DISTANCE LEARNING CENTRE

AHMADU BELLO UNIVERSITY

ZARIA, NIGERIA.

COURSE MATERIAL

FOR

Course Code & Title: BUAD 204 : QUANTITATIVE ANALYSIS

Programme Title: BSc. BUSINESS ADMINISTRATION

 ACKNOWLEDGEMENT

We acknowledge the use of the Courseware of the National Open University of

Nigeria (NOUN) as the primary resource. Internal reviewers in the Ahmadu Bello
University who extensively reviewed and enhanced the material have been duly listed
as members of the Courseware development team.

REVISED 2018 BY: Chat Lot Kogi

 COPYRIGHT PAGE
© 2018 Distance Learning Centre, ABU Zaria, Nigeria

All rights reserved. No part of this publication may be reproduced in any form or by any
means, electronic, mechanical, photocopying, recording or otherwise without the prior
permission of the Director, Distance Learning Centre, Ahmadu Bello University, Zaria,
Nigeria.

First published 2018 in Nigeria.

ISBN:

Published and printed in Nigeria by:

Ahmadu Bello University Press Ltd.
Ahmadu Bello University,
Zaria, Nigeria.

Tel: +234

E-mail:
 COURSE WRITERS/DEVELOPMENT TEAM

Chat Lot Kogi: ABU DLC Subject Matter Reviewer

Enegoloinu Adakole: ABU DLC Language Review
Fatima Kabir: ABU DLC Instructional Designers/Graphics
Prof. Adamu Z. Hassan: ABU DLC Editor
 QUOTE
“Open and Distance Learning has the exceptional ability of meeting the challenges of the three
vectors of dilemma in education delivery – Access, Quality and Cost”
- Sir John Daniels
 TABLE OF CONTENT
Copyright Page
Course Writers/Development Team
Quote
Preamble
Table of Content
Course Title Page

COURSE STUDY GUIDE

i. Information
ii. Course Introduction and Description
iii. Course Prerequisites
iv. Course Learning Resources
v. Course Objectives and Outcomes
vi. Activities to Meet Course Objectives
vii. Time (To study and Complete Course)
viii. Grading Criteria and Scale
ix. OER Resources
x. DLC Academic Calendar
ix. Course Structure and Outline

STUDY MODULES
1.0 Module One:- - - - - - - - - 19
Study Session 1: Sets and Subsets.- - - - - - 19
Study Session 2: Basic Sets Operation.- - - - - - 36
Study Session 3: Set of Numbers.- - - - - - 47
Study Session 4: Functions.- - - - - - - 62

2.0 Module Two:- - - - - - - - - 82

Study Session 1: Probability Theory and Application Contents.- - - 82
Study Session 2: Decision Theory and Types of Decision Situations.- - 101
Study Session 3: Decision Trees.- - - - - - - 141
Study Session 4: Operations Research (OR) and Modeling in Operations
Research.- - - - - - - 162

3.0 Module Three:- - - - - - - - - 189

Study Session 1: Simulation. - - - - - - 189
Study Session 2: System Analysis.- - - - - - 200
Study Session 3: Sequencing - - - - - - - 214
Study Session 4: Games Theory- - - - - - - 245
Study Session 5: Inventory control and Case Analysis.- - - - 274
 COURSE STUDY GUIDE
i. COURSE INFORMATION
Course Code: BUAD 204
Course Title: Quantitative Analysis
Credit Units: 3 Units
Year: 200 Level
Semester: Second

ii. COURSE INTRODUCTION AND DESCRIPTION

BUAD 204: Quantitative Analysis is a three credit unit course for students offering
B.Sc. Business Administration. The course will consist of sixteen (13) study
sessions, that is, four modules of four (4) units each. The material has been developed
to suit undergraduate students of Business Administration at the Distance Learning
Center, Ahmadu Bello University, Zaria (ABU).

At the successful completion of this course, you will surely be in a better position to
manage operations of organisations in both private and public sectors. The course
guide tells you briefly what the course is all about, what course materials you will be
using and how you can work your way through these materials. It suggests some
general guidelines for the amount of time you are likely to spend on each study
session of the course in order to complete it successfully. It also gives you some
guidance on your tutor-marked assignments. Detailed information on tutor-marked
assignment is found in the separate assignment file which will be available in due
course.
 iii. COURSE PREREQUISITES
You should note that although this course has no subject pre-requisite, you are
expected to have:
1. Satisfactory level of English proficiency
2. Basic Computer Operations proficiency
3. Online interaction proficiency
4. Web 2.0 and Social media interactive skills

iv. COURSE LEARNING RESOURCES

Major components of the course are:
1) Course Guide
2) Study Sessions
3) Assignment File
4) Presentation Schedule

v. COURSE AIMS AND OUTCOMES

Aims
The aims of this course, among others, are to give you an understanding of the
intricacies of Quantitative Analysis and how to apply such knowledge in making
real life decisions, and managing production and operations units in both private
and public enterprises. The Course will help you to appreciate the Rationale
behind Quantitative Analysis, Elements of Decision Analysis, Types of Decision
Situations, Decision Trees, Operational Research (OR), Approach to Decision
Analysis, System Analysis, Modelling in OR, Simulation, Cases for OR
Analysis, Mathematical Programming, Game Theory, Inventory Control and
Sequencing.

9
The aims of the course will be achieved by your ability to:
• Identify and explain Quantitative Analysis;
• Identify and use various criteria for solving problems in different decision
situations;
• discuss the decision tree and solve problems involving the general decision
tree and the secretary problem;
• Trace the history and evolution of operation research (OR);
• Explain the different approaches to decision analysis;
• discuss the concept of system analysis and identify the various categories
of systems;
• Describe model and analyse the different types of models;
• Define simulation and highlight the various types of simulation models;
• Solve different types of problems involving Linear Programming;
• Apply various techniques in solving gaming problems.
• Identify and solve problems using the sequencing techniques.

Outcomes
By the end of this course, I expect you to be able to:
• Identify and explain Quantitative Analysis;
• Identify and use various criteria for solving problems in different decision
situations;
• Discuss the decision tree and solve problems involving the general
decision tree and the secretary problem;
• Trace the history and evolution of operation research (OR);
• Explain the different approaches to decision analysis;
• Discuss the concept of system analysis and identify the various categories

10
 of systems;
• Describe model and analyze the different types of models;
• Define simulation and highlight the various types of simulation models;
• Solve different types of problems involving Linear Programming;
• Apply various techniques in solving gaming problems.
• Solve inventory problem
• Identify and solve problems using the sequencing techniques.

vi. ACTIVITIES TO MEET COURSE OBJECTIVES

To complete this course, you are required to read all study units, attempt all the
tutor-marked assignments at the end of each study unit. You will need to study
carefully the principles and concepts guiding each of the topics in the course. You
will also need to undertake practical exercises for which you need access to a
personal computer that runs a suitable Windows of which you have command
over. Each unit contains self-assessment exercises, and at certain points during the
course, you will be expected to submit assignments. At the end of the course is a
final examination. The course should take you about a total of 20 weeks to
complete.

Below are the components of the course, what you have to do, and how you
should allocate your time to each unit in order to complete the course successfully
on time.

Specifically, this course shall comprise of the following activities:

i. Studying courseware
ii. Listening to course audios

11
 iii. Watching relevant course videos
iv. Course assignments (individual and group)
v. Forum discussion participation
vi. Tutorials (optional)
vii. Semester examinations (CBT and essay based).

vii. TIME (TO STUDY AND COMPLETE COURSE)

To get the benefits of this course, you need to manage your time very well. A
minimum of two hours weekly is recommended to study for this course.

Viii. GRADING CRITERIA AND SCALE

Grading Criteria
A. Formative assessment
Grades will be based on the following:
Individual assignments/test (CA 1,2 etc) 20
Group assignments (GCA 1, 2 etc) 10
Discussions/Quizzes/Out of class engagements etc 10

B. Summative assessment (Semester examination)

CBT based 30
Essay based 30
TOTAL 100%

C. Grading Scale:
A = 70-100
B = 60 – 69

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C = 50 - 59
D = 45-49
F = 0-44

D. Feedback
Courseware based:
1. In-text questions and answers (answers preceding references)
2. Self-assessment questions and answers (answers preceding references)

Tutor based:
1. Discussion Forum tutor input
2. Graded Continuous assessments

Student based:
1. Online programme assessment (administration, learning resource,
deployment, and assessment).

IX. LINKS TO OPEN EDUCATION RESOURCES

OSS Watch provides tips for selecting open source, or for procuring free or open
software.

SchoolForge and SourceForge are good places to find, create, and publish open
software. SourceForge, for one, has millions of downloads each day.
Open Source Education Foundation and Open Source Initiative, and other
organisation like these, help disseminate knowledge.

13
 Creative Commons has a number of open projects from Khan
Academy to Curriki where teachers and parents can find educational materials for
children or learn about Creative Commons licenses. Also, they recently launched
the School of Open that offers courses on the meaning, application, and impact of
"openness."
Numerous open or open educational resource databases and search engines
exist. Some examples include:
• OEDb: over 10,000 free courses from universities as well as reviews of colleges
and rankings of college degree programmes
• Open Tapestry: over 100,000 open licensed online learning resources for an
academic and general audience
• OER Commons: over 40,000 open educational resources from elementary school
through to higher education; many of the elementary, middle, and high school
resources are aligned to the Common Core State Standards
• Open Content: a blog, definition, and game of open source as well as a friendly
search engine for open educational resources from MIT, Stanford, and other
universities with subject and description listings
• Academic Earth: over 1,500 video lectures from MIT, Stanford, Berkeley,
Harvard, Princeton, and Yale
• JISC: Joint Information Systems Committee works on behalf of UK higher
education and is involved in many open resources and open projects including
digitising British newspapers from 1620-1900!
Other sources for open education resources
Universities
• The University of Cambridge's guide on Open Educational Resources for Teacher
Education (ORBIT)
• OpenLearn from Open University in the UK
Global
• Unesco's searchable open database is a portal to worldwide courses and research
initiatives

14
• African Virtual University (http://oer.avu.org/) has numerous modules on subjects
in English, French, and Portuguese
• https://code.google.com/p/course-builder/ is Google's open source software that is
designed to let anyone create online education courses
• Global Voices (http://globalvoicesonline.org/) is an international community of
bloggers who report on blogs and citizen media from around the world, including
on open source and open educational resources
Individuals (which include OERs)
• Librarian Chick: everything from books to quizzes and videos here, includes
directories on open source and open educational resources
• K-12 Tech Tools: OERs, from art to special education
• Web 2.0: Cool Tools for Schools: audio and video tools
• Web 2.0 Guru: animation and various collections of free open source software
• Livebinders: search, create, or organise digital information binders by age, grade,
or subject (why re-invent the wheel?)

