NOTES
NOTES
The stages of development of O.R. are also known as phases and process of O.R,
which has six important steps. These six steps are arranged in the following order:
Today, almost all fields of business and government utilizing the benefits of
Operations Research. There are voluminous of applications of Operations Research.
Although it is not feasible to cover all applications of O.R. in brief.
DEFENCE:
In modern time war the military operations are carried out by air force, army & navy
therefore there is a necessarily to formulate optimum strategies that may give
maximum benefit operations research helps military executives and managers to
select the best strategies (course of action) to win the battle thus operations research
has got great scope in defence.
LIC:
Operations research techniques are also applicable to enable LIC officers to decide
the premium rates of various policies for the best interest of corporation.
AGRICULTURE:
With increase of population and consequent shortage of food, there is need to
increase agriculture output for a country. But there are many problems faced by the
agriculture department of a country eg
a. Climatic Condition
b. Problem of optimal distribution of water from the resourses etc.
Thus there is a need of best policy under the given restrictions. Operations research
is the technique to determine best policy.
MANAGEMENT
The following are the abbreviated set of typical operations research applications in
an organization just to show how widely these techniques are used today:
1. Accounting:
Assigning audit teams effectively
Credit policy analysis
Cash flow planning
Developing standard costs
Establishing costs for byproducts
Planning of delinquent account strategy
2. Construction:
Project scheduling, monitoring and control
Determination of proper work force
Deployment of work force
Allocation of resources to projects
3. Facilities Planning:
Factory location and size decision
Estimation of number of facilities required
Hospital planning
International logistic system design
Transportation loading and unloading
Warehouse location decision
4. Finance:
Building cash management models
Allocating capital among various alternatives
Building financial planning models
Investment analysis
Portfolio analysis
Dividend policy making
5. Manufacturing:
Inventory control
Marketing balance projection
Production scheduling
Production smoothing
6. Marketing:
Advertising budget allocation
Product introduction timing
Selection of Product mix
Deciding most effective packaging alternative
8. Purchasing:
Optimal buying
Optimal reordering
Materials transfer
DECISION THEORY
Thousands of business decisions are made every day – and not all will “MAKE” or “BREAK”
the organization. But each one adds a measure of success (or failure) to the operations, i.e. all
decisions have some influence- large or small- on performance. e.g An electronics manufacturer
must decide whether to invest in a new process or to stay with a “proven” one that is producing
defective chips at a rate of 1 in 3.
Does the ability to make good decisions come “naturally” or it can be learned? Management
scientists hold that education, scientific training, and experience can improve a person’s ability to
make decisions. The idea of management as a “science” is founded on its similarity to other
sciences as expressed below.
· Organized principles of knowledge,
· Use of empirical data,
· Systematic analysis of data,
· Repeatable results.
Business decision makers have always had to work with incomplete and uncertain data. In some
situations a decision maker has (or is assumed to have) complete information about the decision
variables; at the other extreme no information available. Managerial decisions are made all along
this continuum.
When dealing with the cost, the maximum cost associated with each
other alternative is considered and the alternative that minimise this
maximum cost is chosen. This is known as minimax criterion and it
involves two steps.
Step I Determine the maximum possible cost for each alternative.
Step II Choose that alternative which corresponds to the minimum of
the above costs.
Step I Determine the maximum possible way off for each alternative.
Step II Select that alternative which corresponds to the maximum of the
above maximum pay offs.
In the decision problems dealing with costs, the minimum for each
alternative is considered and then the alternative which minimizes the
above minimum cost is selected. This is termed as minimin principle. This
is known as minimin criterion and it involves two steps.
Step I Determine the minimum possible way off for each alternative.
Step II Select that alternative which corresponds to the minimum of the
above minimum pay offs.
In decision making under risk probabilities are given. That means we are aware of
success or failure of decision to some extent. We select the alternative with the
highest expected value. We also use the probabilities with the opportunity loss table
to minimize the expected opportunity loss. In decision making under risk, we will
discuss about Expected Monetary Value, Expected Value of Perfect Information,
and Expected Opportunity Loss.
