OR and Supply Chain Management

Hillier, Liberman; Operations Research Levi D, E Simchi, Keminsky P; Designing and Managing Supply Chain; TMH Chopra, Meindil and Kalra; SCM-Strategy, planning and Operation; Pearson Vollman, Berry et al: Mfg Planning and Control for SCM; TMH Salvendi G; Hand Book of Industrial Engg; Wiley

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Prof. S. N. VARMA

Why, What And How Of Subject X

To Understand a subject we must ask three basic questions - Why, What and How?
Part of the answer to all questions such as Why to learn the subject X is that investing time and efforts in learning subject X will enable you to understand, appreciate and develop skills in the subject, and there is high likelihood (probability) of your participation, contribution and taking decisions in subject X which lead to effective and economically efficient operations of an organization. Remaining part of the question Why is specific to the subject and it may be answered along with What is subject X?. During discussions of definition, objectives, historical background, importance and other topics, why and what are both answered; hence many books do not start with why?
Thus there is no need to answer Why subject X?, only we have to answer:
What

is subject X?, to understand Structure and design of the subject; and

How subject X works? for Process planning, control, implementation and auditing.

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Operations Research
Why to study OR? Roots and History The term OR was first used at about 1939, but Sciences evolve over a time and their terminology changes. (Newton in his time was not known as physicist but as a natural philosopher) Credit for fast development of OR goes to World War I, II. Military technology developed faster than it can be absorbed and military executives turned to scientist for aid. In England a team of scientist was drawn to aid in tactics & strategies of air defense with the then new radar. This team got considerable success and demand spread to western allies. Since the team was assigned to military operations, so the body of knowledge known as Operations Research. These persons tickled from military to industry in 1950s. OR Society of America was formed in 1953 & International OR Society in 1957. Need of OR functions began to develop after first Industrial revolution as a consequence of single man advent replaced by organizations, division/ specialization of work, conflict in objectives of these subsystems and need of coordinating these specialized functions.
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Need for OR
The industrial need for OR:
Industr ial growth Division/ segment of work Specialization & conflict of objectives Executive need for co ordination System view OR/ Quanti tative tech.

Where OR is applicable/ Scope of OR:

1. 2. 3. 4. 5. 6. Defense: Efficient use of resources, best course of action, allocation Industry: Co ordination of functions, investment, inventory, maint Government: Social policies, Planning, framing future economy Agriculture: Optimum utilization of land, water, fertilizers, insecticide Hospitals: Waiting lines, Inventory, administration, scheduling. Transport: Allocation and transshipment, waiting lines
Prof. S. N. VARMA 4

25-Nov-12

What is OR?
Objectives: It is to provide scientific basis to decision makers for solving the problems involving integration of the interacting components of the organization system. It uses different disciplines to find optimum solution in the best interest of organization as whole Def: 1. Operation research is research into operations (J. Steinhardt). 2. OR is scientific approach to problem solving for executive mgt. 3. Or is scientific method of providing executive mgt with Quantitative basis for decisions regarding the operations. So named QT for Mgt. 4. OR is - the application of scientific methods - by interdisciplinary teams - to problems evolving control of organized man-m/c systems - to provide solutions which best serve organization as a whole Characteristics: System oriented; Quantitative scientific methods; Use of interdisciplinary teams; Uncovering of new problems

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How OR works?
1. 2. 3. 4. 5. 6. Phases/ methodology of OR and Modelling: Search, define and formulate problem, list alternatives to evaluate. Make hypothesis, construct model and validate with the real system Experiment and deduct results leading to model conclusion & theory Evaluate alternatives & compare/ verify with real system attributes Select best solution, establish controls and implement. Post audit
Formulate/ Inductive generalize Real System Draw conclusions Real system attributes
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Hypothesis and modeling Experiment, deductions Model conclusions, theory

6

Test theory, verify

Prof. S. N. VARMA

Types of Models
Model types at abstraction level:
1. Iconic or physical models e.g. clay, wooden-models of plane, car, bldg 2. Analogue or schematic models e.g. graphs, contours, pie diagram 3. Symbolic or mathematical models e.g. algebraic, differential equation Mathematical models used in OR:

Deterministic models

Allocation: LPP, IPP, Goal Prog., TPP, Assignment, Sequencing, Dynamic P Network models; Deterministic Inventory models Non linear prog.; Capital Investment; Replacement Optimization