15
 ix. ABU DLC ACADEMIC CALENDAR/PLANNER

PERIOD
Semester Semester 1 Semester 2 Semester 3
Activity JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC
Registration

Resumption

Late Registn.

Facilitation

Revision/
Consolidation
Semester
Examination

N.B: - Semester Examinations 1st/2nd Week January

- All Sessions commence Mid-February
- 1 Week break between Semesters and 4 Weeks vocation at end of session.
- Semester 3 is OPTIONAL (Fast-tracking, making up carry-overs & deferments)

16
 xi. COURSE STRUCTURE AND OUTLINE
Course Structure
WEEK MODULE STUDY SESSION ACTIVITY

1 1. Read Courseware for the corresponding Study Session.

Study Session 1: 2. Listen to the Audio on this Study Session
Sets and Subsets. 3. View any other Video/U-tube (tube
(https://www.youtube.com/watch?v=eze6aOHC2fk
https://www.youtube.com/watch?v=s8FGAclojcs
https://www.youtube.com/watch?v=aKZTYRxQChE
https://www.youtube.com/watch?v=s4cJFW8sV9Y)

2 1. Read Courseware for the corresponding Study Session.

Study Session 2 2. Listen to the Audio on this Study Session
Basic Set Operation 3. View any other Video/U-tube
(https://www.youtube.com/watch?v=LaY8dK3msJk
https://www.youtube.com/watch?v=W8zXWxT_H7A
https://www.youtube.com/watch?v=IqFj0kMDNVU&t=79s)
3 1. Read Courseware for the corresponding Study Session.
Study Session 3 2. Listen to the Audio on this Study Session
Set of numbers 3. View any other Video/U-tube
(https://www.youtube.com/watch?v=9orS7coe2WI
https://www.youtube.com/watch?v=6S7cP9XHaHA)
STUDY
4 1. Read Courseware for the corresponding Study Session.
MODULE 1 Study Session 4 2. Listen to the Audio on this Study Session
Functions View any other Video/U-tube
(https://www.youtube.com/watch?v=kvGsIo1TmsM&t=68s
https://www.youtube.com/watch?v=VhokQhjl5t0
https://www.youtube.com/watch?v=Kj3Aqov52TY\)
5 Study Session 1 1. Read Courseware for the corresponding Study Session.

17
 Probability Theory 2. Listen to the Audio on this Study Session
and Application View any other Video/U-tube
Contents (https://www.youtube.com/watch?v=f9XFM8YLccg
https://www.youtube.com/watch?v=-8eSOmTPUbk)
6 Study Session 2 1. Read Courseware for the corresponding Study Session.
Decision Theory and 2. Listen to the Audio on this Study Session
STUDY Types of Decision 3. View any other Video/U-tube
Situation (https://www.youtube.com/watch?v=B7g_xB5apDA
MODULE 2 https://www.youtube.com/watch?v=yACVFI77uuE
https://www.youtube.com/watch?v=MtBnSUIJcVI)

7 1. Read Courseware for the corresponding Study Session.

Study Session 3 2. Listen to the Audio on this Study Session
Decision Trees. 3. View any other Video/U-tube
(https://www.youtube.com/watch?v=a5yWr1hr6QY
https://www.youtube.com/watch?v=eKD5gxPPeY0
https://www.youtube.com/watch?v=ydvnVw80I_8
8 Study Session 4 1. Read Courseware for the corresponding Study Session.
Operations Research 2. Listen to the Audio on this Study Session
(OR) and Modeling in View any other Video/U-tube
Operations Research. (https://www.youtube.com/watch?v=3I5Z-BJcN3I
https://www.youtube.com/watch?v=escNII3CDFY
https://www.youtube.com/watch?v=YJr-2Bqbce0)

9 1. Read Courseware for the corresponding Study Session.

Study Session 1 2. Listen to the Audio on this Study Session
Simulation 3. View any other Video/U-tube
(https://www.youtube.com/watch?v=9o48duEfm3c
https://www.youtube.com/watch?v=Wp3jyLkfBQs)

18
 10 1. Read Courseware for the corresponding Study Session.
Study Session 2 2. Listen to the Audio on this Study Session
STUDY System Analysis. 3. View any other Video/U-tube (:
MODULE 3 https://www.youtube.com/watch?v=pOzSlT2Chi0
https://www.youtube.com/watch?v=muvHcJVTcdA
https://www.youtube.com/watch?v=SR4MzMsrASQ)

11 1. Read Courseware for the corresponding Study Session.

Study Session 3 2. Listen to the Audio on this Study Session
Sequencing. 3. View any other Video/U-tube
(https://www.youtube.com/watch?v=Z-YqfAA9lew
https://www.youtube.com/watch?v=ksCFPRVRTfE)
1. Read Courseware for the corresponding Study Session.
2. Listen to the Audio on this Study Session
Study Session 4 3. View any other Video/U-tube (:
Games Theory https://www.youtube.com/watch?v=xvDdrswAj8M
12 https://www.youtube.com/watch?v=LV7TLjIFBYY&list=PLMGRv4j_3E
Za1IvjfPRwSBCwpZLu0Oa0V
https://www.youtube.com/watch?v=ve6_e8Lh8u4)
1. Read Courseware for the corresponding Study Session.
Study Session 5 2. Listen to the Audio on this Study Session
Inventory control and 3. View any other Video/U-tube
Case Analysis. (https://www.youtube.com/watch?v=9tJv5COGkD0
https://www.youtube.com/watch?v=A6XbBaNqAxw
https://www.youtube.com/watch?v=XDrpfL1TkP0)

Week 13 REVISION/TUTORIALS (On Campus or Online)

Week 14 & 15 SEMESTER EXAMINATION

19
Course Outline
MODULE ONE:
Study Session 1: Sets and Subsets.
Study Session 2: Basic Sets Operations.
Study Session 3: Set of Numbers.
Study Session 4: Functions.

MODULE TWO:
Study Session 1: Probability Theory and Application Contents.
Study Session 2: Decision Theory and Types of Decision Situations.
Study Session 3: Decision Trees.
Study Session 4: Operations Research (OR) and Modeling in
Operation Research.

MODULE THREE:
Study Session 1: Simulation.
Study Session 2: System Analysis.
Study Session 3: Sequencing.
Study Session 4: Games Theory.
Study Session 5: Inventory Control and Case Analysis.

20
 STUDY MODULES
1.0 MODULE 1: Sets and Subsets
Contents:
Study Session 1: Sets and Subsets.
Study Session 2: Basic Sets Operations.
Study Session 3: Set of Numbers.
Study Session 4: Functions.

STUDY SESSION 1
Sets and Subsets
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 - Sets
2.2- Subset
2.3- Proper Subsets
2.4- Set of Sets
2.5- Venn-Euler diagram
2.6- Axiomatic development of set theory
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions
6.0 Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

21
Introduction:
You are welcome to this study session. The theory of sets lies at the foundation of
mathematics. It is a concept that rears its head in almost all fields of mathematics,
pure and applied.
This study session aims at introducing basic concepts that would be explained
further in subsequent sessions. There will be definition of terms and lots of
examples and exercises to help you as you go along.

1.0 Learning Outcomes

At the end of this study session, I expect you to be able to :
1. Identify sets from some given statements
2. Rewrite sets in the different set notations
3. Identify the different kinds of sets with examples

2.0 Main Content

2.1 Sets
As mentioned in the Introduction, a fundamental concept in all the branches of
mathematics is that of Sets. Here is a definition “A set is any well-defined list,
collection or class of objects”.
The objects in sets, as we shall see from examples, can be anything. But for clarity,
we now list ten particular examples of sets:
Example 1.1 The numbers 0, 2, 4, 6, 8
Example 1.2 The solution of the equation x²+ 2x+1 = 0
Example 1.3 The vowels of the alphabet: a, e, i, o, u

Example 1.4 The people living on earth

22
Example 1.5 The students Tom, Dick and Harry Example
1.6 The students who are absent from school

Example 1.7 The countries England, France and Denmark

Example 1.8 The capital cities of Nigeria

Example 1.9 The number 1, 3, 7 and 10

Example 1.10 The Rivers in Nigeria

Note that the sets in the odd-numbered examples are defined, that is, presented, by
actually listing its members; and the sets in the even-numbered examples are
defined by stating properties that is, rules, which decide whether or not a particular
object is a member of the set.

Notation
Sets will usually be denoted by capital letters;
A, B, X, Y,......
while lower case letters will usually represent the elements in our sets.
If we define a particular set by actually listing its members, for example, let A
consist of numbers 1,3,7, and 10, then we write

A={1,3,7,10}
That is, the elements are separated by commas and enclosed in brackets{ }.
We call this the tabular form of a set. Now, try your hand on the following
examples below:

Exercise 1.1
State in words and then write in tabular form 1.

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A = {x}│x ² = 4²}

2. B = {x}│x – 2 = 5}

3. C = {x}│x is positive, x is negative}

4. D = {x}│x is a letter in the word “correct”}

Solution:

1. It reads “A is the set of x such that x squared equals four”. The only numbers
which when squared give four are 2 and -2. Hence A = {2,-2}

2. It reads “B is the set of x such that x minus 2 equals 5”. The only solution is
7; hence B ={7}

3. It read “C is the set of x such that x is positive and x is negative”. There is no

number which is both positive and negative; hence C is empty, that is, C=Ø

4. It reads “D is the set of x such that x is a letter in the word ‘correct’. The
indicated letters are c,o,r,r,e,c and t; thus D ={c,o,r,r,e,c,t}

But if we define a particular set by stating properties which its elements must
satisfy, for example, let B be the set of all even numbers, then we use a letter,
usually x, to represent an arbitrary element and we write:

B = {x│x is even}

Which reads “B is the set of numbers x such that x is even”. We call this the set
builders that form of a set. Notice that the vertical line “│” is read “such that”.

In order to illustrate the use of the above notations, we rewrite the sets in examples
1.1-1.10. We denote the sets by A 1, A 2, ..... A10 respectively.