DECISION TREES
In some cases, the choice of the optimal act is not made in one stage, and the decision problem
involves a sequence (not necessarily in time) of acts, events, acts, events, etc. There may be a
number of basic alternatives, each leading to one of a number of situations depending on the
outcome of a certain random process. At each such situation, a number of other alternatives may
be available which also lead to a new set of situations depending on another set of events... and so
on, with acts followed by events, followed by acts, events, etc. The sequence of acts and events
may be depicted in the form of a decision tree. The decision problem is to find the most preferred
branch of that tree.
A decision tree is a graphical model describing decisions and their possible outcomes. Decision
trees consist of three types of nodes:
1. Decision node: Often represented by squares showing decisions that can be made. Lines
emanating from a square show all distinct options available at a node.
2. Chance node: Often represented by circles showing chance outcomes. Chance
outcomes are events that can occur but are outside the ability of the decision maker to
control.
3. Terminal node: Often represented by triangles or by lines having no further decision
nodes or chance nodes. Terminal nodes depict the final outcomes of the decision making
process.
ANALYSIS OF DECISION TREE:
The general approach used in the decision tree analysis is the “Roll Back Process”, i.e.
here we move from right to left. The expected return (Expected Monetary Value, EMV) is
calculated at each node starting from the extreme right node. If it is a chance node then
EMV of this node is the sum of the products of the respective payoffs. The expected return
(EMV) of a decision node is the maximum EMV’s along all decision branches emanating
this decision node. Thus starting from the extreme right we move along the path that yields
the maximum pay-off (EMV) for each of the decision.
The term linear means that all the relations is the particular problem are linear and the term
programming refers to the process determining a particular programme or plan or plan of action.
The linear function which is to be optimized is called the objective function and the conditions
of the problem expressed as simultaneous linear equations (or inequalities) are referred as
constraints.
Objective Function
Subject to
…… Constraints
……
Non-negative restrictions
5. Non-degenerate BFS
A BFS of a linear programming problem is said to be non-degenerate BFS if none of the
basic variables is zero.
6. Degenerate BFS
A BFS of a linear programming problem is said to be degenerate BFS is at least one of the
basic variables is zero.
Linear programming problems involving only two decision variables can easily be solved by
graphical method. There are two approaches
Step 2: Put x1 = 0 in the equation and find the value of x2 and then put x2 = 0 and find the
value of x1.
Step 4: Find feasible solution by putting x1 = 0 and x2 = 0 in the constraints (or inequalities)
if the condition is true the shade the region towards the origin and if the condition is false
the shade the region away from the origin. The feasible region is the intersection (or
common area) of all the regions represented by the constraints of the problem and is
restricted to first quadrant.
Step 5: The feasible region obtained in step 4 may be bounded or unbounded. Compute
the coordinates of all the corner points of the feasible region.
Step 6: Find out the value of the objective function at each corner (solution) point
determined in step5.
Step 7: Select the corner point that optimizes (maximizes or minimizes) the value of the
objective function. It gives the optimum feasible solution.
Step 2: Put x1 = 0 in the equation and find the value of x2 and then put x2 = 0 and find the
value of x1.
Step 5: The feasible region obtained in step4 may be bounded or unbounded. Compute the
coordinates of all the corner points of the feasible region.
Step 6: Consider Z = 0 and compute = which implies (a, b) now join this point with
the origin (0,0) with a dotted line. This dotted line is known as iso-profit line. Move this
iso-profit line parallel to itself farther (closer) from (to) the origin.
Step 7: Identify the optimum solution as the coordinates of that poibnt on the feasible
region touched by the highest possible iso-profit line (or lower possible iso cost line).
If there are more the two basic variables then graphical methods fails and to overcome this problem
George Dantzig in 1947 developed the method known as simplex method or simplex algorithms.
