one nonzero demand and supply amounts left, we
should identify the next smallest cost. It is Br.2 (at cell12 ). 3000 units can be allocated,
resulting in the following changes after adjustment:

Destination
Origin Addis Gondar Jijiga Supply
Ababa (1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
4000

41
 Gambela (3) 3 5 6 2500

Demand 4500 3500 1500 9500

500 500

 The next smallest cost is Br.3 (at cell11 , cell22 , and cell31 ). However, we cannot
allocate to cell11 and cell22 .
Dear student! Why do you think we cannot make the allocation to those cells?
____________________________________________________________________
______________________________________________________________

Allocation cannot be made to cell11 and cell22 because the supply amounts (i.e the
Mekele and Hawasa supplies) are zero, thus there is no supply. Therefore, we have
to allocate to cell31. 500 units can be allocated, resulting in the following changes
after adjustment:

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
4000
Gambela (3) 3 5 6 2500
500 2000
Demand 4500 3500 1500 9500
500 500

 The next smallest cost is Br.4 (at cell23). However, we cannot allocate to the
cell since there is no supply.
 Birr 5 is the next smallest cost. There are two candidate cells, cell13 and cell32.
However we cannot allocate to cell13 as there is no supply left. Therefore we
make the allocation to cell32 , resulting in the following changes after
adjustments:

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
4000
Gambela (3) 3 5 6 2500
500 500 2000

42
 1500

Demand 4500 3500 1500 9500

500 500

 Finally, exactly one nonzero demand and supply amount remains (i.e the Jijiga
demand and the Gambela supply). Thus, 1500 units is allocated to cell33 and the
initial solution is as follows:

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
4000
Gambela (3) 3 5 6 2500
500 500 1500 2000
1500
Demand 4500 3500 1500 9500
500 500

Initial total cost= 2*3000+ 1*4000+3*500+ 5*500+6*1500=Birr 23,000 .

Dear distance learner! As you can note from the results of the initial solutions found
using the two methods, the initial total cost found using the least-cost method is lower
than the one found using the northwest-corner method. Thus the least-cost method
generally provides a lower cost which is a better starting solution. However, this might
not be the case in all transportation problems.

Evaluating the Initial Solution for Optimality

Dear student! Our discussion so far has been on finding the starting solution for
transportation problems. After determining the initial solution (using either of the two
methods), we have to evaluate it to know whether it is the optimal solution. The purpose
of evaluation is to determine whether it is possible to decrease the current total
transportation cost by reallocating (shifting) certain units of a product from the occupied
cells to empty cells.
We can perform the evaluation process only if the number of occupied cells=m+n-1,
where m=number of rows (sources) and n=number of columns (destinations).
There are two methods of testing the initial solution for optimality. These are:
1.) Stepping-stone method and
2.) Modified distribution (MODI) Method

43
Note that in our example, the number of occupied cells =m+n-1 (i.e 5=3+3-1).
Therefore, it is possible to evaluate both the northwest-corner and stepping-stone initial
solutions.
We illustrate the two methods by taking the northwest-corner initial solution of ABC
Company’s transportation problem. The following table shows the northwest-corner
initial solution we found above.

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 3 4 4000
1500 2500
Gambela (3) 3 5 6 2500
1000 1500
Demand 4500 3500 1500 9500

Table I. ABC Company’s Transportation problem- Northwest-corner initial solution.

1.) Stepping-Stone Method of Evaluation

The stepping-stone method gets its name from the analogy that you need a stepping-
stone to put your feet on when you cross a swampy area. Similarly, when we
evaluate each empty cell by using this method we will use occupied cells as stepping-
stones.

Steps in stepping-stone method of evaluation:

1. Select an empty cell to evaluate.

2. Trace a closed path (closed loop) that starts and ends in the empty cell being
evaluated. You can follow either clock-wise or anti-clock wise direction to form the
path.

3. Place alternating ‘+’s and ‘-’s on this path. Start by placing a plus (+) sign on the
empty cell being evaluated. Place plus and minus signs only on occupied cells except the
empty cell being evaluated. The ‘+’s indicate that certain amount of goods will be added
to that cell. ‘-’s indicate that certain units will be subtracted from that occupied cell.

N.B. There must be equal number of ‘+’s and ‘-’s in every row and column of
the transportation table. This is to ensure that each row supply and column
demand amount remains intact (unaffected).

4. Calculate the net cell evaluation result as follows:

i. Add the cell cost of occupied cells with ‘+’ signs

44
 ii. Add the cell cost of occupied cells with ‘-’ signs
iii. Calculate the difference between (i) and (ii) to find the net cell evaluation
result.
 A negative cell evaluation result indicates the possible decrease the
current total transportation cost for each unit of a product
transferred to that cell. Therefore, negative cell evaluation results
are favorable.
 A positive cell evaluation result indicates the possible increase the
current total transportation cost for each unit of a product
transferred to that cell. Positive cell evaluation results are
unfavorable.

5. Repeat step 1-step 4 for each empty cell in the transportation tableau. If all cell
evaluation results are positive, stop; optimality condition is satisfied. Otherwise
proceed to step 6. Optimal solution in a transportation problem is reached when there is
no any further improvement potential. That means, the minimum-cost transportation
schedule is found.

6. Reallocate to the cell with the largest improvement potential: To make the
reallocation, first identify empty cells with net negative cell evaluation result and
compare their cell evaluation value. The cell with the largest negative net cell
evaluation result is said to have the largest improvement potential. That is, reallocation
to that cell will lead to the largest reduction in the total transportation cost.

 The number of units that can be reallocated is equal to the smallest of the number of
units in the occupied cells which are on the corners of the closed path used to evaluate
the cell with the largest improvement potential. If n=the number of units that can be
reallocated, make the following changes on cells at corners of the closed path of the
current table and draw the next table:
i. Add n to cells with ‘+’ sign
ii. Subtract n from those cells with ‘-‘sign
iii. Leave other cells as they are.

Let us apply the above steps in our example and evaluate the 4 empty cells one by one:

1) cell12 (C12 In short) : We start by placing a ‘+’ sign at C12. Since we have one ‘+’
sign in the first row, there must be one ‘_’ sign in the same row. The minus sign can
be placed only on occupied cell in the row, cell11. The next plus sign should be
placed at c21 since c21 is the only other occupied cell in the first row (other than
c11). Finally the minus sign should be placed at C22 to form the closed path.

45
 Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) _ 3 + 2 5 3000
3000
Hawasa (2) + 1 _ 3 4 4000
1500 2500
Gambela (3) 3 5 6 2500
1000 1500
Demand 4500 3500 1500 9500

Cell evaluation (c12 ) + -

2 3

1 3

+3 -6 +3-6=-3 net cell evaluation result, favorable

 Note that: Except c21 all plus and minus signs are placed on occupied
cells

: There are equal number of plus and minus signs in all rows and
columns. That is: Row 1 (1 plus, 1 minus), Row 2 (1 plus, 1 minus), Row 3
(0 plus, 0 minus). Column 1 (1 plus 1 minus), Column 2 (1 plus, 1 minus),
Column 3 ( 0 plus, 0 minus)

2) Cell13:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) _ 3 2 + 5 3000
3000
Hawasa (2) + 1 _ 3 4 4000
1500 2500
Gambela (3) 3 + 5 _ 6 2500
1000 1500
Demand 4500 3500 1500 9500

46
 Cell evaluation (c13 ) + -

5 6

5 3

1 3

+11 -12 +11-12 = -1 net cell evaluation

result, favorable

3) Cell23 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000
Hawasa (2) 1 _ 3 + 4 4000
1500 2500
Gambela (3) 3 + 5 _ 6 2500
1000 1500
Demand 4500 3500 1500 9500

Cell evaluation (c23 ) + -

4 6

5 3

+9 -9 +9-9=0 net cell evaluation result, neither

favorable nor unfavorable, no effect on initial total cost

4) Cell31 :

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 2 5 3000
3000

47
 Hawasa (2) _ 1 + 3 4 4000
1500 2500
Gambela (3) + 3 _ 5 6 2500
1000 1500
Demand 4500 3500 1500 9500

Cell evaluation (c31 ) + -

3 5

3 1

+6 -6 +6-6=0 net cell evaluation result, neither

favorable nor unfavorable

To summarize, the cell evaluation results of the four empty cells- C12, C13, C23,
C31- are -3, -1, -1, and 0; respectively. This means each unit of the product that is
reallocated to the four cells will decrease the initial total cost (i.e Br. 32,000) by
Br. 3, 1,1,and Br.0, respectively. Since our objective is to minimize the total
transportation cost, C12 is the most favorable one. It has the largest
improvement potential.