Example 2.1: A1 = {0, 2, 4, 6, 8}

24
Example 2.2: A2 = {x│x²+2x + 1 = 0}

Example 2.3: A3 = {a, e, i, o, u}

Example 2.4: A4 = {x │x is a person living on the earth}

Example 2.5: A5 = {Tom, Dick, Harry}

Example 2.6: A6 = {x │ x is a student and x is absent from school}

Example 2.7: A7 = {England, France, Denmark}

Example 2.8: A8 = {x│x is a capital city and x is in Nigeria}

Example 2.9: A9 = {1, 3, 7, 10}

Example 2.10: A10 = { x│x is a river and x is in Nigeria}

It is easy as that!

Exercise 1.2

Write These Sets in a Set-Builder Form

1. Let A consist of the letters a, b, c, d and e.

2. Let B = {2, 4, 6,8........}

3. Let C consist of the countries in the United Nations

4. Let D ={3}

5. Let E be the Heads of State Obasanjo, Yaradua and Jonathan

Solution

1. A={x │x appears before f in the alphabet} = {xx is one of the first five
letters in the alphabet}

2. B = {x │x is even and positive}

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 3. C = {x │x is a country in the United Nations}

4. 4. D = {x │x – 2 = 1} = {x│2x =6}

5. E = {x │x was a Head of State after Abdulsalam}

If an object x is a member of a set A, i.e., A contains x as one of its elements, then

we write: x∈A

Which can be read “x belongs to A” or ‘x is in A”. If, on the other hand, an object
x is not a member of a set A, i.e. A does not contain x as one of its elements, then
we write x∉A

It is a common custom in mathematics to put a vertical line “” or “ \ ” through a

symbol to indicate the opposite or negative meaning of the symbol.

Example 3:1: Let A = {a, e, i o, u}. Then a∈A, b∉A, f∉A.

Example3.2: ∉B, 6∈B,11∉B,14∈B

In-text Question 1. What is a set?

In-text Answer 1: A set is any well-defined list, collection or class of objects.

Finite & Infinite Sets

Sets can be finite or infinite. Intuitively, a set is finite if it consists of a specific
number of different elements, i.e. if in counting the different members of the set the
counting process can come to an end. Otherwise a set is infinite. Let us look at
some examples.

Example 4:1: Let M be the set of the days of the week. Then, M is finite.

Example 4:2: Let N = {0,2,4,6,8........}. Then, N is infinite.

Example 4:3: Let P={x x is a river on earth}. Although it may be difficult to
26
count the number of rivers in the world, P is still a finite set.

Exercise 1.3: Which sets are finite?

1. The months of the year

2. {1, 2, 3, ......... 99, 100}

3. The people living on earth

4. {x | x is even}

5. 5. {1, 2, 3,........}

Solution:

The first three sets are finite. Although physically it might be impossible to count
the number of people on the earth, the set is still finite. The last two sets are
infinite. If we ever try to count the even numbers, we would never come to the end.

Equality of Sets

Set A is equal to set B if they both have the same members, i.e. if every element
which belongs to A also belongs to B and if every element which belongs to B also
belongs to A. We denote the equality of sets A and B as

A=B

Example 5.1 Let A = {1, 2, 3, 4} and B = {3, 1, 4, 2}. Then A = B,

that is {1,2,3,4} = {3,1,4,2}, since each of the elements 1,

2, 3 and 4 of A belongs to B and each of the elements

3, 1, 4 and 2 of B belongs to A. Note therefore that a set does not change if its

27
elements are rearranged.

Example 5.3 Let E={x | x²–3x = -2}, F={2,1} and G ={1,2,2, 1}, then E= F= G

Null Set

It is convenient to introduce the concept of the empty set, that is, a set which
contains no elements. This set is sometimes called the null set. We say that such a set
is void or empty, and we denote it with the symbol ∅.

Example 6.1: Let A be the set of people in the world who are older than 200 years.
According to known statistics A is a null set.

Example 6.2: Let B = {x | x²= 4, x is odd}, Then B is the empty set.

2.2 Subsets

If every element in a set A is also a member of a set B, then A is called subset of B.

More specifically, A is a subset of B if x∈A implies x∈B. We denote this

relationship by writing A⊂B, which can also be read “A is contained in B”.

Example 7.1

The set C = {1,3,5} is a subset of D = {5,4,3,2,1}, since each number 1, 3 and 5

belonging to C also belongs to D.

Example 7.2

The set E = {2,4,6} is a subset of F = {6,2,4}, since each number 2,4, and 6
belonging to E also belongs to F. Note, in particular, that E = F. In a similar manner
it can be shown that every set is a subset of itself.

28
Example 7.3

Let G = {x | x is even}, i.e. G = {2, 4, 6}, and let F = {x | x is a positive power of 2},
i.e. let F = {2,4,8,16.....} Then F⊂G, i.e. F is contained in G.
With the above definition of a subset, we are able to restate the definition of the
equality of two sets.
Two sets A and B are equal, i.e., A = B, if and only if A⊂B and B⊂A. If A is a
subset of B, then we can also write:

B⊃A

Which reads “B is a superset of A” or “B contains A”. Furthermore, we write:

A⊄B

If A is not a subset of B.

Conclusively, we state:

1. The null set ∅ is considered to be a subset of every set

2. If A is not a subset of B, that is, if A⊄B, then there is at least one element in
A that is not a member of B.

2.3 Proper Subsets

Since every set is a subset of itself, we call B a proper subset of A if, first, B is a
subset of A and secondly, if B is not equal to A. More briefly, B is a proper subset
of A if:
B⊂A and B≠A

In some books “B is a subset of A” is denoted by

B⊆A

and “B is a proper subset of A” is denoted by

29
 B⊂A

We will continue to use the previous notation in which we do not distinguish

between a subset and a proper subset.

Comparability

Two sets A and B are said to be comparable if:

A⊂B or B⊂A;

That is, if one of the sets is a subset of the other set. Moreover, two sets A and B are
said to be not comparable if:

A⊄B and B⊄A

Note that if A is not comparable to B then there is an element in A which is not in B

and also, there is an element in B which is not in A.

Example 8.1: Let A = {a,b} and B = {a,b,c}. The A is comparable to B, since A is

a subset of B.

Example 8.2: Let R = {a,b} and S = {b,c,d}. Then R and S are not comparable
since a∈R and a∉S and c∉R

In mathematics, many statements can be proven to be true by the use of previous

assumptions and definitions. In fact, the essence of mathematics consists of
theorems and their proofs. We now proof our first
Theorem 1.1: If A is a subset of B and B is a subset of C then A is a subset of C,
that is,

A⊂B and B⊂C implies A⊂B

Proof: (Notice that we must show that any element in A is also an element in C).
Let x be an element of A, that is, let x∈A. Since A is a subset of B, x also belongs
30
to B, that is, x∈B. But by hypothesis, B⊂C; hence every element of B, which
includes x, is a member of C. We have shown that x∈A implies x∈C. Accordingly,
by definition, A⊂C.
2.4 Sets of Sets

It sometimes will happen that the object of a set are sets themselves; for example,
the set of all subsets of A. In order to avoid saying “set of sets”, it is common
practice to say “family of sets” or “class of sets”. Under the circumstances, and in
order to avoid confusion, we sometimes will let script letters A, B,.......... denote
families, or classes, of sets since capital letters already denote their elements.

Example 9.1: In geometry we usually say “a family of lines” or “a family of

curves” since lines and curves are themselves sets of points.

Example 9.2: The set {{2,3}, {2}, {5,6}} is a family of sets. Its members are the
sets {2,3}, {2} and {5,6}.

Theoretically, it is possible that a set has some members, which are sets themselves
and some members which are not sets, although in any application of the theory of
sets this case arises infrequently.
Example 9.3: Let A = {2, {1,3}, 4, {2,5}}. Then A is not a family of sets; here
some elements of A are sets and some are not.

2.4.1 Universal Set

In any application of the theory of sets, all the sets under investigation will likely be
subsets of a fixed set. We call this set the universal set or universe of discourse. We
denote this set by U.

Example 10.1: In plane geometry, the universal set consists of all the points in the
plane.
31
Example 10.2: In human population studies, the universal set consists of all the
people in the world.

2.4.2 Power Set

The family of all the subsets of any set S is called the power set of S.

We denote the power set of S by: 2S

Example 11.1: Let M = {a,b} Then 2M = {{a, b}, {a}, {b}, ∅}

Example 11.2: Let T = {4,7,8} then 2T = {T, {4,7}, {4,8}, {7,8}, {4}, {7}, {8}, ∅}

If a set S is finite, say S has n elements, then the power set of S can be shown to
have 2n elements. This is one reason why the class of subsets of S is called the
power set of S and is denoted by 2S.

2.4.3 Disjoint Sets

If sets A and B have no elements in common, i.e. if no element of A is in B and no

element of B is in A, then we say that A and B are disjoint
Example 12.1: Let A = {1,3,7,8} and B = {2,4,7,9}, Then A and B are not disjoint
since 7 is in both sets, i.e. 7∈A and 7∈B

Example 12.2: Let A be positive numbers and let B be negative numbers. Then A
and B are disjoint since no number is both positive and negative.

Example 12.3: Let E = {x, y, z} and F = {r, s, t}, Then E and F are disjoint.

2.5 Venn-Euler Diagrams

A simple and instructive way of illustrating the relationships between sets is in the
use of the so-called Venn-Euler diagrams or, simply, Venn diagrams. Here we
32
represent a set by a simple plane area, usually bounded by a circle.

Example 13.1: Suppose A⊂B and, say, A≠B, then A and B can be described by
either diagram

A B

A
B

Example 13.2: Suppose A and B are not comparable. Then A and B can be
represented by the diagram on the right if they are disjoint, or the diagram on the

B
left if they are not disjoint.

B A
A A

Example 13.3: Let A = {a, b, c, d} and B= {c, d, e, f}. Then we illustrate these sets
a Venn diagram of the form:

A B
a c e

b d f
33
2.6 Axiomatic Development of Set Theory

In an axiomatic development of a branch of mathematics, one begins with:

1. Undefined terms

2. Undefined relations

3. Axioms relating the undefined terms and undefined relations

Then, one develops theorems based on the axioms and definitions.