𝑴𝒊𝒏𝒊𝒎𝒖𝒎 𝒁 = 𝒄𝟏 𝒙𝟏 + 𝒄𝟐 𝒙𝟐 + ⋯ … … … … + 𝒄𝒏 𝒙𝒏
𝒁 = −𝒁 = − 𝒄𝟏 𝒙𝟏 − 𝒄𝟐 𝒙𝟐 − ⋯ … … … … − 𝒄𝒏 𝒙𝒏
Step 2: Make all the bi’s positive if any of the bi’s is negative, multiply the corresponding
constraints by -1 also convert the inequality.
Step 3: Convert the constraints into equations by introducing slack or surplus variables. Also
introduce artificial variables in the constraints where surplus variables are inserted and
which do not form the column of the identity matrix.
Slack Variable: If the left side of the inequalities is less than the right hand side then
add Si to left hand side to convert inequality into equality this added
variable is known as Slack Variable.
Surplus Variable: If the left side of the inequalities is more than the right hand side then
subtract Si to left hand side to convert inequality into equality this new
variable is known as Surplus Variable.
Step 4: To find initial basic feasible solution we formulate the simplex table and if all the
constraints have ≤ sign then directly we can find BFS but in case we have ≥ sign in the
LPP artificial variable is also introduced to get identity matrix then we follow two phase
method to get the optimum solution. In phase 1 we proceed to get starting BFS by
considering the cost ‘0’of all the variables except the artificial whose cost would be ‘-1’.
Cj c1 c2 cn 0 0 0
Minimum
Basic Ratio
Variable CB XB x1 x2 ............. xn S1 S2 ............. Sn XB/xj
S1 0 b1 a11 a12 a1n 1 0 ............. 0
S2 0 b2 a21 a22 a2n 0 1 .............. 0
............. ..... ..... .... ..... ..... ...... ....... ............ ........
Sn 0 bm am1 am2 amn 0 0 ............. 1
Δj Δ1 Δ2 Δn 0 0 0
Where,
Δj=CB×xj - Cj
Most negative value in Δj will give you an incoming vector and xj in Minimum ratio is the values
of incoming vector
Step 6: Test for starting BFS for optimality: This is done by computing Δj for each variable xj.
The value Δj = 0, if xj is a basic variable.
ii. If Δj < 0for each the solution under test is not optimal.
a. If corresponding to most negative Δj, all the element in the column xj are negative
or zero, then the solution under test will be unbounded.
b. If the value of at least one artificial variable appearing in the basis is non-zero and
the optimality condition is satisfied, then we shall say that the problem has no
feasible solution.
To improve the above solution we find the incoming vector and outgoing vector.
To find incoming vector: The most negative value of Δj will be the incoming vector.
To find outgoing vector: The outgoing vector is taken corresponding to the minimum
ratio on moving back the first 1 in the identity matrix of the row of minimum ratio will be
the outgoing vector. Put “-“ in place where the minimum ratio is negative or infinite.
Step 8: The point where incoming vector ( ) and minimum ratio ( ) intersect is called key
element and now make key element 1 and remaining element of the incoming vector 0.
If key element is not 1 then divide all the elements of this row by this key element. Then
subtract appropriate multipliers of this row from all the other rows and obtain zero at all
the position of incoming vector. Now construct new (revised) simplex table. In this way
we get improved basic feasible solution.
Step 9: Now test the above improved BFS for optimality as in step 6. If this solution is not optimal
the repeat steps (7) and (8) in succession, until an optimal solution is finally obtained.
A BFS of LPP is said to be degenerate BFS if at least one of the basic variables is zero. So
far we have considered the LPP in which the minimum ratio rule we get only one vector to
be deleted from the basis, but there are LPP where we get more than one vector which may
be deleted from the basis. i.e. minimum occurs for more than one value of i, then the problem
is to select the vectors to be deleted from the basis. Such problem is called the problem of
degeneracy.
If Δk is the incoming vector and minimum , 𝑥 > 0 is not unique i.e. the same minimum
ratio occurs for more than one value in more than one row.
Then to select the vector to be deleted from the basis (i.e., outgoing vector) proceed as
follows:
The concept of duality is based on the fact that any linear programming problem must be first
put in its standard form before solving the problem by simplex method.