Probabilistic models

Forecasting Decision theory, games and competitive strategy. Queuing and waiting models Probabilistic Dynamic programming Probabilistic Inventory Simulation modeling
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Types of solutions
Most of OR models can be represented by a set of equations: Utility function, U=F(X,Y); where X are control var., Y uncontrolled var./ param. Subject to resource constraints f (X,Y) < > = 0. Deductive Method: If we can deduct (find out) values of X as a function of known values of Y, then it is a solution to F(X,Y). Many times this method fail because: (i)lack of closed expression (strict equality) for f, U (ii) complexity of constraint functions, OR (iii) large number of variables (now use computer) Many other time we have set of rules to find U for any set of X, Y (Simplex). Iterative method that successively improve sol. are used in such conditions. eg Deterministic allocation (Y are Ci , Bi , Aij and X are Xi ); NetWrk models Inductive method: Change X values in logical manner and observe effect on U. Simulation, Operational gaming, Experimentaly optimize, Metaheuristic search algorithms for polynomial and combinatorial prob. If Y is selected by nature use Decision model; if Y is selected by intelligent opponent then Game theory/ competitive strategy models are used.
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Introduction to Linear Programming 1

A Linear Programming model seeks to maximize or minimize (Optimize) a linear function, subject to a set of linear constraints. The linear model consists of the following components:
A set of decision variables, parametric constants. An objective function. A set of constraints/ restrictions, (all valuable resources are restricted, if not, then no value)

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Introduction to Linear Programming 2

Assumptions of the LPP models
The parameter values are known with certainty. The objective function and constraints exhibit linear relationships. There are no interactions between the decision variables (additivity assumption, effect of x and 2y equal effect of x+2y, separately or simultaneously). The Continuity assumption: Variables can take on any value within a given feasible range.

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Introduction to Linear Programming 3

The Importance of Linear Programming
Many real world problems lend themselves to LPP modeling. Many real world problems can be approximated by linear models. There are well-known successful applications in: Manufacturing Marketing Finance (investment) Advertising Agriculture

There are efficient solution techniques that solve LPP. The output generated from LPP provides useful what if analysis.
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Generalized LPP Model

Max/min z = c1x1 + c2x2 + ... + cnxn a11x1 + a12x2 + ... + a1nxn (, =, ) b1 a21x1 + a22x2 + ... + a2nxn (, =, ) b2 : am1x1 + am2x2 + ... + amnxn (, =, ) bm

subject to:

xj = decision variables bi = constraint levels cj = objective function coefficients aij = constraint coefficients
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A Prototype Example
Galaxy Company manufactures two toy doll models: Space Ray and Zapper.
Cost/ profit parameters Profit of Space ray doll per dz. = 8 units Profit of Zapper doll per dz = 5 units Resources are limited/ constrained to 1000 Kgs. of special plastic. 40 Hrs of production time per week. Technological input/ constraints Space Rays need 2 kg of plastic and 3 minutes of labor/ dz. Zappers requires 1 Kg of plastic and 4 minutes of labor/ dz. Marketing constraints Total production cannot exceed 700 dozens. Number of dozens of Space Rays cannot exceed number of dozens of Zappers by more than 350.

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The Galaxy LPP Model

Decisions variables Objective Function:
X1 = Weekly production level of Space Rays (in dozens) X2 = Weekly production level of Zappers (in dozens). Weekly profit, to be maximized

Max 8X1 + 5X2 (Weekly profit) Subject to 2X1 + 1X2 1000 (Plastic, Kg.) 3X1 + 4X2 2400 (Production Time, mts/wk) X1 + X2 700 (Total production) X1 - X2 350 (Mix) Xj> = 0 for j = 1,2 (Non-negativity)

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14

Graphical Analysis the Feasible Region

X2

The non-negativity constraints

X1

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Graphical Analysis the Feasible Region

X2

1000

The Plastic constraint 2X1+X2 1000

Total production constraint: X1+X2 700 (redundant)

700 500

Infeasible
Production Time 3X1+4X2 2400

Feasible
500
700 X1

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Graphical Analysis the Feasible Region

X2

1000

The Plastic constraint 2X1+X2 1000 Total production constraint: X1+X2 700 (redundant)

700 500

Infeasible
Feasible
500
700

Production Time 3X1+4X2 2400

Production mix constraint: X1-X2 350

X1

Interior points. Boundary points.

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Extreme points.
17

The search for an optimal solution

X2

Start at some arbitrary profit, say = 1,000 Then increase the profit, if possible...