Example 14:1: In an axiomatic development of Plane Euclidean geometry

1. “Points” and “lines” are undefined terms

2. “Points on a line” or, equivalent, “line containing a point” is an undefined

relation

3. Two of the axioms are:

Axiom 1: Two different points are on one and only one line

Axiom 2: Two different lines cannot contain more than one point in common

In an axiomatic development of set theory:

1. “Element” and “set” are undefined terms

2. “Element belongs to a set” is undefined relation

3. Two of the axioms are

Axiom of Extension: Two sets A and B are equal if and only if every element in A
belongs to B and every element in B belongs to A.

34
Axiom of Specification: Let P(x) be any statement and let A be any set. Then
there exists a set:

B= {aa ∈ A, P (a) is true}

Here, P(x) is a sentence in one variable for which P(a) is true or false for any a∈A.
For example, P(x) could be the sentence “x² = 4” or “x is a member of the United
Nations”

3.1 Tutor Marked Assignment

Rewrite the following statement using set notation:

a) x does not belong to A.

b) R is a superset of S
c) d is a member of E
d) F is not a subset of G
e) H does not include D

4.0 Summary
A summary of the basic concept of set theory is as follows:

• A set is any well-defined list, collection, or class of objects.

• Given a set A with elements 1,3,5,7 the tabular form of representing this set
is A = {1, 3, 5,7}.
• The set-builder form of the same set is A = {x| x = 2n + 1,0≤n≤3}
• Given the set N = {2,4,6,8,....} then N is said to be infinite, since the
counting process of its elements will never come to an end, otherwise it is
finite

35
• Two sets of A and B are said to be equal if they both have the same
elements, written A =B
• The null set,∅ , contains no elements and is a subset of every set
• The set A is a subset of another set B, written A⊂B, if every element of A is
also an element of B, i.e. for every x∈A then x∈B
• If B⊂A and B≠A, then B is a proper subset of A
• Two sets A and B are comparable if A⊂B and B⊂A
• The power set 2² of any set S is the family of all the subsets of S
• Two sets A and B are said to be disjoint if they do not have any element in
common, i.e. their intersection is a null set.

5.0 Self - Assessment Questions

1.Which of these sets are equal: {r,t,s}, {s,t,r,s}, {t,s,t,r},{s,r,s,t}?
2. Which sets are finite?

1. The months of the year

2. {1,2,3,......99,100}
3. The people living on earth
4. {x | x is even}
5. {1,2,3........)

36
6.0 Additional Activities (Videos, Animations & Out of Class activities)
a. Visit U-tube add : https://www.youtube.com/watch?v=eze6aOHC2fk
https://www.youtube.com/watch?v=s8FGAclojcs
https://www.youtube.com/watch?v=aKZTYRxQChE
https://www.youtube.com/watch?v=s4cJFW8sV9Y. Watch the video & summarise
in 1 paragraph

Reference and Further Reading

Seymour, L.S. (1964). Outline Series: Theory and Problems of Set Theory and
Related Topics, pp. 1 – 133.

Sunday, O.I. (1998). Introduction to Real Analysis (Real-valued Functions of a Real

Variable, Vol. 1)

37
 STUDY SESSION 2
Basic Set Operations
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 – Set Operations
2.2- Operations on Comparable Sets
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions
6.0 Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

Introduction
Welcome to this study session. In this Study Session, we shall see operations performed
on sets as in simple arithmetic. This operations simply give sets a language of their own.
You will notice in subsequent units that you cannot talk of sets without reference, sort of,
to these operations.

1.0 Study Session Learning Outcomes

At the end of this study session, I expect you to be able to :
1. Compare two sets and/or assign to them another set depending on their
comparability.
2. Represent these relationships on the Venn diagram.

38
2.0 Main Content
2.1 Set Operations
In arithmetic, we learn to add, subtract and multiply, that is, we assign to each pair of
numbers x and y a number x + y called the sum of x and y, a number x – y called the
difference of x and y, and a number xy called the product of x and y. These assignments
are called the operations of addition, subtraction and multiplication of numbers. In this
Unit, we define the operations Union, Intersection and Difference of sets, that is, we will
assign new pairs of sets A and B. In a later Unit, we will see that these set operations
behave in a manner somewhat similar to the above operations on numbers.

2.1.1 Union

The union of sets A and B is the set of all elements which belong to A or to B or to both.
We denote the union of A and B by;

A∪B
A B
Which is usually read “A union B”

Example 1.1: In the Venn diagram in fig 2-1, we have shaded A∪B, i.e. the area of A
and the area of B.

A∪B is shaded

Example 1.2: Let S = {a, b. c. d} and T = {f, b, d, g}. Then

S∪T = {a, b, c, d, f, g}.

Example 1.3: Let P be the set of positive real numbers and let Q be the set of negative
real numbers. Then P∪Q, the union of P and Q, consist of all the real numbers except
39
zero. The union of A and B may also be defined concisely by:

A∪B = {xx∈A or x∈B}

Remark 2.1: It follows directly from the definition of the union of two sets that A∪B
and B∪A are the same set, i.e.,

A∪B = B∪A

Remark 2.2: Both A and B are always subsets of A and B that is, A⊂

(A∪B) and B⊂ (A∪B)

In some books, the union of A and B is denoted by A + B and is called the set- theoretic
sum of A and B or, simply, A plus B

In-text Questions 1: What is a union of sets?

Answer 1: A union of sets A and B is the set of all elements which belong to A or to B or to both.

2.1.2 Intersection

The Intersection of sets A and B is the set of elements which are common to A and B,
that is, those elements which belong to A and which belong to B. We denote the
intersection of A and B by:
A∩B

Which is read “A intersection B”.

Example 2.1: In the Venn diagram in fig 2.2, we have shaded A∩B, the area that is
common to both A and B

40
 A∩B is shaded

Example 2.2: Let S = {a, b, c, d} and T = {f, b, d, g}. Then S∩T = {b, d}

Example 2.3: Let V = 2, 3, 6, ......} i.e. the multiples of 2; and

Let W = {3, 6, 9,....} i.e. the multiples of 3. Then

V∩W = {6, 12, 18......}

The intersection of A and B may also be defined concisely by A∩B =

{x∈A, x∈B}

Here, the comma has the same meaning as “and”.

Remark 2.3: It follows directly from the definition of the intersection of two sets that;

A∩B =B∩A

Remark 2.4:Each of the sets A and B contains A∩B as a subset, i.e.,

(A∩B)⊂A and (A∩B) ⊂B

Remark 2.5: If sets A and B have no elements in common, i.e. if A and B are disjoint,

then the intersection of A and B is the null set, i.e. A∩B =∅

In some books, especially on probability, the intersection of A and B is denoted by AB

and is called the set-theoretic product of A and B or, simply, A times B.

2.1.3 Difference

The difference of sets A and B is the set of elements which belong to A but which do
not belong to B. We denote the difference of A and B by A – B
41
Which is read “A difference B” or, simply, “A minus B”.

Example 3.1: In the Venn diagram in Fig 2.3, we have shaded A – B, the area in A which
is not part of B.

A – B is shaded

Example 3.2: Let R be the set of real numbers and let Q be the set of rational numbers.
Then R – Q consists of the irrational numbers.
The difference of A and B may also be defined concisely by A – B

= {xx∈A, x∉B}

Remark 2.6: Set A contains A – B as a subset, i.e.,

(A – B)⊂A

Remark 2.7: The sets (A – B), A∩B and (B – A) are mutually disjoint, that is, the
intersection of any two is the null set.

The difference of A and B is sometimes denoted by A/B or A ~ B

2.1.4 Complement

The complement of a set A is the set of elements that do not belong to A, that is, the
difference of the universal set U and A. We denote the complement of A by A′.

42
 Example 4.1: In the Venn diagram below, we shaded the complement of A, i.e. the area
outside A. Here we assume that the universal set U consists of the area in the rectangle.

B
A

Example 4.2: Let the Universal set U be the English alphabet and let T = {a, b, c}. Then;

T′ = {d, e, f... y, z}

Example 4.3:

Let E = {2, 4, 6, ...}, that is, the even numbers.

Then E′ = {1, 3, 5, ...}, the odd numbers. Here we assume that the universal set is the
natural numbers, 1, 2, 3,.....

The complement of A may also be defined concisely by; A′=

{xx∈U, x∉A} or, simply,

A′= {xx∉A}

We state some facts about sets, which follow directly from the definition of the
complement of a set.

Remark 2.8: The union of any set A and its complement A′ is the universal set, i.e.,

43
 A∪A′ = U

Furthermore, set A and its complement A′ are disjoint, i.e., A∩A′ =

Remark 2.9: The complement of the universal set U is the null set ∅, and vice versa, that
is,

U′ = ∅ and ∅′ = U

Remark 2.10: The complement of the complement of set A is the set A itself. More
briefly,
(A′)′ = A

Our next remark shows how the difference of two sets can be defined in terms of the
complement of a set and the intersection of two sets. More specifically, we have the
following basic relationships:

Remark 2.11: The difference of A and B is equal to the intersection of A and the
complement of B, that is,

A – B = A∩B′

The proof of Remark 2.11 follows directly from definitions:

A – B = {xx∈A, x∉B} = {xx∈A, x∉B’} = A∩B’

2.2 Operations on Comparable Sets

The operations of union, intersection, difference and complement have simple properties
when the sets under investigation are comparable. The following theorems can be
proved.

44
Theorem 2.1: Let A be a subset of B. Then the intersection of A and B is precisely A,
that is,

A⊂B implies A∩B = A

Theorem 2.2: Let A be a subset of B. Then the union of A and B is precisely B, that is,

A⊂B implies A∪B = B

Theorem 2.3: Let A be a subset of B. Then B′ is a subset of A′, that is, A⊂B

implies B′⊂A′.

We illustrate Theorem 2.3 by the Venn diagrams in Fig 2-5 and 2-6. Notice how the
area of B′ is included in the area of A′.
B
A
B
A

B′ is shaded A′ is shaded

Theorem 2.4: Let A be a subset of B. Then the Union of A and (B – A) is precisely B,

that is,

A⊂B implies A∪(B – A) = B

Exercises

1. In the Venn diagram below, shade A Union B, that is A∪B:

45
 (a) (b) (c)

Solution:

The union of A and B is the set of all elements that belong to A and to B or to both. We
therefore shade the area in A and B as follows:

2. Let A = {1,2,3,4}, B = {2,4,6,8} and C = {3,4,5,6}. Find

(a) A∪B, (b) A∪C, (c) B∪C, (d) B∪B

Solution:
To form the union of A and B we put all the elements from A together with the elements
of B Accordingly,

A∪B = {1,2,3,4,6,8}
A∪C = { 1,2,3,4,5,6}
B∪C = {2,4,6,8,3,5}
B∪B = {2,4,6,8}
Notice that B∪B is precisely B.