Definition 1: (Standard Primal Problem)
Maximize Z = 𝑐 𝑥 + 𝑐 𝑥 + ⋯ … … … … + 𝑐 𝑥
Subject to
……..
Non-negative restrictions
Dual Problem
Minimize ZD = 𝑏 𝑤 + 𝑏 𝑤 + ⋯ … … … … + 𝑏 𝑤
Subject to
……..
Non-negative restrictions
Minimize Z = 𝑐 𝑥 + 𝑐 𝑥 + ⋯ … … … … + 𝑐 𝑥
Subject to
……..
Non-negative restrictions
Maximize ZD = 𝑏 𝑤 + 𝑏 𝑤 + ⋯ … … … … + 𝑏 𝑤
Subject to
……..
Non-negative restrictions
REMARK:
TRANSPORTATION PROBLEM
3.1 INTRODUCTION
The transportation problem is a particular class of linear programming problem in which the
objective is to transport a commodity or to provide services from several supply origins to
different demand destinations at a minimum total cost.
Important Definition
1. Feasible Solution
When the total availability is equal to the total requirement i.e ∑ai = ∑bj then it is called
feasible solution.
2. Basic Feasible Solution
The number of basic variables of the general transportation problem at any stage of feasible
solution must be m + n – 1.
3. Optimal Solution
A feasible solution is said to be optimal if it minimizes the total transportation cost.
After getting the initial FS of a transportation problem, we test this solution for optimality i.e.
we check whether the feasible solution obtained, minimizes the total transportation cost or
not. There we start the optimality test to BF consisting of (m + n – 1) allocations in
independent positions.
In general there are following two methods used for the test of optimality of the solution
1. The stepping stone method
2. The modified distribution (MODI) method
1. Construct a transportation table with a given unit cost of transportation along with the rim
conditions
2. Determine a initial basic feasible solution (allocation) using a suitable method as discussed
earlier
3. Evaluate all unoccupied cells for the effect of transferring one unit from an occupied cell
to the unoccupied cell. This transfer is made by forming a closed path that retains the SS
and DD condition of the problem.
4. Check the sign of each of the net change in the unit transportation costs. If the net changes
are plus or zero, then the an optimal solution has been arrived at, otherwise go to step 5 .
5. Select the unoccupied cell with most negative net change among all unoccupied cells.
6. Assign a many units as possible to unoccupied cell satisfying rim conditions. The
maximum number of units to be assigned are equal to the smaller circled number among
the occupied cells with the minus value in a closed path.
7. Go to step 3, and repeat the problem until all unoccupied cells are evaluated and the net
change result in positive or zero.
The Modified Distribution Method, also known as MODI method or u-v method, which provides
a minimum cost solution (optimal solution) to the transportation problem. The following are the
steps involved in this method.
Step 1: Find out the basic feasible solution of the transportation problem using any one of the
three methods discussed in the previous section.
Step 2: Find the set of numbers ui, i=1,2,…..m and vj, j=1,2,…..n. by using allocated cell ui
+ vj = cij if xij > 0 -+
Step 3: Find the cell evaluation ui + vj for each unoccupied cell (i, j) and enter at the upper right
corner of the corresponding cell (i, j).
Step 4: Find the cell evaluation dij = cij – (ui- + vj) for each unoccupied cell (i, j) and enter at the
lower right corner of the corresponding cells.
ALLOCATION (dij)
Step 5: Examine the cell evaluation dij for unoccupied cells and conclude that
a. If all dij > 0, then the solution under test is optimal and unique.
b. If all dij ≥ 0, with at least dij = 0 then the solution under test is optimal and the alternative
optimal solution exists.
c. If at least one dij < 0, then the solution is not optimal. Then proceed to step 6.
Step 6: Considering the negative dij form a loop such that its corners must contain allocations
now assign θ to negative dij and alternative sign θ to the allocations lying on loop. Now
considering negative θ we find the minimum value and put equal to 0 and accordingly
make changes to all the cells lying on a loop
Step 7: Form a new BFS then repeat the step (2) to (5) to test the optimality to this new BFS.