 To determine the number of units that can be reallocated to C12, look at the
closed path we use to evaluate this cell. In the path, the occupied cells with the
negative sign attached to them are C11 and C22. From these 2 cells, C22 has the
lower number of units in it (2500 units Versus 3000 for C11 ). Therefore, we add
2500 units to cells with a plus sign (i.e C12 and C21 ) and subtract 2500 units from
those cells with a negative sign (i.e C11 and C22). Keeping other cells as they are,
the following table (Table II) is drawn:

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 2 5 3000
(1) 500 2500
Hawasa 1 3 4 4000
(2) 4000
Gambela 3 5 6 2500
(3) 1000 1500
Demand 4500 3500 1500 9500

Table II. ABC Company’s Transportation problem

 Now, total transportation cost= 3*500+2*2500+1*4000+5*1000+6*1500
= Br. 24,500

48
 =Initial cost-(cell evaluation*number reallocated units)
=Br. 32,000-(3*2500)
=Br.32, 000-Br.7500
 As we have said earlier, each unit of good reallocated to C12 reduces the initial
cost by Br.3 (the -3 cell evaluation result indicates this). Now, we have
reallocated 2500 units, resulting in a Br.7,500 (i.e 3*2500) cost reduction.

 But we did not yet know whether the solution we have found is optimal. The new
solution should be evaluated again. So we should evaluate each empty cell in the table-
Cell13, Cell22, Cell23, and Cell31- one by one.

1) Cell13 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) 3 _ 2 + 5 3000
500 2500
Hawasa (2) 1 3 4 4000
4000
Gambela (3) 3 + 5 _ 6 2500
1000 1500
Demand 4500 3500 1500 9500

Cell evaluation (c13 ) + -

5 2

5 6

+10 -8 +10-8=+2 net cell evaluation result,

unfavorable

2) Cell22 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) + 3 _ 2 5 3000
500 2500
Hawasa (2) _ 1 +3 4 4000
4000

49
 Gambela (3) 3 5 6 2500
1000 1500
Demand 4500 3500 1500 9500

Cell evaluation (c22 ) + -

3 2

3 1

+6 -3 +6-3=+3 net cell evaluation result,

unfavorable

3) Cell23 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) + 3 _ 2 5 3000
500 2500
Hawasa (2) _ 1 3 +4 4000
4000
Gambela (3) 3 + 5 _ 6 2500
1000 1500
Demand 4500 3500 1500 9500

Cell evaluation (c23 ) + -

4 6

5 2

3 1

+12 -9 +12-11=+3 net cell evaluation result,

unfavorable

4) Cell31 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele (1) _ 3 + 2 5 3000
500 2500
Hawasa (2) 1 3 4 4000
4000

50
 Gambela (3) + 3 _ 5 6 2500
1000 1500
Demand 4500 3500 1500 9500

Cell evaluation (c31 ) + -

3 5

2 3

+5 -8 +5-8=-3 net cell evaluation result,

favorable
 Again there is a cell- Cell31 – with an improvement potential. Therefore, we should
reallocate to it. 500 units should be reallocated, resulting in the following table, table III.

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 2 5 3000
(1) 3000
Hawasa 1 3 4 4000
(2) 4000
Gambela 3 5 6 2500
(3) 500 500 1500
Demand 4500 3500 1500 9500

Table III. ABC Company’s Transportation problem-Optimal solution

 Total transportation cost= 2*3000+1*4000+3*500+5*500+6*1500
=Br.23, 000
=Br.24, 500-(3*500)
=Br.24,500-Br.1500
 Again we have to evaluate the new solution to know whether it is optimal. The four
empty cells (Cell11, Cell13, Cell22, and Cell23 ) are evaluated as follows:

1) Cell11:
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele + 3 _ 2 5 3000
(1) 3000
Hawasa 1 3 4 4000
(2) 4000

51
 Gambela _ 3 + 5 6 2500
(3) 500 500 1500
Demand 4500 3500 1500 9500

Cell evaluation (c11 ) + -

5 2

3 3

+8 -5 +8-5=+3 net cell evaluation result,

unfavorable

2) Cell13 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 _ 2 + 5 3000
(1) 3000
Hawasa 1 3 4 4000
(2) 4000

Gambela 3 + 5 _ 6 2500
(3) 500 500 1500
Demand 4500 3500 1500 9500

Cell evaluation (c13 ) + -

5 6

5 2

+10 -8 +10-8=+2 net cell evaluation result,

unfavorable

3) Cell22 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 2 5 3000
(1) 3000
Hawasa _ 1 + 3 4 4000
(2) 4000

52
 Gambela + 3 _ 5 6 2500
(3) 500 500 1500
Demand 4500 3500 1500 9500

Cell evaluation (c11 ) + -

3 5

3 1

+6 -6 +6-6=0 net cell evaluation result, neither

favorable nor unfavorable

4) Cell23 :
Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 2 5 3000
(1) 3000
Hawasa _ 1 3 + 4 4000
(2) 4000
Gambela + 3 5 _ 6 2500
(3) 500 500 1500
Demand 4500 3500 1500 9500

Cell evaluation (c11 ) + -

4 6

3 1

+7 -7 +7-7=0 net cell evaluation result, neither

favorable nor unfavorable

 Now there is no cell with an improvement potential. Therefore, the optimal

solution is found. The minimum transportation cost is Birr 23,000. Table III
indicates the optimal transportation schedule.

Dear distance learner! As you can observe the optimal solution (Table III) and
the least-cost initial solution are the same. But this occurs just by chance in our
specific example. You should not assume that the least-cost initial solution will
always be the same to the final solution. Infact, the two are different in most
problems.

53
2.) The MODI ( MOdified DIstribution) Method of Evaluation

The MODI method requires that we define an index ui for each row of the tableau and an
index vj for each column of the tableau. Computing these row and column indices
requires that the cost coefficient for each occupied cell equal ui + vj . Thus, if Cij the cost
per unit from origin i to destination j, we have Cij = ui + vj for each occupied cell.
Steps in MODI method:
(i). Develop an initial feasible solution using one of the two methods- NWC or Least-cost
(ii). Setting the row index of the first row equal to zero: ul= 0. Compute successive ui
and vj values for each row and column such that ui + vj = Cij for each occupied cell.
(iii). Compute the net cell evaluation result (eij ) as cij – ui – vj for each empty cell. eij is
called net evaluation index.
(iv). Allocate as much as possible to the empty cell that has the largest improvement
potential. Allocate according to the stepping-stone path for the selected cell and develop
the next table.
(v). Repeat steps (ii) to (iv) in successive tables until all cell evaluation results (eij ) are
greater than or equal to zero; that is until there is no further improvement potential.

Let us return to the initial solution for ABC Company which we found using the
northwest-corner method and use MODI to evaluate it for further improvement potential.
The table, along with row and column indices, is repeated below for easy reference:

Origin Addis Gondar Jijiga Supply Row

Ababa (1) (2) (3) indices
(ui )
Mekele (1) _ 3 + 2 3000 0
3000 5
Hawasa (2) + _ 4000 -2
1 3 4
1500 2500
Gambela 3 2500 0
(3) 5 6
1000 1500
Demand 4500 3500 1500 9500 -
Column 3 5 6 - -
indices (vj )
Table I. ABC Company’s NWC initial Solution-MODI Evaluation I

Step ii. Calculating row and column indices (ui and vj):
Requiring that ui + vj = Cij for all occupied cells in the initial solution leads to a system
of 5 equations and 6 indices, or variables:

Occupied cell ui + vj = Cij

Mekele-A/Ababa u1 + v1 = 3
Hawasa-A/Ababa u2 + v1 = 1

54
 Hawasa-Gondar u2 + v2 = 3
Gambela-Gondar u3 + v2 = 5
Gambela-Jijiga u3 + v3 = 6
With one more index (variable) available than equation in this system, we can freely
choose a value for one of the indices and then solve for others. We will always choose u1
= 0 and then solve for the values of the other indices. Setting u1 = 0, we obtain

0 + v1 = 3…v1=3
u2 + 3 = 1… u2 = -2
-2 + v2 = 3… v2 = 5
u3 + 5 = 5... u3 =0
0 + v3 = 6… v3 =6
 The above row and column indices are indicated in the table.
Step iii. Calculating net evaluation index (eij )

Empty cell eij = cij – ui – vj

Cell12 e12 = c12 – u1 – v2

= 2-0-5
= -3, favourable
Cell13 e13 = c13 – u1 – v3
= 5-0-6
= -1, favourable
Cell23 e23 = c23 – u2 – v3
= 4-(-2)-6
= 0, neither favourable nor unfavorable
Cell31 e31 = c31 – u3 – v1
= 3-0-3
= 0, neither favourable nor unfavorable

 Dear student! Before we continue further, have you observed that the net evaluation
results we found above using MODI method for each empty cell are exactly the same to
those we found using the stepping-stone method? Go back to page 17 and compare the
results. When we are evaluating one table using the stepping-stone method and MODI
method the net evaluation results will ALWAYS be the same for each empty cell evaluated.
 Cell12 has the highest improvement potential. Therefore, we have to reallocate to Cell12 .
How many units should be reallocated to it? We use the stepping-stone method, only for
Cell12, to determine the number of units that can be reallocated. The path is indicated in the
above table. 2500 units (i.e the lower of 2500 and 3000) can be reallocated, resulting in the
next table after adjustments.