46
3. Let A, B and C be the sets in Problem 2. Find (1) (A∪B)∪C,(2) A∪(B∪C).

Solution:
1. We first find (A∪B) = {1,2,3,4,6,8}. Then the union of {A∪B} and C is

(A∪B)∪C ={1,2,3,4,6,8,5}

2. We first find (B∪C) = {2,4,6,8,3,5}. Then the union of A and (B∪C) is A∪(B∪C)

={1,2,3,4,6,8,5}.

Notice that (A∪B)∪C = A∪(B∪C)

4.0 Summary

The basic set operations are Union, Intersection, Difference and Complement defined as:

• The Union of sets A and B, denoted by A∪B, is the set of all elements, which
belong to A or to B or to both.

• The intersection of sets A and B, denoted by A∩B, is the set of elements, which
are common to A and B. If A and B are disjoint then their intersection is the Null
set∅

• The difference of sets A and B, denoted by A – B, is the set of elements which

belong to A but which do not belong to B.

• The complement of a set A, denoted by A’, is the set of elements, which do not
belong to A, that is, the difference of the universal set U and A.
5.0 Self-Assessment Questions

1. Let X = {Tom, Dick, Harry}, Y = {Tom, Marc, Eric} and Z = {Marc, Eric,
Edward}. Find (a) X∪Y, (b) Y∪Z(c)X∪Z

2. Prove: A∩∅=∅.
47
 3. Prove Remark 2.6: (A –B)⊂A.
4. Let U = {1,2,3,...,8,9}, A = {1,2,3,4}, B = {2,4,6,8} and C = {3,4,5,6}. Find
(a) A′, (b) B′, (c) (A∩C)′, (d) (A∪B)′, (e) (A′)′, (f) (B – C)′

5. Prove: B – A is a subset of A′

6.0 Additional Activities (Videos, Animations & Out of Class activities)

a. Visit U-tube add https://www.youtube.com/watch?v=LaY8dK3msJk
https://www.youtube.com/watch?v=W8zXWxT_H7A
https://www.youtube.com/watch?v=IqFj0kMDNVU&t=79s. Watch the video &
summarise in 1 paragraph

7.0 References and Further Readings

Seymour, L.S. (1964). Outline Series: Theory and Problems of Set Theory and Related

Topics, pp. 1 – 133.

Sunday, O.I. (1998). Introduction to Real Analysis (Real – valued Functions of a

Real Variable), Vol. 1

48
 STUDY SESSION 3
Set of Numbers
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 – Real Number, R.
2.2 – Line diagram of the number systems
2.3 – Decimals and real numbers
2.4 – Inequalities
2.5 – Bounded and unbounded sets
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

Introduction
You are welcome to this study session. Although, the theory of sets is very general,
important sets, which we meet in elementary mathematics, are sets of numbers. Of
particular importance, especially in analysis, is the set of real numbers, which we denote
by R.

In fact, we assume in this study session, unless otherwise stated, that the set of real
numbers R is our universal set. We first review some elementary properties of real
numbers before applying our elementary principles of set theory to sets of numbers. The
set of real numbers and its properties is called the real number system.
49
1.0 Learning Outcomes
At the ends of this study session, I expect you to be able to do the following:
1. Represent the set of numbers on the real line
2. Perform the basic set operations on intervals

2.0 Main Content

2.1 Real Numbers, R
One of the most important properties of the real numbers is that a points on a straight line
can represent them. As in Fig 3.1, we choose a point, called the origin, to represent 0 and
another point, usually to the right, to represent 1. Then there is a natural way to pair off
the points on the line and the real numbers, that is, each point will represent a unique real
number and each real number will be represented by a unique point. We refer to this line
as the real line. Accordingly, we can use the words “point” and “number”
interchangeably. Those numbers to the right of 0, i.e. on the same side as 1, are called the
positive numbers and those numbers to the left of 0 are called the negative numbers. The
number 0 itself is neither positive nor negative.

E=2.7
-π ½ √2 π

-5 -4 -3 -2 -1 0 1 2 3 4 5

Fig 3.1

50
2.1.1 Integers, Z
Integers are those real numbers

…, -3, -2, -1, 0, 1, 2, 3,…

We denote the integers by Z; hence we can write Z =

{…, -2, - 1, 0, 1, 2…}

Integers are also referred to as the “whole” numbers.

One important property of integers is that they are “closed” under the operations of
addition, multiplication and subtraction; that is, the sum, product and difference of two
integers is again an integer. Notice that the quotient of two integers, e.g. 3 and 7, need
not be an integer; hence the integers are not closed under the operation of division.

2.1.2 Rational Numbers, Q

Rational numbers are those real numbers, which can be expressed as the ratio of two
integers. We denote the set of rational numbers by Q. Accordingly,

Q = {xx = p q where p z, qz}

Notice that each integer is also a rational number since, for example, 5 = 5/1; hence Z is
a subset of Q.

The rational numbers are closed not only under the operations of addition, multiplication
and subtraction but also under the operation of division (except by 0). In other words, the
sum, product, difference and quotient (except by 0) of two rational numbers is again a
rational number.

2.1.3 Natural Numbers, N

The natural numbers are the positive integers. We denote the set of natural numbers by
51
N; hence N = {1,2,3…}

The natural numbers were the first number system developed and were used primarily, at
one time, for counting. Notice the following relationship between the above number
systems:

NZQR

The natural numbers are closed only under the operation of addition and multiplication.
The difference and quotient of two natural numbers needed not be a natural number.

The prime numbers are those natural numbers p, excluding 1, which are only divisible 1
and p itself. We list the first few prime numbers: 2,3,5,7,11,13,17,19…

2.1.4 Irrational Numbers, Q’

The irrational numbers are those real numbers which are not rational, that is, the set of
irrational numbers is the complement of the set of rational numbers Q in the real numbers
R; hence Q’ denote the irrational numbers. Examples of irrational numbers are 3, ,
2, etc.

2.2 Line Diagram of the Number Systems

Below is a line diagram of the various sets of numbers, which we have investigated. (For
completeness, the diagram include the sets of complex numbers, number of the form a +
bi where a and b are real. Notice that the set of complex numbers is the superset of the
set of real numbers.)

Complex
52
b
 Real Numbers

Rational Numbers Irrational Numbers

Integers
Natural Numbers

Negative Integers Zero

Prime Numbers

2.3 Decimals and Real Numbers

Every real number can be represented by a “non-terminating decimal”. The decimal

representation of a rational number p/q can be found by “dividing the denominator q into
the numerator p”. If the indicated division terminates, as for

3/8 = .375

We write 3/8=.375000 or

3/8 =.374999…

If the indicated division of q into p does not terminate, then it is known that a block of
digits will continually be repeated; for example, 2/11 = .181818…

We now state the basic fact connecting decimals and real numbers. The rational numbers
correspond precisely to those decimals in which a block of digits is continually repeated,
53
and the irrational numbers correspond to the other non- terminating decimals.

2.4 Inequalities

The concept of “order” is introduced in the real number system .

Definition: The real number a is less than the real number b, written a < b

If b – a is a positive number.

The following properties of the relation a < b can be proven. Let a, b and c be real

numbers; then:

P1: Either a < b, a = b or b < a. P2: If

a < b and b < c, then a < c. P3: If a <

b, then a + c < b + c

P4: If a < b and c is positive, then ac < bc P5: If

a < b and c is negative, then bc < ac.

Geometrically, if a < b then the point a on the real line lies to the left of the point b. We

also denote a < b by b > a

Which reads “b is greater than a”. Furthermore, we write a < b

or b > a

if a < b or a = b, that is, if a is not greater than b.

Example 1.1: 2 < 5; -6 < -3 and 4 < 4; 5 > -8

Example 1.2: The notation x < 5 means that x is a real number which is less than

54
5; hence x lies to the left of 5 on the real line.

The notation 2 < x < 7; means 2 < x and also x < 7; hence x will lie between 2 and 7 on
the real line.

Remark 3.1: Notice that the concept of order, i.e. the relation a < b, is defined in terms
of the concept of positive numbers. The fundamental property of the positive numbers
which is used to prove properties of the relation a < b is that the positive numbers are
closed under the operations of addition and multiplication. Moreover, this fact is
intimately connected with the fact that the natural numbers are also closed under the
operations of addition and multiplication.

Remark 3.2: The following statements are true when a, b, c are any real numbers:

1. a < a

2. if a < b and b < a then a =b.

3. if a < b and b < c then a < c.

2.4.1 Absolute Value

The absolute value of a real number x, denoted by ÷ x ÷ is defined by the formula

x = x if x > 0

-x if x < 0

that is, if x is positive or zero then x equals x, and if x is negative then
x equals – x. Consequently, the absolute value of any number is always non-
negative, i.e. x> 0 for every x  R.

Geometrically speaking, the absolute value of x is the distance between the point x on

55
the real line and the origin, i.e. the point 0. Moreover, the distance between any two
points, i.e. real numbers, a and b is a - b= b - a. Example 2.1: -2 = 2, 7 =
7. -p = p

Example 2.2: The statement x < 5 can be interpreted to mean that the distance
between x and the origin is less than 5, i.e. x must lie between -5 and 5 on the real line.
In other words,

x< 5 and -5 < x < 5

have identical meaning. Similarly,

x< 5 and -5 < x < 5

have identical meaning.

2.4.2 Intervals

Consider the following set of numbers;

A1 = {x 2 < x < 5}

A2 = {x 2 <x <5}

A3 = {x 2 < x <5}

A4 = {x2 <x < 5}

Notice that the four sets contain only the points that lie between 2 and 5 with the
possible exceptions of 2 and/or 5. We call these sets intervals, the numbers 2 and 5 being
the endpoints of each interval. Moreover, A1 is an open interval as it does not contain
either end point: A2 is a closed interval as it contains both endpoints; A3 and A4 are
open-closed and closed-open respectively.
56
We display, i.e. graph, these sets on the real line as follows.

- - - - - 0 1 2 3 4 5 6

A1

- - - - - 0 1 2 3 4 5 6

A2

- - - - - 0 1 2 3 4 5 6

A3
- - - - - 0 1 2 3 4 5 6

Notice that in each diagram, we circle the endpoints 2 and 5 and thicken (or shade) the
line segment between the points. If an interval includes an endpoint, then this is denoted
by shading the circle about the endpoint.