Continue improving the BFS interactively using step (2) to (6) till the optimal solution is
attained.
Degeneracy in Transportation Problems
Till now we discussed cost minimization transportation problems. But in some cases in the
transportation matrix, the profits are given in place of cost and we are required to find the
allocations to maximize the profit. Such problems can be termed as profit maximization
problems. Such problems can be solved in any of the following two ways.
Assignment problem is the special case of Transportation problem in which the objective is to find the
optimum allocation of a number of tasks (jobs) to an equal number of facilities (persons). Here we make
the assumption that each person can perform each job but with varying degree of efficiency. For example
a departmental head may have four persons available for assignment and four jobs to fill. Then his interest
is to find the best assignment which will be in the best interest of the department.
The problem can be stated in the form of n×n, matric [cij] called the cost or the effectiveness matrix, where
cij is the cost of assigning i-th facility (person) to the j-th job.
Given n facilities, n jobs and the effectiveness of each facility to each job, here the problem is to assign
each facility to one and only one job so that the measure of effectiveness if optimized. Here the optimization
means Minimized.
The objective of this section is to examine a computational method – an algorithm - for deriving solutions
to the assignment problems. The following steps summarize the approach:
Step 1. Identify the minimum element in each row and subtract it from every element of that row.
Step 2. Identify the minimum element in each column and subtract it from every element of that column.
Step 3. Make the assignments for the reduced matrix obtained from steps 1 and 2 in the following way:
a. For each row or column with a single zero value cell that has not be assigned or eliminated,
box that zero value as an assigned cell.
b. For every zero that becomes assigned, cross out (X) all other zeros in the same row and the
same column.
c. If for a row and a column, there are two or more zeros and one cannot be chosen by inspection,
then you are at liberty to choose the cell arbitrarily for assignment.
d. The above process may be continued until every zero cell is either assigned or crossed (X).
Step 4. An optimal assignment is found, if the number of assigned cells equals the number of rows (and
columns). In case you have chosen a zero cell arbitrarily, there may be alternate optimal solutions.
If no optimal solution is found, go to step 5.
Step 5. Draw the minimum number of vertical and horizontal lines necessary to cover all the zeros in the
reduced matrix obtained from step 3 by adopting the following procedure:
Step 6. Select the smallest element from all the uncovered elements. Subtract this smallest element from
all the uncovered elements and add it to the elements, which lie at the intersection of two lines.
Thus, we obtain another reduced matrix for fresh assignment.
Step 7. Go to step 3 and repeat the procedure until you arrive at an optimal assignment.
When number of rows is not equal to the number of columns then the problem is said to be an unbalanced
assignment problem to make it a balanced assignment problem we add a row or column whichever is less
with the cost zero in each cell.
5. GAME THEORY
5.1 Introduction
Game theory is the study of human conflict and cooperation within a competitive situation. In some
respects, game theory is the science of strategy, or at least the optimal decision-making of independent and
competing actors in a strategic setting. The competitors are called the players.
The game theory is a mathematical theory that deals with the general features of competitive situation. The
competitive situation is called a game i.e. the term game represents a conflict between two or more parties.
The competitors are called the players.
Fair Game
A game is said to be a fair game if the value of the game is zero.
Saddle Point
The point at which maximin is equal to minimax is known to be a saddle point.
Maximin Principle:
Minimax Principle:
There are various ways to obtain the solution of the game when saddle point does not exist.
1. Algebraic Method
2. Arithmetic method
3. Graphical Method
(𝑎 × 𝑎 ) − (𝑎 ×𝑎 )
𝑣=
(𝑎 + 𝑎 ) − (𝑎 +𝑎 )
B
B 1 B2
A1 a11 a12
A
A2 a21 a22
Arithmetic method provides an easy technique for obtaining the optimum strategies for each player in (2×2)
games without the saddle point. This method consists of the following steps:
Step 1: Find the difference of two numbers in column I and put it under the column II, neglecting the
negative sign if occurs.