Exercise: Calculate row and column indices. Check your answer in the following table.

Origin Addis Ababa Gondar Jijiga Supply Row

(1) (2) (3) indices

55
 (ui )

Mekele _ 3 + 2 5 3000 0
(1) 500 2500
Hawasa 1 3 4 4000 -2
(2) 4000
Gambela + 3 _ 5 6 2500 3
(3) 1000 1500
Demand 4500 3500 1500 9500 -
Column 3 2 3 - -
indices (vj )

Table II. ABC Company’s NWC initial Solution-MODI Evaluation II

Step iii. Calculating net evaluation index (eij )

Empty cell eij = cij – ui – vj

Cell13 e13 = c13 – u1 – v3

= 5-0-3
= +2, unfavorable
Cell22 e22 = c22 – u2 – v2
= 3-(-2)-2
= +3, unfavourable
Cell23 e23 = c23 – u2 – v3
= 4-(-2)-3
= +3, unfavorable
Cell31 e31 = c31 – u3 – v1
= 3-3-3
= -3, favourable
 Cell31 is the only cell with an improvement potential. The stepping-stone path
required to make the reallocation is indicated in the table above. As you can see,
500 units (i.e the lower of 500 and 1000) can be reallocated, resulting in the
following table:
Exercise: Calculate row and column indices. Check your answer in the following table.

Origin Addis Ababa Gondar (2) Jijiga (3) Supply Row indices
(1) (ui )
Mekele (1) 3 2 5 3000 0
3000
Hawasa(2) 1 3 4 4000 1
4000
Gambela(3) 3 5 6 2500 3
500 500 1500

56
 Demand 4500 3500 1500 9500 -

Column indices(vj) 0 2 3 - -

Table III. ABC Company’s NWC initial Solution -MODI Evaluation, optimum solution

Step iii. Calculating net evaluation index (eij )

Empty cell eij = cij – ui – vj

Cell11 e11 = c11 – u1 – v1

= 3-0-0
= +3, unfavorable
Cell13 e13 = c13 – u1 – v3
= 5-0-3
= +2, unfavourable

Cell22 e22 = c22 – u2 – v2

= 3-1-2
= 0, neither favourable nor unfavorable
Cell23 e23 = c23 – u2 – v3
= 4-1-3
= 0, neither favourable nor unfavourable
 Now there is no empty cell with an improvement potential. Therefore, we can
conclude that the solution is optimal.
 Total transportation cost= 2*3000+1*4000+3*500+5*500+6*1500
=Br.23, 000

3.4 Special Cases in Transportation

Dear distance learner! In transportation problems, special cases include the
following:

1. Unbalanced transportation Problem

2. Multiple optimum solutions

3. Degeneracy in the transportation Problem

4. Maximization transportation problems

5. Restricted transportation routes

3.4.1 Unbalanced Transportation Problems

57
 If the total supply is not equal to the total demand then the problem is known as
unbalanced transportation problem. If the total supply is more than the total demand,
we introduce an additional column, called dummy column, which will indicate the
surplus supply with transportation cost zero.

Similarly, if the total demand is more than the total supply, an additional row, called
dummy row, which represents unsatisfied demand with transportation cost zero, is
introduced in the table.

 After introducing a dummy row or column, the problem is solved just like other
‘normal’ transportation problems.

Example. Consider the following transportation problem faced by XYZ Company to

transport a certain product from its 2 plants to 3 warehouses . Assume that unit
transportation costs are in Birr.

To Warehouse Warehouse Warehouse Supply

I II III
From
Plant I 7 8 10 50
Plant II 9 7 8 60
Demand 70 30 40

Required:

a.) Show that the transportation problem is unbalanced and draw a transportation tableau
for the corresponding balanced problem.
b.) Find the initial solution using northwest-corner (NWC) method and, by using MODI
method of evaluation, find the optimal solution.

Solution

a.) Total demand=70+30+40=140 units

Total Supply=50+60=110 units.

Total demand ≠ Total supply. Therefore the problem is unbalanced. The problem
should be converted into a balanced one before solving it. Since demand is greater
than supply, dummy row (i.e dummy plant) should be added to the table to balance
the problem. The dummy row’s amount=140-110=30 units. The balanced
transportation table should be as follows:

Table I

58
 To Warehouse Warehouse Warehouse Supply
I II III
From
Plant I 7 8 10 50
Plant II 9 7 8 60
Dummy row 0 0 0 30
Demand 70 30 40 140

 Now the problem is balanced since total demand (140)=total supply (140). Note
that transportation costs in the dummy row are zero(0) because there will not be
an actual shipment of goods from the dummy row. The purpose of the dummy
row here is to balance the problem and know the demand of which warehouse will
not be partially or completely satisfied at the optimal solution..

b.) NWC Initial solution: Table I

To Warehouse I Warehouse Warehouse Supply

II III
From
Plant I 7 50 8 10 50

Plant II 9 7 8 60 40 10

20 30 10
Dummy row 0 0 0 30

30
Demand 70 20 30 40 30 140

Initial total cost=50*7+20*9+30*7+10*8+0*30

=Birr 820

Evaluating the initial solution by Stepping-stone method:

i. Cell12

To Warehouse I Warehouse Warehouse Supply

II III
From
Plant I _ 7 50 + 8 10 50

59
 Plant II + 9 _ 7 8 60 40 10

20 30 10
Dummy row 0 0 0 30

30
Demand 70 20 30 40 30 140

Cell evaluation (c11 ) + -

8 7

9 7

+17 -14 +17-14=+3 net cell evaluation result,

unfavorable

ii. Cell13

To Warehouse I Warehouse Warehouse Supply

II III
From
Plant I _ 7 50 8 + 10 50

Plant II + 9 7 _ 8 60 40 10

20 30 10
Dummy row 0 0 0 30

30
Demand 70 20 30 40 30 140

Cell evaluation (c13 ) + -

10 8

9 7

+19 -15 +19-15=+4 net cell evaluation result,

unfavorable

iii. Cell31

To Warehouse I Warehouse Warehouse Supply

II III
From

60
 Plant I 7 50 8 10 50

Plant II _ 9 7 +8 60 40 10

20 30 10
Dummy row + 0 0 _ 0 30

30
Demand 70 20 30 40 30 140

Cell evaluation (c31 ) + -

0 0

8 9

+8 -9 +8-9=-1 net cell evaluation result, favorable

iv. Cell32

To Warehouse I Warehouse Warehouse Supply

II III
From
Plant I 7 50 8 10 50

Plant II 9 _ 7 +8 60 40 10

20 30 10
Dummy row 0 + 0 _0 30

30
Demand 70 20 30 40 30 140

Cell evaluation (c11 ) + -

0 0

8 7

+8 -7 +8-7=+1 net cell evaluation result, unfavorable

 Cell31 is the only cell with an improvement potential. 20 units (the lower of 20 and
30) can be reallocated, resulting in the following table after reallocation:

Table II. (Optimal Solution)

61
 To Warehouse I Warehouse Warehouse Supply
II III
From
Plant I 7 8 10 50

50
Plant II 9 7 8 60

30 30
Dummy row 0 0 0 30

20 10
Demand 70 30 40 140

 We should again evaluate the solution in table II to know whether it is

optimal.

i. Cell12
To Warehouse I Warehouse Warehouse Supply
II III
From
Plant I _ 7 + 8 10 50

50
Plant II 9 _ 7 + 8 60

30 30
Dummy row + 0 0 _ 0 30

20 10
Demand 70 30 40 140

Optimal Cost=7*50+7*30+8*30+0*20+0*30

=Birr 800

Cell evaluation (c12 ) + -

8 7

8 0

0 7

+16 -14 +16-14=+2 net cell evaluation result, unfavorable

ii. Cell13

62
 To Warehouse Warehouse Warehouse Supply
I II III
From
Plant I _ 7 8 +10 50

50
Plant II 9 7 8 60

30 30
Dummy row + 0 0 _ 0 30

20 10
Demand 70 30 40 140

Cell evaluation (c13 ) + -

10 0

0 7

+10 -7 +10-7=+3 net cell evaluation result,

unfavorable

iii. Cell21
To Warehouse I Warehouse Warehouse Supply
II III
From
Plant I 7 8 10 50

50
Plant II + 9 7 _ 8 60

30 30
Dummy row _ 0 0 + 0 30

20 10
Demand 70 30 40 140

Cell evaluation (c31 ) + -

9 8

0 0

+9 -8 +9-8=+1 net cell evaluation result, unfavorable

iv. Cell34

63
 To Warehouse Warehouse Warehouse Supply
I II III
From
Plant I 7 8 10 50

50
Plant II 9 _ 7 + 8 60

30 30
Dummy row 0 + 0 _ 0 30

20 10
Demand 70 30 40 140

Cell evaluation (c34 ) + -

0 0

8 7

+8 -7 +8-7=+1 net cell evaluation result,

unfavorable

 Now, there is no cell with an improvement potential. Therefore, the solution we

found is optimal.
 At the optimal solution, Warehouse I gets only 50 units, and Warehouse III gets
only 30 units. Thus, the demand of the two warehouses is only partially fulfilled.