Since intervals appear very often in mathematics, a shorter notation is frequently used to
designate intervals, specifically, the above intervals are sometimes denoted by;

A1 = (2, 5)

57
A2 = [2, 5]

A3 = (2, 5]

A4 = [2, 5)

Notice that a parenthesis is used to designate an open endpoint, i.e. an endpoint that is
not in the interval, and a bracket is used to designate a closed endpoint.

2.4.2.1 Properties of Intervals

Let  be the family of all intervals on the real line. We include in  the null set 
and single points a = [a, a]. Then the intervals have the following properties:

1. The intersection of two intervals is an interval, that is, A,Bimplies A

B

2.The union of two non-disjoint intervals is an interval, that is, A  , B  , A

B   implies A  B  

3. The difference of two non-comparable intervals is an interval, that is, A  , B

 , A  B, B  A implies A - B  

Example 3.1: Let A = {2, 4), B = (3, 8). Then

A Ç B = (3, 4), A È B = [2, 8)

A – B = [2, 3], B – A = [4, 8)

Infinite Intervals

Sets of the form A =

{xx > 1} B = {x

58
x >2 C = {x x < 3}

D = {x x <4}

E = {x  x  }

Are called infinite intervals and are also denoted by

A = (1, ∞), B = [2, ∞), C = ( - ∞, 3), D = (-∞, 4], E = (-∞,∞)

We plot these intervals on the real line as follows:

-4 -3 -2 -1 0 1 2 3 4

A is Shaded

-4 -3 -2 -1 0 1 2 3 4

B is Shaded

-4 -3 -2 -1 0 1 2 3 4

C is Shaded

59
 -4 -3 -2 -1 0 1 2 3 4
D is Shaded

-4 -3 -2
-2 -1 0 12 3 4

E is Shaded

60
2.5 Bounded And Unbounded Sets

Let A be a set of numbers, then A is called bounded set if A is the subset of a finite
interval. An equivalent definition of boundedness is;

Definition 3.1: Set A is bounded if there exists a positive number M such that x
<M.

for all x  A. A set is called unbounded if it is not bounded.

Notice then, that A is a subset of the finite interval [-M, M].

Example 4.1: Let A = {1, ½, 1/3…}. Then A is bounded since A is certainly a

subset of the closed interval [0, 1].

Example 4.2: Let A = {2, 4, 6,…..}. Then A is an unbounded set.

Example 4.3: Let A = {7, 350, -473, 2322, 42}. Then A is bounded

Remark 3.3: If a set A is finite then, it is necessarily bounded.

If a set is infinite then it can be either bounded as in example 4.1 or unbounded as

in example 4.2.

3.0 Tutor Marked Assignment

1. Prove: If a < b and B < c, then a <c.

61
4.0 Summary
In this study session, you have been introduced to the sets of numbers. The set of
real numbers, , contains the set of integers, Z, Rational numbers, Q, Natural
numbers, N, and Irrational numbers, Q’.
Intervals on the real line are open, closed, open-closed or closed-open depending
on the nature of the endpoints.

4.0 Self-Assignment Questions

1-Under what conditions will the union of two disjoint interval be an interval?
2- If two sets R and S are bounded, what can be said about the union and
Intersection of these sets?

6.0 Additional Activities (Videos, Animations & Out of Class activities)

a. Visit U-tube add : https://www.youtube.com/watch?v=9orS7coe2WI
https://www.youtube.com/watch?v=6S7cP9XHaHA. Watch the video & summarise
in 1 paragraph

7.0 References And Further Readings

Seymour, L.S. (1964). Outline Series: Theory and Problems of Set Theory and
Related Topics, pp. 1 – 133.

Sunday, O.I. (1998). Introduction to Real Analysis (Real–valued Functions of a

Real Variable), Vol. 1

62
 STUDY SESSION 4
Functions
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 – Mappings, Operators and Transformations.
2.2 – Equal Functions
2.3 – Range of a Function
2.4 – Inverse of a function
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions
6.0 Additional Activities (Videos, Animations & Out of Class activities)
7.0 References/Further Readings

Introduction
You are welcome to this study session. In this study session, you will be introduced
to the concept of functions, mappings and transformations. You will also be given
instructive and typical examples of functions.

1.0 Learning Outcomes

At the end of this session, I expect you to be able to dot the following :
1. Identify functions from statements or diagrams
2. Find composition function of two or more functions

63
2.0 Main Content
Definition
Suppose that to each element in a set A there is assigned by some manner or other,
a unique element of a set . We call such assignment function. If we let ¦ denote
these assignments, we write;
f: A B

Which reads “f is a function of A onto B”. The set A is called the domain of the
function f, and B is called the co-domain of f. Further, if a  A the element in B
D = [4, 9] = {x4 <x <9}
Which is assigned to a is called the image of a and is denoted by f(a) which reads
“f of a”.
We list a number of instructive examples of functions.

Example 1.1: Let f assign to each real number its square, that is, for every real

number x let f(x) = x2. The domain and co-domain of f are both the real numbers, so
we can write: f: >
The image of -3 is 9; hence we can also write f (-3) = 9
or f: 3 9
Example 1.2: Let f assign to each country in the world its capital city. Here, the
domain of f is the set of countries in the world; the co-domain of f is the list of
capital cities in the world. The image of France is Paris, that is, f(France) = Paris
Example 1.3: Let A = {a, b, c, d} and B = {a, b, c} define a function f of A into B
by the correspondence f(a) = b, f(b) = c, f(c) = c and f(d) = b. By this definition, the
image, for example, of b is c.
Example 1.4: Let A = {-1, 1}. Let f assign to each rational number in  the number

64
1, and to each irrational number in  the number -1. Then f: A, and f can be
defined concisely by
f(x) = 1 if x is rational

-1 if a is irrational

Example 1.5: Let A = {a, b, c, d} and B = {x, y, z}. Let f:

A  B be defined by the diagram:

x
a
y
b
z
c

Notice that the functions in examples 1.1 and 1.4 are defined by specific formulas.
But this need not always be the case, as is indicated by the other examples. The
rules of correspondence which define functions can be diagrams as in example 1.5,
or geographical as in example 1.2, or, when the domain is finite, can be listed for
each element in the domain as in example 1.4.

65
2.1 Mappings, Operators, Transformations
If A and B are sets in general, not necessarily sets of numbers, then a function f of
A into B is frequently called a mapping of A into B; and the notation
f: A ---> B is then read “f maps A into B”. We can also denote a mapping, or
function, f of A into B by
f: A B

Or by the diagram

f B

If the domain and co-domain of a function are both the same set, say

f: A ---> A then f is frequently called an operator or transformation on A. As we

will see later operators are important special cases of functions.

2.2 Equal Functions

If f and g are functions defined on the same domain D and if f (a) = g (a) for every a
 D, then the functions f and g are equal and we write f = g

Example 2.1: Let f (x) = x2 where x is a real number. Let g(x) = x2 where x is a
complex number. Then the function f is not equal to g since they have different
domains.

Example 2.2: Let the function f be defined by the diagram

66
 1
1
2
2
3

Let a function g be defined by the formula g(x) = x2 where the domain of g is the
set {1, 2}. Then f = g since they both have the same domain and since f and g assign
the same image to each element in the domain.

Example 2.3: Let f:  and g:. Suppose f is defined by f(x) = x2 and g by

g(y) = y2. Then f and g are equal functions, that is, f = g. Notice that x and y are
merely dummy variable in the formulas defining the functions.

2.3 Range of a Function

Let f be the mapping of A into B, that is, let f: A B. Each element in B need not
appear as the image of an element in A. We define the range of f to consist
precisely of those elements in B which appear and the image of at least one
element in A. We denote the range of f: A by f(A)
Notice that f(A) is a subset of B. i.e. f(A)

Example 3.1: Let the function f:  be defined by the formula f(x) = x2. Then the
range of f consists of the positive real numbers and zero.

67
Example 3.2: Let f: A B be the function in Example 1.3. Then f(A) = {b, c}

2.3.1 ONE – One (injective) functions

Let f map A into B. Then f is called a one-one or Injective function if different
elements in B are assigned to different elements in A, that is, if no two different
elements in A have the same image. More briefly, f: A  B is one-one if f(a) = f(a’)
implies a = a` or, equivalently, a = a` implies f(a)  f(a`)

Example 4.1: Let the function f:  be defined by the formula f(x) = x2. Then f
is not a one-one function since f(2) = f(-2) = 4, that is, since the image of two
different real numbers, 2 and -2, is the same number, 4.

Example 4.2: Let the function f:  be defined by the formula f(x) = x3. Then f
is a one-one mapping since the cubes of the different real numbers are themselves
different.
Example 4.3: The function f which assigns to each country in the world, its capital
city is one-one since different countries have a different capital that is no city is the
capital of two different countries.

2.3.2 Onto (subjective) function

Let f be a function of A into B. Then the range f(A) of the function f is a subset of
B, that is, f(A)  B. If f(A) = B, that is, if every member of B appears as the image
of at least one element of A, then we say “f is a function of A onto B”, or “f maps A
onto B”, of “f is an onto or Subjective function”.

Example 5.1: Let the function f:  be defined by the formula f(x) = x2. Then f
is not an onto function since the negative numbers do not appear in the range of f,
That is, no negative number is the square of a real number.

68
Example 5.2: Let f: A B be the function in Example 1.3. Notice that f(A) = {b,
c}. Since B = {a, b, c} the range of f does not equal co-domain, i.e. is not onto.
Example 5.3: Let f: A  B be the function in example 1.5: Notice that

f(A) = {x, y, z} = B that is, the range of f is equal to the co-domain B. Thus f maps
A onto B, i.e. f is an onto mapping.

2.3.3 Identity function

Let A be any set. Let the function f: A A be defined by the formula f(x) = x, that
is, let f assign to each element in A the element itself. Then f is called the identity

function or the identity transformation on A. We denote this function by 1 or by 1A.

2.3.4 Constant functions

A function f of A onto B is called a constant function if the same element of bB
is assigned to every element in A. In other words, f: A  B is a constant function if
the range of f consists of only one element.