L(125,0;0,200)

1000 700 500

...and continue until it becomes infeasible

Profit= 4360

X1
18

500
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Summary of the optimal solution

Space Rays Zappers Profit production hours. Total production is only 680 (not 700). Space Rays production is 40 dozens Less than = 320 dozen = 360 dozen = 4360

This solution utilizes all the plastic and all the

Zappers production.

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19

Feasible Area is always a convex polygon and optimal solutions is at Extreme points
If a linear programming problem has an optimal solution, any one of extreme points is optimal.

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Multiple optimal solutions

For multiple optimal solutions to exist, the objective function must be parallel to one of the constraints

-Any weighted average of optimal solutions is also an optimal solution.

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Sensitivity Analysis of Optimal Solution

Is the optimal solution sensitive to changes in input parameters? Possible reasons for asking this question:

Parameter values used were only best estimates. Dynamic environment may cause changes. What-if analysis may provide economical and operational information. Sensitivity analysis seeks to find range of cj ,bi and aij which does not change solution values of xj , though value of objective function may change. It also seek to find shadow prices of constraints (duality)

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Sensitivity Analysis of cj , bi
Range of Optimality of cj The optimal solution will remain unchanged as long as Any one objective function coefficient lies within its range of optimality There are no changes in any other input parameters. The value of the objective function will change if the coefficient multiplies a variable whose value is nonzero. Shadow price Assuming there are no other changes to the input parameters, the change to the objective function value per unit increase to a right hand side of a constraint is called the Shadow Price or the value of the constraint-resource

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Sensitivity Analysis, feasibility range of cj

1000 X2
Keeping c2 at 5; 3.75< c1 <10 does not change sol. Keeping c1 at 8; 4< c2 <10.66 does not change sol.

500

X1
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500

800

24

The Plastic constraint

1000

Shadow Price graphical demonstration . When more plastic becomes available (the
X2

plastic constraint is relaxed), the right hand side of the plastic constraint increases.

Maximum profit = 4360 Before

500

Maximum profit = 4363.4 After Shadow price = 4363.40 4360.00 = 3.40

Solution X1 = 320.8 X2 = 359.4

Production time constraint

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X1 500
Prof. S. N. VARMA 25

Range of Feasibility of bi
Assuming there are no other changes to the input parameters, the range of feasibility of bi is
The range of values for a right hand side of a constraint, in which the shadow prices for the constraints remain unchanged. In this case the solution (X1 , X2 ) also changes. In the range of feasibility the objective function value changes as follows: Change in objective value = [Shadow price][Change in the right hand side value]

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Range of Feasibility of bi
The Plastic constraint
X2

Increasing the amount of plastic is effective until a new constraint becomes active.

1000

Production mix constraint X1 + X2 700

A new active constraint

This is an infeasible solution This is extended possible feasible area
X1

500

Production time constraint

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500

27

Other Post - Optimality Changes

Addition of a constraint. Deletion of a constraint. Addition of a variable. Deletion of a variable. Changes in left - hand side coefficients, aij

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Using Excel Solver for LPP

Click Solver to obtain the following dialog box.
This cell contains the value of the objective function Set Target cell By Changing cells These cells contain the decision variables $B$4:$C$4

$D$6

To enter constraints click

All the constraints have the same direction, thus are included in one Excel constraint.
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$D$7:$D$10

$F$7:$F$10

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29

Using Excel Solver

- Target cell Set
This cell contains the value of the objective function By Changing cells These cells contain the decision variables $B$4:$C$4 $D$7:$D$10<=$F$7:$F$10 $D$6

Click on Options and check Linear Programming and Non-negative.

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Using Excel Solver Optimal Solution

GALAXY INDUSTRIES
Dozens Profit Plastic Prod. Time Total Mix Space Rays 320 8 2 3 1 1 Zappers 360 5 1 4 1 -1 Total 4360 1000 2400 680 -40 Limit <= <= <= <= 1000 2400 700 350

Solver is ready to provide reports to analyze the optimal solution.