3.4.2 Multiple Optimum Solutions

This case occurs when there are more than one (multiple) optimal solutions. This
would be indicated when at one or more unoccupied (empty) cells have zero value
for the net evaluation result in the optimum solution.

Thus a reallocation to cell having a net cost change equal to zero will have no effect
on transportation cost. This reallocation will provide another solution with same
transportation cost, but the routes employed will be different from those for the
original optimal solution. This is important because they provide management with
added flexibility in decision making.

For instance, the ABC Company’s transportation problem we solved above is a

multiple-solution case. The zero (0) net evaluation result for Cell22 and Cell23 (in
both the MODI and Stepping-stone optimum solutions) indicate that reallocation can
be made to those cells without any change in the optimum (minimum) transportation
cost.

64
 Let us take the optimum solution table and make reallocation to Cell23 to see the
effect. The required stepping-stone path is indicated in the table below:

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 2 5 3000
(1) 3000
Hawasa _ 1 3 + 4 4000
(2) 4000
Gambela + 3 5 _ 6 2500
(3) 500 500 1500
Demand 4500 3500 1500 9500

As you can see from the table, 1500 units (i.e the lower of 1500 and 4000) can be
reallocated. After the reallocation, the table will look as follows:

Destination
Origin Addis Ababa Gondar Jijiga Supply
(1) (2) (3)
Mekele 3 2 5 3000
(1) 3000
Hawasa 1 3 4 4000
(2) 2500 1500
Gambela 3 5 6 2500
(3) 2000 500
Demand 4500 3500 1500 9500

Now, Total transportation cost= 2*3000+1*2500+4*1500+3*2000+5*500

=Br. 23,000

 The total cost is after the reallocation is the same, indicating that the problem is
optimal.

Exercise: Show that reallocation to Cell22 will not result in any change in the total
transportation cost.

3.4.3 Degeneracy in Transportation Problems

If a transportation problem with m origins and n destinations has fewer than m + n –

1 occupied cells, the problem is said to be a degenerate transportation problem.

Degeneracy can occur at two stages:

65
 1. At the initial solution

2. During the testing of the optimum solution

A degenerate solution in a transportation problem exists if and only if a supply from

a source and demand at a destination are exhausted (become zero) simultaneously
before the last allocation in any transportation table.

 When degeneracy occurs, place any symbol (usually epsilon- ε or delta- Δ)

in one of the empty cells. However, not every empty cell is acceptable: The
cell where Δ is placed should enable the evaluation of all the remaining
empty cells. This means, we should be able to calculate all Ui and Vj (in
MODI); or we should be able to form a closed loop for all the remaining
empty cells (in Stepping-stone method). There can be 2 or more appropriate
cells in which to place Δ.
 The value of Δ is assumed to be so negligible (close to zero) that the supply
and demand amounts will not change.
 After placing Δ in an appropriate cell, continue the evaluation just like other
‘normal’ transportation problems. However, adding or subtracting Δ from an
occupied cell will not change the number of units in that cell. When Δ is
added to an empty cell, the empty cell becomes an occupied cell; do not
leave the empty cell as it is!

Example: Given the following transportation table,

To Town A Town B Town C Supply (in

tons)
From

Factory I 5 4 12 500

Factory II 8 6 10 600

Demand (in tons) 300 400 400

Required:

Find the optimum transportation schedule by using NWC method for initial solution and
MODI for evaluation purpose. Assume that unit transportation costs are in Birr per ton of
a product.

Solution

NWC Initial solution:

66
 To Town A Town B Town C Supply (in Row index
tons) (Ui)
From

Factory I 5 4 12 500 200 0

300
200
Factory II 8 6 10 250 2

X 250
Factory III 3 7 5 400 ?

400
Demand (in tons) 300 450 250 400 1500 -

Column index 5 4 ? - -
(Vj)

 The number of occupied cell is fewer than m+n-1. The number of sources (i.e m)=3;
the number of destinations (i.e n)=3. Thus, m+n-1 is 3+3-1=5. Normally the number of
occupied cell should be 5. But it is only 4 in our case, indicating that the problem is
degenerate.
 The degeneracy arises because in making our third allocation, 250 units in Cell22 ,
both the supply from Factory II AND the demand of Town B are exhausted
simultaneously, leading to fewer occupied cells.
 To avoid the degeneracy, we should place Δ in one of the empty cells. Dear student!
Which of the empty cells do you think is/are the appropriate place(s) for Δ? Well, you
may find the right place through trial-and-error. But there is a better way than trial-and-
error:
 First, try to calculate Ui’s and Vj ‘s by using the current occupied cells. Remember
our formula: Cij = ui + vj., where Cij is the cost of occupied cells. By using the three
occupied cells, we can find the following indices:
 U1 (which is 0 by default),
 V1 (5-0=5)
 V2 (4-0=4)
 U2 (6-4=2)
 We cannot find U3 and V3 currently (indicated by ? in the above table). Now, Δ can be
placed in any one of the empty cells in the column/row containing the question mark (?).
Accordingly, only the empty cell marked X (see the table above) is the wrong place for Δ.

Exercise: Place Δ in any one of the 4 appropriate cells and solve the problem like any
other nondegenerate, ‘normal problem’

Answer (Optimum Solution Table)

67
 To Town A Town B Town C Supply
(in tons)
From

Factory I 5 4 12 500 200

300 200
Factory II 8 6 10 250
250
Factory III 3 7 5 400

400
Demand (in tons) 300 450 250 400 1500

3.4.4 Restricted (Prohibited) Transportation Routes

Dear learner! Our discussion of transportation problems has so far been based on the
assumption that all routes from sources to destinations can be used. However in the
real world a situation such as road hazards (snow, floods, etc), traffic regulation, road
maintenance, safety problems etc may arise. In such situations it is not possible to
transport goods from certain sources to certain destinations. In this case, the
restricted cell may either be completely crossed out or a very large per unit
transportation cost (M ) is assigned to it. After placing M to the prohibited cell, ignore
that cell from further analysis.

Exercise: Take ABC Company’s transportation problem. But, now assume that it is
not possible to transport the product from Gambela to Addis Ababa directly because
the route is not operational due to road maintenance taking place.

Required: Solve the transportation problem by using least-cost method for initial
solution and stepping method for evaluation. Check your answer below:

Solution

68
 Least-cost initial solution

Origin Addis Ababa Gondar Jijiga Supply

(1) (2) (3)
Mekele (1) 3 2 5 3000
3000

Hawasa (2) 1 3 4 4000

4000

Gambela (3) M 5 6 2500

500 1500 2000
500
Demand 4500 3500 1500 9500
500 500

Initial Total cost=22,500 Birr

 Note that Addis Ababa’s demand is not fully satisfied (is short of 500 units)
because of the restriction. The 500 units are retained by the Gambela plant.
 The problem is degenerate case.

Optimal Solution table

Origin Addis Ababa Gondar Jijiga Supply

(1) (2) (3)
Mekele 3 2 5 3000
(1) 3000

Hawasa 1 3 4 4000
(2) 4000

Gambela M 5 6 2500
(3) 500 1500

Demand 4500 3500 1500 9500

Minimum transportation cost=Br.22,500

3.4.5 Maximization Transportation Problems

Although transportation model is usually used to minimize transportation cost, it can also
be used to get a solution with an objective of maximizing the total value or returns. Since
the criterion of optimality is maximization, the converse of the rule for minimization will
be used. The rule is: A solution is optimal if all opportunity costs for the unoccupied cell
are zero or positive.

69
The only difference between maximization and minimization transportation problems is
the addition of one initial step in the process of finding the solution. That is, we must first
convert the maximization table into its equivalent minimization opportunity cost table.
This is done by subtracting every number in the maximization table from the largest
number in the table. The resulting table is called opportunity cost table.