Step 2: Find the difference of two columns in column II and put it under the column I, neglecting the
negative sign if occurs.
Step 3: Repeat the above two steps for the two rows also.
The values thus obtained are called the oddments. These are the frequencies with which the players must
use their course of action in their optimum strategies. With the help of these frequencies we find the
probability of happening of A’s & B’s strategies.
Sometimes it is observed that one of the pure strategies of either player is always inferior to at least one of
those remaining. The superior strategies are said to dominate the inferior ones. In such cases of dominance,
we reduce the size of the pay-off matrix by deleting those strategies which are dominated by others. The
general rules for dominance are:
i. If all the element of a row, say kth row, are less than or equal to the corresponding elements of any
other row say rth row, then kth row is dominated by rth row.
ii. If all the element of a row, say kth column, is greater than or equal to the corresponding elements
of any other column say rth column, then kth column is dominated by rth column.
iii. Dominated rows and columns may be deleted to reduce the size of the pay-off matrix, as the
optimal strategies will remain unaffected.
iv. If some linear combination of certain rows dominate ith row, then the ith row will be
deleted. Similar arguments follow for columns.
NOTES-UNIT-4
6. SEQUENCING PROBLEM
6.1 INTRODUCTION
To determine an appropriate order (sequence) for a series of jobs to be done on a finite number of
service facilities in some pre-assigned order, so as to optimize the total cost (time) involved.
6.1.1 Definition
Sequencing gives us an idea of the order in which things happen or come in event. Suppose there are
n jobs (1,2,….n), each of which has to be processed one at a time at m machines (A, B,….m). The
order of processing each job through each machine is given. The problem is to find a sequence
among (n!)m number of all possible sequences for processing the jobs so that the total elapsed time
for all the jobs will be minimum.
a. Number of Machines: It means the service facilities through which a job must pass before it is
completed.
b. Processing Order: It refers to the order in which various machines are required for completing
the jobs.
c. Processing Time: It means the time required by each job to complete a prescribed procedure on
each machines.
d. Idle time on a machine: this is the time for which a machine remains idle during the total elapsed
time.
e. Total Elapsed Time: This is the time between starting the first job and completing the last job,
which also includes the idle time, if it occurs.
f. No passing Rule: It means, passing is not allowed, i.e., maintaining the same order of jobs over
each machine. If each n-jobs is to be processed through 2 machines M1 and M2 in the order M1M2,
then this rule will mean that each job will go to the machine M1 first then to and M2.
7. QUEUING THEORY
7.1 Introduction
A group of items waiting to receive service, including those receiving the service is known as a waiting
line or a queue. Queuing theory involves the mathematical study of “queues” or waiting lines. The
formation of waiting lines is a common phenomenon which occurs whenever the current demand for a
service exceeds the current capacity to provide that service. The queues of peoples may be seen at cinema
ticket window, bus stop, reservation office, counters of super market etc. the person waiting in a queue
or receiving the service is called the customer and the person by whom he is serviced is called a server.
The basic queuing process can be described as a process in which the customers arrive for service at a
service at a service counter (or station), wait for their turn in the queue if the server is busy in the
service of the other customer and are served when the server gets free. Finally the customer leave the
system as soon as he is served.
Queue discipline
Balking : A customer leaves the queue because the queue is too long and he has no
timeto wait.
Reneging: A customer leave the queue due to impatience.
Priorities: Some customers are served before others, regardless of their arrival.
Jockeying: If there are more than one queue then a customer may leave one
queue andjoin the other due to its length.
Kendall’s Notation
a = probability law for the arrival (inter-arrival) time (I.e. Poisson distribution)
b = probability law according to which customers are served (i.e exponential distribution)
c = number of servers
e = queue discipline
𝑊 =
REPLACEMENT
The primary objective of replacement is to direct the organization towards profit maximization or cost
minimization. Deciding the replacement policy that determines the optimal replacement age of
equipment, instead of using with higher maintenance costs for long time, is the main objective of
replacement problem. For instance, in order to replace an:
Item whether to wait till its failure or replacing at an early age with higher cost.