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Using Excel Solver Answer Report

Microsoft Excel 9.0 Answer Report Worksheet: [Galaxy.xls]Galaxy Report Created: 11/12/2001 8:02:06 PM

Target Cell (Max) Cell Name $D$6 Profit Total

Original Value 4360

Final Value 4360

Adjustable Cells Cell Name Original Value $B$4 Dozens Space Rays 320 $C$4 Dozens Zappers 360

Final Value 320 360

Constraints Cell Name $D$7 Plastic Total $D$8 Prod. Time Total $D$9 Total Total $D$10 Mix Total

Cell Value 1000 2400 680 -40

Formula $D$7<=$F$7 $D$8<=$F$8 $D$9<=$F$9 $D$10<=$F$10

Status Slack Binding 0 Binding 0 Not Binding 20 Not Binding 390

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Using Excel Solver Sensitivity Report

Microsoft Excel Sensitivity Report Worksheet: [Galaxy.xls]Sheet1 Report Created:

Adjustable Cells Final Reduced Objective Allowable Allowable Cell Name Value Cost Coefficient Increase Decrease $B$4 Dozens Space Rays 320 0 8 2 4.25 $C$4 Dozens Zappers 360 0 5 5.666666667 1 Constraints Cell $D$7 $D$8 $D$9 $D$10 Name Plastic Total Prod. Time Total Total Total Mix Total Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 1000 3.4 1000 100 400 2400 0.4 2400 100 650 680 0 700 1E+30 20 -40 0 350 1E+30 390

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Models Without Unique Optimal Solutions

Infeasibility: Occurs when a model has no feasible point (Excell output solver could not find a
feasible solution)

Unboundness: Occurs when the objective can become infinitely large (max), or infinitely small (min). (Excell output The Set Cell values do not
converge)

Alternate solution: Occurs when more than one

point optimizes the objective function

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34

Infeasible Model

No point, simultaneously, lies both above line 1 and

2

below lines .

2 and 3

1 3
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Unbounded solution

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36

Cost Minimization Diet Problem

Decision variables
X1 -The units of Texfood product in a serving. X2 -The units of Calration product in a serving.

The Model Cost per unit Minimize 0.60X1 + 0.50X2 Subject to 20X1 + 50X2 100 Vitamin A % Vitamin A 25X1 + 25X2 100 Vitamin D provided per unit 50X1 + 10X2 100 Iron X1, X2 0
% required

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The Diet Problem - Graphical solution

10

The Iron constraint

Feasible Region
Vitamin D constraint

Vitamin A constraint

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Cost Minimization Diet Problem

Summary of the optimal solution
Texfood product = 1.5 units (= 3 ounces) Calration product = 2.5 units (= 5 ounces)
Cost = 2.15 per serving. The minimum requirement for Vitamin D and iron are met with no surplus.

The mixture provides 155% more of the requirement for Vitamin A.

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39

Transportation Problem
Transportation problem is a special kind of LP problem in which goods are transported from a set of sources to a set of destinations subject to restrictions on the supply and demand of the source and the destination respectively, such that the total cost of transportation is minimized. Solution of transportation problems is a two phase process:
First phase:

Find an initial feasible solution

2nd phase:

Check for optimality and improve the solution

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Transport problem schematic

a1

S1

D1

b1 b2

D2

ai

Si

Dj

bj

am

Sm

Dn

bn

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Transportation as a LP model
There are mn unknown variables and m+n-1 independent equations (1 less due to balancing)

Minimize : Z cij X ij
i 1 j 1

subject to

X
j 1 m i 1 ij

ij

ai i 1,2,....,m bj j 1,2,.....,n

X
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X ij 0 f or i 1,...m and j 1,..n

Prof. S. N. VARMA 42

Types of transportation problems

Balanced transportation problems Unbalanced transportation problems
m n a b i j i 1 j 1
m n ai b j i 1 j 1

Include a dummy source or a dummy destination having a supply ak or demand bl to convert it to a balanced transportation problem. Where
ak

b
j 1

a
i 1

or bl

a
i 1

b
j 1

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Transportation: a Balanced Problem Ex

Destinations

Supplies
D3 D4

D1 Sources S1 S2 S3

D2

50 65 40

75 80 70

30 40 50

45 60 55

12 17 11

Demand

10

10

10

10

40 \ 40

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Balancing TPP By Dummies Example 2

Destinations

Supplies
D3 D4

D1
Sources S1

D2

50

75

30

45

12

S2
S3 (Dummy- S)

65
40 0 15

80
70 0 10

40
50 0 15

60
55 0 10

17
11 10 50 \ 50

Demand

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45

Vogels Method- Initial Feasible solution

1. For each remaining row and column, determine the difference between the lowest two remaining costs; these are called the row and column penalties.