Once the opportunity table is developed exactly the same methods of finding the initial
solution and evaluation are carried out on the opportunity cost table.

Example: Assume that Trans Ethiopia provides transportation service to three factories-
X, Y and Z- to transport their goods to four dealers spread all over the country. The
production capacities of these factories and the demand of the four dealers are given
below. Also given in the table are the transportation fees (in Br./quintal) Trans charges
for its service.

To Dealer I Dealer II Dealer III Dealer IV Supply

(in
From quintals)

Factory X 2 3 1 4 3000

Factory Y 5 4 3 4 2000

Factory Z 3 2 1 2 5000

Demand (in 4000 1500 2000 2500 10,000

quintals)

Required: Develop the opportunity cost table for Trans’s problem and find the
northwest-corner initial solution.

Solution

Develop opportunity cost table by minimizing every number in the table from the largest
number (5 in our example). The NWC initial solution is also indicated in the table below.

Opportunity Cost table

70
 To Dealer I Dealer II Dealer III Dealer IV Supply (in
quintals)
From

Factory X 3 2 4 1 3000

3000
Factory Y 0 1 2 1 2000

1000 1000 1000

Factory Z 2 3 4 3 5000 4500
2500
500 2000 2500

Demand (in 4000 1500 2000 2500 10,000

quintals)
1000 500

Initial total opportunity cost= Birr 27,000

Exercise: Use MODI method for evaluation purpose and find the minimum
opportunity-cost (i.e maximum revenue) for Trans. Check your answer below

Solution-The last, optimal table

To Dealer I Dealer II Dealer III Dealer IV Supply (in

quintals)
From

Factory X 3 2 4 1 3000

500 2500
Factory Y 0 2 1 2000

2000
Factory Z 2 3 4 3 5000

2000 1000 2000

Demand(quintals) 4000 1500 2000 2500 10,000

Minimum opportunity cost=Br.18500. To find the maximum revenue, use the original revenue figures, not
the opportunity costs.

MaximumRevenue=3*500+4*2500+5*2000+3*2000+2*1000+1*2000 Birr
31,500

71
 ASSIGNMENT PROBLEMS

3.5 Structure of Assignment Problems

Assignment problem is a special type of transportation problem in which demand
at each “destination” and supply from each “source” is one. Thus, we assume that
one worker will be assigned to one machine; one job will be assigned to one
machine, and so on.

The goal of a general assignment problem is to find an optimal assignment of jobs to

machines, or persons to jobs, etc without assigning a job or person more than once
and ensuring that all jobs are completed. The objective might be to minimize the
total time to complete a set of jobs, or to maximize skill ratings, maximize the total
satisfaction of the group, maximize the average score of students, minimize the cost
of the assignments, etc.

In assigning jobs to machines, for instance, the assignment problem is subjected to

the following two basic requirements/constraints.

1. Each job is assigned to exactly one machine.

2. Each machine is assigned not more than one job.

3.6 General LPM Formulation of Assignment Problems

Consider m machines to which n jobs are assigned. No machine can either sit idle or
do more than one job. Every pair of machine and assigned job has a rating. This rating
may be cost, processing time, to finish the job. There will be n2 (n-squared) such
combinations of machines and jobs assigned. Thus, the optimization problem is to find
such job- machine combinations that optimize the sum of ratings among all.

The formulation of this problem as a special case of transportation problem can be

represented by treating jobs as sources and the machines as destinations. The supply
available at each source is 1 and the demand required at each destination is 1.The
cost of assigning (transporting) job i to machine j is cij.

Example: Assume that a production manager wants to assign 3 jobs (m=3) to 3 machines (n=3).
Processing costs of each job in each machine is given below. For example, it costs Br.5 to process job
1 in machine 1, Br. 7 to process job 1 in machine 2…Br.16 to process job 3 in machine 3.

72
Required:

a. Develop Linear Programming Model for the problem.

b. Find the optimum assignment schedule by using the Hungarian method of
assignment.

Solution

a. Let xij= number of job i assigned in machine j,

where i= 1,2,3,…,m and j= 1,2,3,…n. n=number of “origins/sources”, m=number of

“destinations”

Objective function:
Minimize Z= Min Z= 5x11 + 7x12 +9x13 +14x21 + 10x22 +12x23 + 15x31 + 13x32 + 16x33
Subject to:
x11 + x12 +x13 = 1
x21 + x22 + x23 = 1
x31 + x32 +x33 = 1
x11 + x21 + x31 = 1
x12 + x22 + x32 = 1
x13 + x23 + x33 = 1
xij ≥0, for i= 1,2,3 and j= 1,2,3
Once this problem is developed the problem can be solved with simplex approach, just
like transportation problems. The optimal solution to each decision variable in the above
assignment model will be as follows:
Xij= 0, if the job i is not assigned to machine j
1, if the job i is assigned to machine j

73
Even if assignment problems can be solved with the general LPM approach, the solution
will be found out using a more convenient algorithm called Hungarian method which
will be illustrated with our example.

3.7 Hungarian Method of Assignment

Steps of the Hungarian method

Step 1: Row Reduction: Select the smallest value in each row. Subtract this value
from each value in that row and develop a new table. The new table is called row
reduction table.

In our example the smallest numbers in Row 1,Row 2 and Row 3 are 5,10, and
13;respectively.

Row Reduction Table

Step 2: Column Reduction: In the row reduction table, select the smallest value in each
column (0, 0, and 2, respectively in our example). Subtract this value from each value in
that column and develop a new table. The new table is called column reduction table.

Column reduction table

74
 Step 3: On the column reduction table, draw a minimum number of horizontal and
vertical lines through some of the rows and columns, such that all zero values are
crossed out.

3.1) If the minimum number of lines required to cover all zeros is equal to the
number of rows, stop. Optimality condition is satisfied. Make the optimal assignment
as follows:

i. First count the number of zero’s in each row. If there is a row with only one zero,
encircle that zero and cancel all other zero’s in the encircled zero’s column. If all
assignments cannot be made in this way, proceed to ii
ii. Count the number of zero’s in each column. If there is a column with only one
zero, encircle that zero and cancel all other zero’s in the encircled zero’s row.

N.B: The number of encircled zero’s must be equal to the number of rows/columns,
that is, all jobs must be assigned to all machines by assigning one job to one
machine.

3.2) If the minimum number of lines required covering all zeros is not equal to the
number of rows identify the smallest number from the uncovered numbers. If there are
more than one smallest numbers, just select any one of them. Let θ be the smallest
number. Make the following changes on the column reduction table and draw a new
table.

i. Add θ to those numbers at the intersection of two lines (i.e numbers covered by a
vertical and horizontal line)
ii. Subtract θ from the uncovered numbers
iii. Leave numbers that are crossed out by only one line as they are.

Step 4: Repeat Step 3 in subsequent tables until the optimality condition is satisfied.

In our example, the minimum number of lines required to cover all the zero’s in the
column reduction table is 3 which is equal to the number of rows. Therefore, optimal
assignment can be made (indicated by the bold 0’s in the column reduction table above)
as follows:

75
  We assign job 1 to machine 1; job 2 to machine 3, and job 3 to machine 2.
 Total cost is 5+12+13 = 30.

Hungarian Method- Example 2

Consider the following example where 4 jobs are to be assigned to 4 machines.

Processing time (in minutes) for each job in each machine is provided in the table.

Table 0

Machines

Jobs 1 2 3 4 Row
minimum
A 1 4 6 3 1
B 9 7 10 9 7
C 4 5 11 7 4
D 8 7 8 5 5

Required: Find the optimum assignment schedule by using the Hungarian method

Solution

Step 1. Row reduction table: Table 1

Machines

Jobs 1 2 3 4
A 0 3 5 2
B 2 0 3 2
C 0 1 7 3
D 3 2 3 0
Column 0 0 3 0
Minimum

Step 2. Column reduction table: Table 2

76
 Machines

Jobs 1 2 3 4
A 0 3 2 2
B 2 0 0 2
C 0 1 4 3
D 3 2 0 0

 θ= 1

 The minimum number of lines required to cover all the 4 zero’s in the column
reduction table is 3, which is less than 4 (i.e the number of rows). Thus a
feasible assignment is not possible at this moment.
 Apply step 3.2 in the column reduction table. The minimum uncovered
number (θ) is 1. After applying step 3.2 the following table results

Table 3

Machines

Jobs 1 2 3 4
A 0 2 1 1
B 3 0xx 0 2
C 0x 0 3 2
D 4 2 0xxx 0

 Now a minimum of 4 lines (which is equal to number of rows) is required to

cover all zeros. Optimality condition is satisfied.