2.3.5 Product function

Let F: A  B and g: BC be two functions then the product of functions f and g is
denoted
(g o f) : A  C defined by
(g o f)(a) = g (f(a))

69
 We can now complete our
diagram:

g
A
B C

(g 0 f)

Example 7.1: Let f: A  B and g: B  C be defined by the diagrams

A B C

a x r

b y s

c z t

We compute (g o f): A  C by its definition:

(g o f)(a) = g(f(a)) = g(y) = t
(g o f)(b) = g(f(a)) = g(z) = r

(g o f)(c) = g(f(a)) = g(y) = t

Notice that the function (g o f) is equivalent to “following the arrows” from A to C

70
in the diagrams of the functions f and g.

Example 7.2: To each real number let f assign its square, i.e. let f(x) = x2. To each
real number let g assign the number plus 3, i.e. let g(x) = x + 3. Then

(g o f)(x) = f(g(x)) = f(x+3) = (x+3)2 = x2 + 6x + 9

(g o f)(x) = g(f(x)) = g(x2) = x2 + 3

Remark 4.1: Let f: A  B. Then IB

o f = f and f o 1A = f

that is, the product of any function and identity is the function itself.

Associativity of Products of Functions

Let f: A  B, g: B  C and h: c  D. Then, as illustrated in Figure 4-1, we can

form the product function g o f: A  C, and then the function ho (g o f): A D.

f g h
A B C D

(g 0 f)

(ho (g o f)

71
Similarly, as illustrated in Figure 4-2, we can form the product function h o
g: B  D and then the function (h o g) o f: A  D.

A B C D

(h 0 g)

(ho (g o f)

Both h o (g o f) and (h o g) o f are function of A into D. A basic theorem on

functions states that these functions are equal. Specifically,

Theorem 4.1: Let f: A B, B  C and h: C D. Then

(h o g) o f = h o (g o f)

In view of Theorem 4.1, we can write

h o g o f: A  D without any parenthesis.

2.4 Inverse of a Function

Let f be a function of A into B, and let b  B. Then the inverse of b, denoted by f -1

(b) consists of those elements in A which are mapped onto b, that is, those element
72
in A which have m as their image. More briefly, if f: A B then f -1 (b) = {x} x 
A; f(x) = b}

Notice that f -1 (b) is always a subset of A. We read f -1 as “f inverse”.

Example 8.1: Let the function f: A  B be defined by the diagram

x
a
y
b
z
c

Then f -1 (x) = {b, c}, since both b and c have x as their image point.

Also, f -1 (y) = {a}, as only a is mapped into y. The inverse of z, f -1 (z), is the null
set , since no element of A is mapped into z.

Example 8.2: Let f: , the real numbers, be defined by the formula f(x) = x2.

Then f -1 (4) = {2, -2}, since 4 is the image of both 2 and -2 and there is no other

real number whose square is four. Notice that f -1 (-3) =, since there is no element
in  whose square is-3.

Example 8.3: Let f be a function of the complex numbers into the complex

numbers, where f is defined by the formula f(x) = x2. Then f -1 (3) = {3i, - 3i},
as the square of each of these numbers is -3.
Notice that the function in Example 8.2 and 8.3 are different although they are
defined by the same formula.
73
We now extend the definition of the inverse of a function. Let f: A  B and let D be
a subset of B, that is, D  B. Then the inverse of D under the mapping f, denoted by

f –1 (D), consists of those elements in A which are mapped onto some element in D.
More briefly,

f -1 (D) = {xx  A, f(x)  D}

Example 9.1: Let the function f: A  B be defined by the diagram

x r
y s
z t

Then f -1 ({r, s}) = {y}, since only y is mapped into r or s. Also

f -1 ({r, t}) = {x, y, z} = A, since each element in A as its image r or t.

Example 9.2: Let f:  be defined by f(x) = x2, and let

Then f -1 (D) = {x-3 <x <-2 or 2 <x <3}

Example 9.3: Let f: A  B be any function. Then f -1 (B) = A, since every element

in A has its image in B. If f(A) denote the range of the function f, then f -1 (f(A)) =
A

Further, if b  B, then f -1(b) = f -1({b})

74
Here f -1 has two meanings, as the inverse of an element of B and as the inverse of
a subset of B.

2.4.1 Inverse function

Let f be a function of A into B. In general, f -1(b) could consist of more than one
element or might even be empty set . Now if f: A  B is a one-one function and

an onto function, then for each b  B the inverse f -1 (b) will consist of a single
element in A. We therefore have a rule that assigns to each b  B a unique element

f -1(b) in A. Accordingly, f -1 is a function of B into A and we can write f -1 : B 

A

In this situation, when f: A ® B is one-one and onto, we call f -1 the inverse

function off.
Example 10.1: Let the function f: A  B be defined by the diagram

a f x

b y

c z

Notice that f is one-one and onto. Therefore f -1, the inverse function exists.

We describe f -1: B  A by the diagram

75
 x a
f -1

y b

z c

Example6.1: Let the function f be defined by the diagram:

a 1

b 2

c 3

Then f is a constant function since 3 is assigned to every element in A.

Example 6.3: Let f:  be defined by the formula f(x) = 5. Then f is a constant
Function since 5 is assigned to every element.

2.4.2 Product function

76
Let f be a function of A and B and let g be a function of B, the co-domain of f, into
C. We illustrate the function below.

f g
A B C

Let a  A; then its image f (x) is in B which is the domain of g. Accordingly, we

can find the image of f (a) under the mapping of g, that is, we can find g (f(a)).
Thus, we have a rule which assigns to each element a A a corresponding element
(f(a))  C. In other words, we have a function of A into C. This new function is
called the product function or composition function of f and g and it is denoted by

(g o f) or (gf)
More briefly, if f: A  B and g: B  C

Notice further, that if we send the arrows in the opposite direction in the first

diagram of f we essentially have the diagram of f -1.

Example 10.2: Let the function f: A  B be defined by the diagram

Since f(a) = y and f(c) = y, the function f is not one-one. Therefore, the inverse

function f -1 does not exist. As f -1 (y) = {a, c}, we cannot assign both a and c to the
element y  B.
a x

b y

c z

77
Example 10.3: Let f: , the real numbers, be defined by f(x) = x3. Notice that f
is one-one and onto.

Hence f -1:  exists. In fact, we have a formula which defines the inverse

function, f -1 (x) = 3x.

2.4.3 Theorems on the Inverse Function

Let a function f: A  B have an inverse function f -1: B  A. Then we see by the

diagram

f f -1
A B C

(f-1 0 f)

That we can form the product (f -1 o f) which maps A into A, and we see by the
diagram

78
 f -1 f
B A B

(f-1 0 f)
That we can form the product function (f o f -1) which maps B into B. We now state
the basic theorems on the inverse function:
Theorem 4.2: Let the function f: A  B be one-one and onto; i.e. the inverse

function f -1: B  A exists. Then the product function

(f -1 o f): A  A

is the identity function on A, and the product function (f o f -1): B  B is the

identity function on B.
Theorem 4.3: Let f: A  B and g: B  A. Then g is the inverse function of f, i.e. g

= f – 1, if the product functions (g o f): A  A is the identity function on A and (f o

g): B  B is the identity function on B.

Both conditions are necessary in Theorem 4.3 as we shall see from the example
below;

X a a x

b b

y c c y

(a) (b)
79
Now define a function g: B  A by the diagram (b) above.

We compute (g o f): A A, (g o f)(x) = g (f(x)) = g(c) = x and (g o f)(y) = g (f(y))

= g(a) = y

Therefore the product function (g o f) is the identity function on A. But g is not the

inverse function of f because the product function (f o G) is not the identity

function on B, f not being an auto function.

3.0 Tutor Marked Assignments

1. Let the function f: R#  R# be defined by f (X) = {1 if x is rational] {-1 if x is
irrational.
a. Express f in words
b. Suppose the ordered pairs (x + y, 1) and (3, x – y) are equal.

Find x and y.

4.0 Summary
Recall that in this study session we have studied concepts such as mappings and
functions. We have also examined the concepts of one-to-one and onto functions.
This concept has allowed us to explain equality between two sets. We also

established in this session that the inverse of f: A – B usually denoted f-1, exits, if f
is a one-to-one and onto function.
It is instructive to note that Inverse function is not studied in isolation but more
importantly a useful and powerful tool in understanding calculus.

4.0 Self– Assignment Questions

80
1- Let M = {1, 2, 3, 4, 5} and let the function f: M  be defined by f(x) = x2 + 2x
-1. Find the graph off.
2- Prove: A x (B  C) = (A x B)  (A x C)
3- Prove A  B and C  D implies (A x C)  (B xD).

6.0 Additional Activities (Videos, Animations & Out of Class activities)

a. Visit U-tube add https://www.youtube.com/watch?v=kvGsIo1TmsM&t=68s
https://www.youtube.com/watch?v=VhokQhjl5t0
https://www.youtube.com/watch?v=Kj3Aqov52TY\. Watch the video & summarize
in 1 paragraph

REFERENCES AND FURTHERREADINGS

Seymour L.S. (1964). Outline Series: Theory and Problems of Set Theory and
Related Topics, pp. 1 – 133.
Sunday, O.I. (1998). Introduction to Real Analysis (Real-valued Functions of a
Real Variable), Vol. 1.

81
 MODULE 2
Contents:
Study Session 1: Probability Theory and Application Contents.
Study Session 2: Decision Theory and Types of Decision Situations.
Study Session 3: Decision Trees.
Study Session 4: Operations Research (OR) and Modeling in
Operation Research.

82
 STUDY SESSION 1
Probability Theory And Applications Contents
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 – Definition of Probability
2.2 – Law of Probability
2.3 – Joint, Marginal, Conditional Probabilities and the Bayes Theory
2.4 – Probability and Expected Value
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions
6.0 Additional Activities
References/Further Readings

Introduction:
You are welcome to this study session. In this study session, we are going to pay a
special attention to the concept of probability, probability laws, computation of
probabilities and their applications to business decisions. At the end of this lecture, I
expect you to be able to make effective decisions under uncertainties. The basic
elements of probability theory are the outcomes of the process or phenomenon under
study. Each possible type of occurrence is referred to as an event. The collection of
all the possible events is called the sample space. A compound or joint event is an
event that has two or more characteristics. For example, the event of a student who
is “an economics major and B or above average” is a joint or compound event since
83
the student must be an economics major and have a B or above average. The event
“black ace” is also a compound event since the card must be both black and ace in
order to qualify as a black ace.
Probability is a concept that most people understand naturally, since such words as
“chance,” “likelihood,” “possibility” and “proportion are used as part of everyday
speech. For example, most of the following which might be heard in any business
situation, are in fact statements of probability. a) “There is a 30% chance that this
job will not be finished in time”. b) “There is every likelihood that the business will
make a profit next year”. c) “Nine times out of ten, he arrives late for his
appointments”. In statistical sense, probability simply puts a well-defined structure
around the concept of everyday probability, enabling a logical approach to problem
solving to be followed.