2. Select the row or column with the largest penalty found in step 1 and note the supply remaining for its row, s, and the demand remaining in its column, d.
3. Allocate the minimum of s or d to the variable in the selected row or column with the lowest remaining unit cost. If this minimum is s, eliminate all variables in its row from future consideration and reduce the demand in its column by s; if the minimum is d, eliminate all variables in the column from future consideration and reduce the supply in its row by d.

REPEAT THESE STEPS UNTIL ALL SUPPLIES HAVE BEEN ALLOCATED.

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Allocation at highest penalty

Destinat ions D1 Sources S1 S2 S3 D2 D3 D4

Suppli es
Column Penalty

50

75

30

45

12

15

65
40 10

80
70 10
5

10 40
50 10 0
10

60
55 10
10

17 7
11 40 \ 40

20
5

Deman d

Row Penalties 10

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47

Initial Feasible solution by Vogels Method

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48

Step2.1: Determine CijZij for Non-basic Var

1. If Ui is the dual variable associated with the i-th supply constraint, and Vj is the dual variable associated with the j-th demand constraint, then for shipments from node i to node j, one can find the corresponding Zij value by Zij = Ui - Vj. Thus the CijZij value for variable Xij is found by Cij - Zij = Cij - (Ui - Vj) = Cij - Ui + Vj 2. Given that there is a redundant equation among the m n constraints (and any of the m n constraints can be considered the redundant one), one can show that the Ui or Vj associated with the redundant equation is 0. Thus one Ui or Vj can arbitrarily be selected and set to 0. Arbitrarily choose U1 = 0.

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Shadow cost-continue
3. Since the CijZij values for basic variables are 0 (i.e., Cij Ui + Vj = 0 for basic variables), we can easily solve for the remaining values of the Uis and Vjs from the m + n 1 equations for the basic variables. 4. Once the Uis and Vjs have been determined, the CijZij values for the non-basic variables can be calculated by Cij - Zij = Cij - Ui + Vj

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Calculations for Uis and Vjs

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Calculations for cell evaluations, non-basic Note: X13 is the entering variable.

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Step 2.2: Determine leaving Basic Variable Note: Cycle property; X12 is the leaving variable

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Step 2.3: Determine the Next Transportation Tableau

Total shipping cost = 2020; {Improvement = 2 (-5) = 10 } Iterate to optimum solution.

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Degeneracy in Transportation Problems

Degeneracy occurs when the number of occupied squares or routes in a transportation table solution is less than the number of rows plus the number of columns minus 1 Such a situation may arise in the initial solution or in any subsequent solution Degeneracy requires a special procedure to correct the problem since there are not enough occupied squares to trace a closed path for each unused route and it would be impossible to apply the steppingstone method or to calculate the R and K values needed for the MODI technique
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Degeneracy in Transportation Problems

To handle degenerate problems, create an artificially occupied cell That is, place a zero (representing a fake shipment) in one of the unused squares and then treat that square as if it were occupied The square chosen must be in such a position as to allow all stepping-stone paths to be closed There is usually a good deal of flexibility in selecting the unused square that will receive the zero

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The Assignment Problem (AP)

Special case of TP with m=n and si= dj = 1 for all i, and j.
The Hungarian Algorithm Initialization 1. For each row, subtract the minimum number from all numbers in that row. 2. In the resulting matrix, subtract the minimum number in each column from all numbers in the column.

Assignment problems have square matrix of cost/benefit

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Hungarian Method Iterative Steps

1. Make as many 0 cost assignments as possible. If all workers are assigned, STOP; this is the minimum cost assignment. Otherwise draw the minimum number of horizontal and vertical lines necessary to cover all 0s in the matrix. (A method for making the maximum number of 0 cost assignments and drawing the minimum number of lines to cover all 0s follows.) 2. Find the smallest value not covered by the lines; this number is the reduction value. 3. Subtract the reduction value from all numbers not covered by any lines. Add the reduction value to any number covered by both a horizontal and vertical line. GO TO STEP 1.
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Assignment example

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59

Subtract row minima from all row elements, then do for columns.

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60

Assign rows/column with single zero, cut col./row

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Optimal solution- assignment

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CONVERSION OF A MAXIMIZATION PROBLEM TO A MINIMIZATION PROBLEM

The Hungarian algorithm works only if the matrix is a cost matrix. A maximization assignment problem can be converted to a minimization problem by creating a lost opportunity matrix. The problem then is to minimize the total lost opportunity.

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63