 Assignment should be made by first checking the number of 0’s in each

row. Row 1 has only one zero, so that 0 is encircled (indicated by bold in
the table above) and the 0 at Cell31 is cancelled (0x).
 When the 0 in row 3 is cancelled, only 1 zero will be left in the row;
encircle the remaining zero and cancel the 0 at Cell22 (0xx).
 When the 0 at Cell22 is cancelled, only 1 zero will be left in the row;
encircle the remaining zero and cancel the 0 at Cell43 (0xxx).
 Finally, encircle the remaining 0 at Cell44.
 Note that there is only one encircled (bold) zero in each row and each column.
 Thus the optimal assignment schedule is:
 Job A to machine 1; job B to machine 3;job C to machine 2, and job D to
machine 4
 Total processing time=1+10 5+5 =21 minutes.

3.8 Special Cases in Assignment Problems

77
Dear learner! Like transportation problems assignment problems can have the following
special cases:

1. Unbalanced assignment problems

2. Multiple solutions in assignment
3. Restricted Assignment
4. Maximization Assignment problems

3.8.1 Unbalanced Assignment Problems

The Hungarian method of assignment requires that the number of columns and rows in
the assignment matrix be equal. However, when the given cost matrix is not a square
matrix, the assignment problem is called an unbalanced problem. In such cases a dummy
row (s) or column (s) are added in the matrix (with zeros as the cost elements) to make it
a square matrix. After making the given cost matrix a square matrix, the Hungarian
method is used to solve the problem.

Example: A software company has 3 software programmers to be assigned to write 4

programs. The following table shows the time (in hours) required by each programmer to
write each program.

Programs

Programmer 1 2 3 4
John 4 1.5 2 3
Kumar 2 2 1 3
Tut 2.5 3 1.5 1

Required: Find the optimum assignment schedule by using the Hungarian method.

Solution.

Step 0. Add dummy row to balance the problem.

Programs

Programmer 1 2 3 4
John 4 1.5 2 3
Kumar 2 2 1 3

78
 Tut 2.5 3 1.5 1
Dummy 0 0 0 0

Step 1. Row reduction table.

Programs

Programmer 1 2 3 4
John 2.5 0 0.5 1.5
Kumar 1 1 0 2
Tut 1.5 2 0.5 0
Dummy 0 0 0 0

Step 2. Column reduction table

Programs

Programmer 1 2 3 4
John 2.5 0 0.5 1.5
Kumar 1 1 0 2
Tut 1.5 2 0.5 0
Dummy 0 0 0 0

Optimum Assignment: John to Program 2, Kumar to Program 3, and Tut to Program 4.

Program 1 will not be written.

Total time taken to write the 3 programs: 1.5+1+1=3.5 hours.

3.8.2 Multiple Optimal Solutions in Assignment

Multiple solutions arise when, at step 3 of assignment, there are more than one 0’s in
more than one row and column of the optimal assignment table. Such situation
indicates multiple optimal solutions with the same optimal value of objective function
(total cost, processing time, etc). In such cases the more suitable solution may be
considered by the decision-maker.

Example: Solve the following assignment problem by the Hungarian method and show
that it has multiple solutions. Check your answer below. Processing time (hours) of jobs
in machines is given.

Machines

79
 Jobs 1 2 3
A 2 4 6
B 5 3 3
C 3 2 2

Solution

Step 1. Row reduction table

Machines
Jobs 1 2 3
A 0 2 4
B 2 0 0
C 1 0 0

Step 2. Column reduction table…Optimal table

Machines
Jobs 1 2 3
A 0 2 4
B 2 0 0
C 1 0 0

 In the optimal table, there are two 0’s in two rows (Row 2 and Row 3) and two
columns (Column 2 and Column 3) at the same time, indicating that the problem
has multiple solutions. There are two possible assignments in this case.

Optimal Assignment I:

 Job A to machine 1; job B to machine 2;job C to machine 3.

 Total processing time=2+ 3+2 =7 hours.

Optimal Assignment II:

 Job A to machine 1; job B to machine 3;job C to machine 2.

 Total processing time=2+ 3+2 =7 hours.

3.8.3 Restricted Assignment Problems

In certain instances, it may happen that a particular match or pairing may be either
undesirable or otherwise unacceptable. For example, an employee may not have the
skills necessary to perform a particular job or a machine may not be equipped to handle a
particular operation. In such cases, the cost of performing that particular activity by a

80
particular resource is considered to be very large (written as M or  ) so as to prohibit
the entry of this pair of employee-job into the final solution.

 When such a restriction is present, a letter (M) is often placed in the table in the
that contains M is ignored throughout the analysis. That is, M is not used in any
reductions, nor is any value added to it or subtracted from it during the course of
the analysis.

Example: Assume that 3 workers-Alemayehu, Tigist and Tiruwork-are to be assigned to

3 departments of a manufacturing organization- Assembly, Quality control, and
Packaging. However, Tigist cannot be assigned to Assembly department because of the
labor intensiveness of the job and her pregnancy. Because of differences in skill,
experience and educational background the payments of the employees vary. The table
below shows the daily wages (in Birr) for the three workers in the departments.

Departments
Employee Assembly Quality Packaging
control
Alemayehu 50 45 48
Tigist M 46 50
Tiruwork 55 52 50

Required: Find the minimum-cost assignment schedule by using the Hungarian

method.

Solution
Step 1. Row reduction table…Table I

Departments
Employee Assembly Quality Packaging
control
Alemayehu 5 0 3
Tigist M 0 4
Tiruwork 5 2 0

Step 2. Column reduction table….Table II

Departments
Employee Assembly Quality Packaging
control
Alemayehu 0 0 3
Tigist M 0 4
Tiruwork 0 2 0

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  A minimum of 3 lines, which is equal to the number of rows, are required to
cover all 0’s . Therefore, optimal assignment can be made.
 Optimal assignment: Alemayehu to Assembly, Tigist to quality control, and
Tiruwork to packaging.
: Minimum daily wage (for the 3 workers)= 50+46+50= 146
Birr.

3.8.4 Maximization Assignment Problems

There may arise situations when the assignment problem calls for maximization of profit,
revenue, etc as the objective function. Such problem may be solved by converting the
given maximization problem into a minimization problem by the following procedure:

i. Find the largest number (profit, revenue, etc) in the entire table.

ii. Subtract each entry in the original table from the largest profit coefficient and
develop opportunity cost table.

The transformed assignment problem so obtained can be solved by using the Hungarian
method.

Example: Assume that the head of management department wants to assign 3 instructors
to 3 courses. From previous studies, the department head determines that average score of
students taking the 3 courses offered by the instructors are as given in the table below.

Required: Find the optimal assignment schedule that maximizes the average score of
students in the 3 courses

Course
Instructor 1 2 3
A 60 65 75
B 80 70 67
C 67 82 73

i. Find the largest score in the entire table. It is 82.

ii. Subtract each entry in the original table from the largest score (from 82) and
develop “ opportunity cost” table.

“Opportunity cost” table

Course
Instructor 1 2 3
A 22 17 7

82
 B 2 12 15
C 15 0 9

 Row reduction table

Course
Instructor 1 2 3
A 15 10 0
B 0 10 13
C 15 0 9

 Column reduction table

Course
Instructor 1 2 3
A 15 10 0
B 0 10 13
C 15 0 9

 A minimum of 3 lines are required to cover all zero’s, indicating that optimal
assignment can be made.

Optimal Assignment: Instructor A to Course 3, Instructor B to Course 1 , and

Instructor C to Course 2. Total score= 75+80+82=237; And Average
score=237/3=79.

83
 UNIT SIX
GAME THEORY
UNIT OBJECTIVES
After a thorough study of this unit, you will be able to:
 Define strategy
 Understand the nature of game theory
 Develop acquaintance with types of games
 Define saddle point
 Explain pure strategies
 Comprehend mixed strategies
 understand dominance property

UNIT INTRODUCTION
Decision makers are often faced with situations of conflict and competition which
involve two or more rational opponents. Their results are not solely dependent on their
own decisions but are influenced by what the rival does. War between nations, sports
competitions, market rivalry and competition, negotiations between trade unions and the
management and so on are typical of such situations. The aim of each participant in such
conflicts would be to ascertain what each one can expect to gain in view of the opposing
interests. The theory of games provides an insight in to such problems.

Cognizant to the above fact, we need to be well acquainted with the fundamentals of
game theory in making winning decisions in case of conflicting situations in the business
environment. This unit is devoted to explain game theory to make you a better decision
maker by being watchdog of competitions. To this end, the unit is organized in to two
sections. In the first section, you will learn about assumptions, definitions and
classifications of games; pure strategies and saddle points. The second section is devoted
to mixed strategies & the rule of dominance.