Equipment whether to replace the inefficient equipment with a similar type of equipment or
with a modern one.
In case of high cost equipment, the decision is whether to replace it immediately or later. The term
“failure” has a wider meaning in business than what it has in our daily life. Failures can be discussed
under two categories viz., Gradual Failures, and Sudden Failures.
GRADUAL FAILURE
The mechanism under this category is progressive. That is, as the life of an item increases, its efficiency
deteriorates, causing:
Example: bearings, pistons, piston rings, „Automobile Tyres‟, mechanical systems like machines,
machine tools, flexible manufacturing equipment etc. fall under this category.
SUDDEN FAILURE
This type of failure can be observed in the items that do not deteriorate gradually with age but which
fail suddenly after some period of service. The time period between installation and failure will not be
constant for any particular equipment.
The replacement situations generally are divided into the following types:
1. Replacement of capital equipment whose performance decreases with time, e.g., machine tools,
vehicles in a transport organization, airplanes, etc.
2. Group replacement items that fail completely, e.g., electrical bulbs,etc.
Determining the optimal replacement period for an item can be explained by considering an example
of a vehicle owner whose aim is to find the best age at which the old vehicle is to be replaced by a new
one. The vehicle owner intends to ship cargo as cheaply as possible. The associated costs are:
(i) The running costs and (ii) the capital cost of the vehicle
These costs can be summarized as average cost per month. It can be observed that the average monthly
cost will go on decreasing, with increase in time. However, there will be an age at which the rate of
increase in running cost is considerably higher than the savings in average capital costs. Thus, at this
age it is justifiable to replace the vehicle.
Consider a system usually made up of a large number of low cost items that are prone to failure with
age e.g. failure of a resistor in television, radio, computer etc. In some cases the failure of a component
may cause the complete failure of the system. In such cases, the cost of overall failure will be quite
higher than the cost of component itself. E.g. the cost of a condenser or tube in an aircraft is little, but
its failure may result in total collapse of the airplane. When dealing with such situations, two types of
replacement policies shall be considered.
Individual replacement: In this policy, an item is replaced immediately after its failure.
Group replacement: In this policy, decision is about the age when all the items should be
replaced, irrespective of whether the items have failed or not. In this policy the items that fail
before the optimal time, will be replaced individually.
PERT – Program Evaluation & Review Technique – It is generally used for those projects where
time required to complete various activities are not known as a priori. It is probabilistic model & is
primarily concerned for evaluation of time. It is event oriented.
CPM – Critical Path Method – It is a commonly used for those projects which are repetitive in
nature & where one has prior experience of handling similar projects. It is a deterministic model &
places emphasis on time & cost for activities of a project.
PERT and CPM have been used for a variety of projects, including the
following types.
1. Construction of a new plant
2. Research and development of a new product
3. NASA space exploration projects
4. Movie productions
5. Building a ship
6. Government-sponsored projects for developing a new weapons system
7. Relocation of a major facility
8. Maintenance of a nuclear reactor
9. Installation of a management information system
10. Conducting an advertising campaign
Project Crashing
There are usually compelling reasons to complete the project earlier than the originally estimated duration of
critical path computed on the normal basis of a new project.
Direct Cost: This is the cost of the materials, equipment and labour required to perform the activity. When the
time duration is reduced the project direct cost increases.
Activity Cost Slope = (Cc- Nc) ÷ (Nt-Ct)
Where,
Cc = Crash Cost = Direct cost that is anticipated in completing an activity within crash
time.Nc = Normal Cost = This is the lowest possible direct cost required to complete
an activity Nt = Normal Time = Min. time required to complete an activity at normal
cost.
Ct = Crash Time = Min. time required to complete an activity.
Indirect Cost: It consists of two parts: fixed cost and variable cost. The fixed cost is due to general and
administrative expenses, insurance, etc. Variable indirect cost consists of supervision, interest on capital, etc.
The total project cost is the sum of the direct & the indirect costs. Optimum duration is the project duration at
which totalproject cost is lowest.