Section One: Assumptions, Definition, Classification of Games and

Pure Strategies
Section Objectives:
Up on completing this section, you will be able to:
- Elaborate basic assumptions of games
- Define game theory
- Understand the types of games
- Determine saddle points
- Differentiate pure strategies
Section Overview:
6.1 Assumptions and Definitions games
6.2 Classification of games
6.3 Pure strategies and saddle point

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 6.1 Assumptions and Definitions of Games
Competition is the watch word of modern of life. We say that a competitive solution
exists if two or more individuals make decision in a situation that involves conflicting
interest in which the outcome is controlled by the decision of all the concerned parties. A
competitive solution is called a game. The term game represents a conflict between two
or more parties. A situation is called a game when it possesses the following properties:
I. The number of competitors is finite.
II. There is a conflict in interests between the participants.
III. Each of the participants has a finite set of possible courses of action.
IV. The rules governing these choices are specified and known to all players, a play of
the game results when each of the players chooses a single course of action from the
courses available to him/her.
V. The outcome of the game is affected by the choices made by all the players.
VI. The outcome for all specific set of choices by all of the players is known in advance
and numerically defined.
The outcome of a play consists of a particular set of courses of action undertaken by the
competitors. Each outcome determines a set of payments (Positive, Negative or Zero) one
to each competitor.

Game theory, therefore, is theory that examines the choices of optimal strategies in
conflict situations, where it is concerned with general analysis of strategic interactions.
Economists call game theory as psychologists’ call the theory of social situations, which
is an accurate description of what game theory is about. Most researches in game theory
focuses on how groups of people interact. There are two main branches of game theory:
i.e. Co-operative and non co-operative game theory. Cooperation is more likely to occur
in repeated or many move games, which are more realistic in the real world. In such
games (repeated games) the best strategy is that of to do to your opponent what he/she
has done to you. This is begun by cooperating and continuing to cooperate as long as
your opponent cooperates. If a given firm betrays you after some time he/she agreed to
cooperate, the next time the other opponent waits to betray back. So that for any optimal
cooperation to be applied there must be a hope that cooperation will induce further
cooperation in the future. Among other conditions, it must be assumed that the game is
repeated indefinitely, or at a least a very large and uncertain number of times. If the game
is played for a finite number of times, each firm has an incentive to cooperate in the final
period because it cannot be harmed by retaliation. Each firm knows thus and will not
cooperate on the next- to- the last move. In an effort to gain a competitive advantage by
being the first to start cheating, the entire situation will be unravel (there will be no
confusion) and cheating begins from the first move.
The following conditions should be met other than infinite number of games for an
optimal cooperative game type to be applied. These are:
 Stable set of players for the cooperative behavior to develop.
 A small number of players to keep track of what each are doing.
 Each firm can quickly detect and is willing and able to quickly retaliate for
cheating by other firms.
 Demand and cost conditions are relatively stable.

85
Under conflicting situations, the theory of game generally concerned with the denial
analysis of strategic interactions where we apply it to the study of economic behavior in
different market situations like oligopolistic markets.
Non- Cooperative game theory deals largely with how intelligent enough individuals
interact with one another in an effort to achieve their own goals. Most of the time,
competitive rival industrial, manufacturing as well as service rendering firms compete
one another and try to choose their optimal strategies in non- cooperative styles and select
their optimal strategies given the strategies chosen by the competitive firms.

The term strategy is defined as a complete set of plan of actions specifying precisely
what the player will do under every possible future contingency that might occur during
the play of the game. That is, strategy of a player is the decision rule he/she uses for
making a choice from his/her list of courses of actions. Strategy can be classified as:
1. Pure strategy
2. Mixed strategy
A strategy is called pure if one knows in advance of the play that it is certain to be
adopted irrespective of the strategy the other player might choose. The optimal strategy
mixture for each player may be determined by assigning to each strategy, its probability
of being selected. These strategies so determined are called mixed strategy because they
are probabilistic combination of available choices of strategy. Mixed strategy is denoted
by the set S=(x1, x2 ….xn); where xj is probability of choosing the course j such that
xj > 0, for j=1, 2…..n and x1 + x2+…… + xn = 1.
It is evident that pure strategy is a special case of mixed strategy. In the case where all
but one xj is zero, a player may be able to choose only n pure strategy but he has an
infinite number of mixed strategies to choose from.

 Pay off matrix of a game :

Payoff is the outcome of playing the game that generates rewards or benefits for the
player. The pay of matrix is a table that gives the payoff from all strategies open to the
firm and the rivals’ responses. Moreover, a payoff matrix is a table showing the amount
received by the player named at the left hand side after all possible plays of the game.
The payment is made by the player named at the top of the table. A pay off table
represents the conditional values associated with all the possible combinations of the acts
and the events. If player A has m-courses of actions and player B has n- courses of
actions, then a payoff matrix can constructed using the following steps.
i. Row designations for each matrix are the course of actions available to A.
ii. Column designations for each matrix are the course of actions available to B.
iii. With a two person zero sum game, the cell entries in B’s payoff matrix will be
the negative of the corresponding entries in A’s payoff matrix and the matrices
will be shown below:

86
 Player B
1 2 3 …….j………...n
a11 a12 a13…. .a1j….. …..a1n
Player A a21 a22 a23 …..a2j ……....a2n A’s payoff matrix

a31 a32 a33.......a3j..……...a3n

: : : : .
am1 am2 am3…...amj……....amn

Player B
1 2 3 j n
1 -a11 - a12 a13……-a1j……..-a1
Player A 2 -a21 -a22 -a23…...-a2j… …...-a2
: : : : : ;
i -ai1 -ai2 -ai3……-ai .......-ain

m -am1 -am2 -am3…..-amj…..-amn

B’s payoff matrix

6.2 Classification of Games

Games are classified according to the number of players involved, the sum of the gains
and losses, and the number of strategies employed in the game.
1. Two – person games and n-person games: In two person games, the players may
have many possible choices open to them for each play of the game, but the
number of players remains only two. Hence it is called a two person game. In case
of more than two persons, the game is generally called n-person game.
2. Zero Sum Game: A zero sum game is one in which the sum of the payment to all
the competitors is zero for every possible outcome of the game is in a game if the
sum of the points won equals the sum of the points lost.
3. Two person zero sum game: A game with two players, where the gain of one
player equals the loss to the other is known as a two person zero sum game. It is
also called a rectangular game because their payoff matrix is in the rectangular
form. The characteristics of this game are :
i) Only two players participate in the game.
ii) Each player has a finite number of strategies to use.
iii) Each specific strategy results in a payoff.
iv) Total payoff to the two players at the end of each play is zero.

87
 6.3 Pure Strategies: Games With saddle Point

6.3.1 The Maximin – Minimax Principles

This principle is used for the selection of optimal strategies by two players. Consider two
players A and B; A is a player who wishes to maximize his Minimum gain in the strategy
to minimize his losses. Since A would like to maximize his minimum gain, we obtain for
player A, the value called Maximin value and the corresponding strategy is called the
Maximin strategy.

On the other hand, since player B wishes to minimize his losses, a value called the
minimax value which is the minimum of the maximum losses is found. The
corresponding strategy is called the minimax strategy. When these two are equal
(Maximin value = Minimax value), the corresponding strategies are called optimal
strategy and the game is said to have saddle point. The value of the game is given by the
saddle point.

The selection of Maximin and Minimax strategies by A and B is based upon the so called
Maximin-Minimax principle which guarantees the best of the worst results.

Saddle point: a saddle point is a position in the payoff matrix where the maximum of row
minima coincides with the minimum of column maxima. The payoff at the saddle point is
called the value of the game.

We shall denote the Maximin value by ұ, the minimax value of the game by ŷ and the
value of the game by Y.

Note: i.) A game is said to be fair if;

Maximin value = Minimax value = 0, i.e., if ұ = ŷ = 0
ii.) A game is said to be strictly determinable if;
Maximin value = Minimax value ≠ 0; ұ = ŷ = Y.

Example 6.1: Solve the game whose pay off matrix is given by:

Player B

Player A

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Solution: Player B
Row minima

Player A
Column maxima 1 5 1

Maxi (minimum) = Max (1, -4, -1) = 1

Mini (maximum) = Min (1, 5, 1) = 1
That is, Maximin value ұ = 1= Minimax value ŷ
Therefore; Saddle point exists. The value of the game is the saddle point which is 1. The
optimal strategy is the position of the saddle point and is given by (A1, B1).

Example 6.2:
Determine which of the following two people zero sum games are strictly determinable
and fair. Given; the optimum strategy for each player in the case of strictly determinable
games.
Player B
(a) Player B (b) B1 B2
B1 B2 A1 1 1
A1 -5 2 Player A
Player A
A2 -7 -4 A2 4 -3

Maxi (minimum) = ұ = max (-5,-7) = -5

Mini (maximum) = ŷ = min (-5, 2) = -5

Solution:
a)
Player B

B1 B2 Row minima

Player A A1 -5 2 -5

A2 -7 -4 -7
Column maxima -5 2
Since ұ = ŷ = -5, the game is strictly determinable, there exist a saddle point= -5. Hence
the value of the game is -5. The optimal strategy is the position of the saddle point given
by (A1, B1).

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 Player B
b) B1 B2 Row minimum
A1 1 1 1
Player A
A2 4 -3 -3
Column maximum 4 1

Maxi (minimum) = ұ = max (1,-3) = 1

Mini (maximum) = ŷ = min (4, 1) = 1
Since ұ = ŷ = 1 ≠ 0, the game is strictly determinable. The value of the game is 1.The
optimal strategy is (A1, B2).

Exercise 6-1

1. Determine which of the following two people zero sum games are strictly
determinable and fair. Give the optimum strategies for each player in the case of strictly
determinable games.
a) b)
Player B Player B

Player A 5 0 Player A 0 2

0 2 -1 4

2. For the game with payoff matrix;

Player A
Player B -1 2 -2

6 4 -6

Determine the best strategies for players A and B and also the value of the game for
them. Is this game (i) fair, (ii) strictly determinable?
3. Define a game.
4. Explain a saddle point.
5. What is meant by Minimax and Maximin?
6. What is a pure strategy?

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Section Two: Mixed Strategies and Rule of Dominance
Section Objectives:
Up on completing this section, you will be able to:
- Distinguish mixed strategies
- Identify dominance property
- Determine value of games without saddle point
Section Overview:
6.4 Mixed Strategies: Games Without saddle point
6.5 Dominance property

6.4 Mixed Strategies: Games without Saddle Points

A game without saddle point can be solved by various solutions methods.

6.4.1 2x2Games without saddle point

Pure strategy is a strategy in which each agent marked a specific choice and stick to it. If
the agents are allowed to randomize their strategies to assign probabilities to each choice
according to the probability, we call this strategy a mixed strategy.

Example 1. Consider a 2x2 two person zero sum game without any saddle point having
the payoff matrix for player A;
B1 B2
A1 a11 a12

A2 a21 a22
The optimal mixed strategies;

SA= A1 A2 and SB =
B1 B2
P1 P2
q1 q2
Where p1 = a22 - a21 ; p1+ p2=1 → p2 = 1- p1
(a11 + a22) - (a12 + a21)

q1 = a22 - a11 ; q1 + q2 = 1 → q2 = 1-q1

(a11 + a22) - (a12 + a21)

The value of the game is 8 = a11a22 - a12a21

(a11 + a22) - (a12 + a21)

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Example 6.4:
Solve the following game and determine the value of the game.

B
4 -4
A
-4 4

Solution: It is clear that the payoff matrix does not possess any saddle point. The players
will use mixed strategies. The optimum mixed strategy for the players are :

SA= A1 A2 , P1 + P2 = 1 and SB =
B1 B2 , q1 + q2 = 1
P1 P2
q1 q2

p1 = a22 - a21 = 4 – (-4) = 8/16 = ½

(a11 + a22) - (a12 + a21) (4 + 4 – (-4-4)

p2 = 1 – p1 = 1 – ½ = ½

q1 = a22 - a11 = 4 – (-4) = 8/16 = ½

(a11 + a22) - (a12 + a21) 4 + 4 – (-4-4)

q2 = 1- q1 = 1- ½ = ½
Therefore; the optimum strategy is SA = (½, ½); SB = ( ½ , ½ )
The value of the game is y = a22 a11 - a12a21 = (4x4) – ( -4 x (-4) ) = 0
(a11 + a22) - (a12 + a21) (4 + 4) – (-4+ (-4))

Example 6.5:
In a game of matching coins with two players suppose A wins one unit of value when
there are two heads, wins nothing when there are two tails and losses ½ unit of value
when there are one head and one tail. Determine the payoff matrix, the best strategies for
each player and the value of game to A.

Solution:
The payoff matrix for the player A is given by:

Player B
H T
H 1 -1/2
Player A
T -1/2 0

Let this be: B1 B2

A1 a11 a12

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 A2 a21 a22

The optimum mixed strategies;

SA= A1 A2 and SB =
B1 B2
P1 P2
q1 q2

Where p1 = a22 - a21 ; p1+ p2=1 → p2 = 1- p1

(a11 + a22) - (a12 + a21)
= 0 – (-1/2)
1+ 0 – (- ½ – ½ )
= ½ /2 = ¼
p2 = 1 – p1 = 1 – ¼ = ¾

q1 = a22 - a11 ; q1 + q2 = 1 → q2 = 1-q1

(a11 + a22) - (a12 + a21)

= 0 – (- ½ )
1+ 0 – (- ½ – ½ )
= ½ /2 = ¼
q2 = 1 – q1 = 1 – ¼ = ¾

The value of the game is =

1x 0 – (- ½ ) (- ½ )
1 + 0 – (- ½ - - ½)
y = - ¼ /2 = - 1/8
The optimum mixed strategy is given by:
SA = (¼, ¾); and SB = (¼, ¾)

6.5 Dominance Property

Sometimes it is observed that one of the pure strategies of either player is always inferior
to at least one of the remaining ones. The superior strategies are said to dominate the
other inferior ones. In such case of dominance, we can reduce the size of payoff matrix
by deleting those strategies which are dominated by others. The general rule for
dominance is:
i) If all elements of a row, say kth row, are less than or equal to corresponding
elements of any row other row say rth row, then kth row is dominant by the rth
row.
ii) If all elements of a column, say kth column, are less than or equal to
corresponding elements of any other column say rth column , then the kth
column is dominated by the rth column.
iii) Dominated rows and columns may be deleted to reduce the size of the payoff
matrix as the optimal strategies will remain unaffected.

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 iv) If some linear combinations if some rows dominates ith row, then the ith row
will be deleted. Similar arguments follow for column.

Example 6
Player B
3 -2 4
Player A -1 4 2
2 2 6

Solution:
In the given payoff matrix, the entire elements in the third column are greater than or
equal to the corresponding elements in the first column. Therefore, column 3 is
dominated by first column. Delete column 3. The reduced payoff matrix is given by:
Player B
3 -2
Player A -1 4
2 2

Since no row (or column) dominates another row (or column). The 3 x 2 game could now
be solved in simplest ways.

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 Unit Summary

The theory of games deals with decision making under conditions of competition or
conflict. The players have the same objective but conflicting interests. In the world of
business, striving for greater market share by the different competitors is a typical game
situation. Games are classifies according to the number of players and according to
whether the gains of one player are equal to the losses of the other or not. The simplest
form of game is the two-person zero sum game , implying that there are only two
participants who may be individuals , groups or organizations, and that the gains of one
are the losses of the other.
An optimal strategy guarantees a player the best payoff regardless of the strategies
adopted by the opponent. Two-person zero sum games have pure strategies for the
players if a saddle point exists, that is a single optimal strategy for both the players.
Where no saddle point exists, players have to use mixed strategies. A strategy is said to
dominate another if the payoffs it yields are higher than the payoffs of the other strategy
no matter what strategy the opponent adopts. Dominated strategies can be eliminated
from the game.
Game theory has limited practical use at present because of the assumptions made. These
are not totally realistic. Situations are not as simplistic. When there are more than two
players, some of them may negotiate or collaborate against another player. Such
situations are complex and cannot be dealt with the game theory in its present form.

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 Exercise 6-2

1. What is a mixed strategy?

2. Explain dominance property.
3. For a game with the following payoff matrix, determine the optimal strategy and
the value of the game.
B
6 -3
A
-3 0

4. Compute the value of the game given by :

B
2 5
A
4 1

5. Solve the following game ;

Player B
1 7 2
Player A 6 2 7
5 1 6

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 References

1. W. J. Stevenson (1991); Introduction to Management Science, Richard D. Irwin

Inc.
2. J K Sharma (2003): Operations Research, Theory and Application,
Second Edition.
3. M.P. Gupta R.B. Khanna (2004), Quantitative Techniques for Decision
Making New Delhi.
4. Anderson, Sweeney, and Williams (2003), An Introduction to
Management Science: Quantitative Approaches to Decision Making, 5th
ed. west publishing. Co.
5. Gupta Pram Kumar (2007), Operations Research, S. Chard and Company
LTD. New Delhi, India.
6. Jeffrey D. Camm and James R. Evans; Management Science: Modeling,
Analysis and Interpretation, South Western College Publishing.
7. Harvey M. Wagner; Principles of Operations Research, Prentice Hall
International Inc.
8. Kant Swamp, P.K. Gupta and Man Mohan; Operations Research;
McGraw Hill International.

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