1.0 Learning Outcomes

After studying this session, you should be able to do the following:
• Explain the theory of probability
• Define probability
• Recognise the laws of probability
• Calculate probabilities
• Apply probabilities in making decisions involving uncertainties.

2.0 Main Content

2.1 Definitions of Probability
There are basically two separate ways of calculating probability. 1. Calculation
based on theoretical probability. This is the name given to probability that is
calculated without an experiment that is, using only information that is known about
84
the physical situation. 2. Calculation based on empirical probability. This is
probability calculated using the results of an experiment that has been performed a
number of times. Empirical probability is often referred to as relative frequency or
Subjective probability.
Definition of Theoretical Probability Let E represent an event of an experiment
that has an equally likely outcome set, U, then the theoretical probability of event E
occurring when the experiment carried out is written as Pr (E) and given by:

Where n (E) = the number of outcomes in event set

E n (U) = total possible number of outcomes in outcome set, U. If, for example, an
ordinary six-sided die is to be rolled, the equally likely outcome set, U, is
{1,2,3,4,5,6} and the event “even number” has event set {2,4,6}. It follows that the
theoretical probability of obtaining an even number can be calculated as:

Other Examples
A wholesaler stocks heavy (2B), medium (HB), fine (2H) and extra fine (3H)
pencils which come in packs of 10. Currently in stock are 2 packs of 3H, 14 packs of
2H, 35 packs of HB and 8 packs of 2B. If a pack of pencil is chosen at random for
inspection, what is the probability that they are: (a) medium (b) heavy (c ) not very
fine (d) neither heavy nor medium?

Solutions
Since the pencil pack is chosen at random, each separate pack of pencils can be
regarded as a single equally likely outcome. The total number of outcomes is the
85
number of pencil packs, that is, 2+14+35+8 = 59.

Thus, n (U) = 59

(c) Pr (not very fine). Note that the number of pencil packs that are not very fine is
14+35+8 =57

(d) “Neither heavy nor medium” is equivalent to “fine” or “very fine” in the
problem. There is 2+14 = 16 of these pencil packs.
Thus, Pr (neither heavy nor medium)

=n(neither heavy nor medium) = 16 =0.2781

n(U) 59

Definition of Empirical (Relative Frequency) Probability

If E is some event of an experiment that has been performed a number of times,

yielding a frequency distribution of events or outcomes, then the empirical
probability of event E occurring when the experiment is performed one more time is
given by:

Pr(E)=number of times the event occurred = f(E)

86
number of times the experiment was performed ∑f

Where f(E) = the frequency of event E

Σf = total frequency ofthe experiment.

Put differently, the empirical probability of an event E occurring is simply the

proportion of times that event E actually occurred when the experiment was
performed. For example, if, out of 60 orders received so far this financial year, 12
were not completely satisfied, the proportion, 12/60 = 0.2 is the empirical
probability that the next order received will not be completely satisfied.

Other Examples
A number of families of a particular type were measured by the number of children
they have, given the following frequency distribution:
Number of children: 0 1 2 3 4 5 or more

Number of families: 12 28 22 8 2 2

Use this information to calculate the (relative frequency) probability that another
family of this type chosen at random will have:
(a)2 children (b) 3 or more children (c) less than 2 children
Solutions Here, Σf = total number of families =74
(a)Pr (2 children) =f(2children) =22
∑f 74 = 0.297

(b) f (3 or more children) = 8+2+2 = 12 Thus,

87
Pr(3 or more children = 12/74 = 0.162
(c) Pr(less than 2 children) = f (less than 2 children = 12+28 = 0.541
∑f 74

In-text Question 1: Define Theoretical and Empirical probability.

In-text Answer 1: Theoretical probability is the name given to probability that is calculated
without an experiment, that is, using only information that is known about the physical situation.
While Empirical probability is probability calculated using the results of an experiment that has
been performed a number of times.

2.2 Laws of Probability

There are four basic laws of probability.
1. Addition Law for mutually exclusive events
2. Addition Law for events that are not mutually exclusive
3. Multiplication Law for Independent events
4. Multiplication Law for Dependent events.

2.2.1 Addition Law for Mutually Exclusive Events

Two events are said to be mutually exclusive events if they cannot occur at
the same time. The addition law states that if events A and B are mutually
exclusive events, then: Pr (A or B) = Pr (A) + Pr (B)

Examples
The purchasing department of a big company has analysed the number of orders
placed by each of the 5 departments in the company by type as follows:
Table 2.1: Departmental Orders
88
Type of Order Department
Sales Purchasing Production Accounts Maintenance Total
Consumables 10 12 4 8 4 38
Equipment 1 3 9 1 1 15
Special 0 0 4 1 2 7
Total 11 15 17 10 7 60

An error has been found in one of these orders. What is the probability that the
incorrect order:
a) Came from maintenance?
b) Came from production?
c) Came from maintenance or production?
d) Came from neither maintenance nor production?

Solutions
a) since there are 7 maintenance orders out of the 60,

Pr (maintenance) = 7/60 = 0.117

b) Similarly, Pr (Production) = 17/60 =0.283

c) Maintenance and production departments are two mutually exclusive events so
that, Pr (maintenance or production) = Pr (maintenance) + Pr(production = 0.117 +
0.283 =0.40
d) Pr (neither maintenance nor production)

= 1-Pr (maintenance or production) = 1-0.4 = 0.6

89
2.2.2 Addition Law for Events that are Not Mutually Exclusive Events
If events A and B are not mutually exclusive, that is, they can either occur together
or occur separately, then according to the Law:
Pr (A or B or Both) = Pr (A) +Pr (B) – Pr (A).Pr (B)

Example
Consider the following contingency table for the salary range of 94 employees:

Table 2.2: Contingency Table for the Salary range of 94 Employees

Salary/month Men Women Total
N10, 000 and above 20 37 57
Below 10,000 15 22 37
Total 35 59 94

What is the probability of selecting an employee who is a man or earns below N10,
000 per month?

Solution
The two events of being a man and earning below N10, 000 is not mutually
exclusive. It follows that:

35/94 + 37/94 – (35)/(94)(37)/(94)

=0.372+0.394 – (0.372)(0.394)
=0.766 – 0.147
= 0.619 or 61.9%

90
2.2.3 Multiplication Law for Independent Events
This law states that if A and B are independent events, then:
Pr (A and B) = Pr (A). Pr (B)
As an example, suppose in any given week, the probability of an assembly line
failing is 0.03 and the probability of a raw material shortage is 0.1.If these two events
are independent of each other, then the probability of an assembly line failing and a
raw material shortage is given by:
Pr (Assembly line failing and Material shortage) = (0.03)(0.1) = 0.003

2.2.4 Multiplication Law for Dependent Events

This Law states that if A and B are dependent events, then:
Pr (A and B) = Pr(A).Pr(B/A)
Note that Pr (B/A) is interpreted as probability of B given that event A has occurred.

Example
A display of 15 T-shirts in a Sports shop contains three different sizes: small,
medium and large. Of the 15 T-shirts:
3 are small
6 are medium
6 are large.

If two T-shirts are randomly selected from the T-shirts, what is the probability of
selecting both a small T-shirt and a large T-shirt, the first not being replaced before
the second is selected?

Solution
91
Since the first selected T-shirt is not replaced before the second T-shirt is selected,
the two events are said to be dependent events. It follows that:
Pr (Small T-shirt and Large T-shirt)
= Pr(Small).Pr(Large/Small)

= (3/15)(4/14)
= (0.2)(0.429)
= 0.086

2.2.5 Computational Formula for Multiple Occurrence of an Event

The probability of an event, E, occurring X times in n number of trials are given by
the formula:

Pr (Enx) = Cn,xpxq(n - x)

n!
WhereCn,x = X !( n − x )!

p = probability of success q= probability of failure p + q = 1

Example Assume there is a drug store with 10 antibiotic capsules of which 6

capsules are effective and 4 are defective. What is the probability of purchasing the
effective capsules from the drugstore?
Solution
From the given information: The probability of purchasing an effective capsule is: P
= 6/10 = 0.60
92
Since p + q = 1; q = 1 – 0.60 = 0.40; n = 10; x = 6
Pr (E106) = probability of purchasing the 6 effective capsules
= C10,6(0.6)6(0.4)4
= 10!/(6!(10 – 6)!)(0.047)(0.026)
= 10.9.8.7.6!(0.0012) 6! 4!
= 210(0.0012) = 0.252

Hence, the probability of purchasing the 6 effective capsules out of the 10 capsules is
25.2 percent

2.3 Joint, Marginal, Conditional Probabilities, and the Bayes Theorem

2.3.1 Joint Probabilities
A joint probability implies the probability of joint events. Joint probabilities can be
conveniently analysed with the aid of joint probability tables.

The Joint Probability Table

A joint probability table is a contingency table in which all possible events for a
variable are recorded in a row and those of other variables are recorded in a column,
with the values listed in corresponding cells as in the following example.
Example: Consider a research activity with the following observations on the
number of customers that visit XYZ supermarket per day. The observations (or
events) are recorded in a joint probability table as follows:

93
Table 2.3: Joint Probability Table

Table 9.3: Joint Male Female Total

Probability Table (M) (F)
Below 30 (B) 60 70 130
30 and Above (A) 60 20 80
Total 120 90 210

We can observe four joint events from the above table:

Below 30 and Male (B∩M) = 60

Below 30 and Female (B∩F) = 70
30 and Above and Male (A∩M) = 60
30 and Above and Female (A∩F) = 20
Total events or sample space = 210
The joint probabilities associated with the above joint events are

Pr( B ∩ M ) = 60 = 0.2857
210

Pr (B ∩ F) 70/120 = 0 3333
Pr (A ∩ M) 60/210 = 0.2857
Pr (A ∩ F) 20/210 = 0.0952

2.3.2 Marginal Probabilities

The Marginal Probability of an event is its simple probability of occurrence, given
the sample space. In the present discussion, the results of adding the joint
probabilities in rows and columns are known as marginal probabilities.
94
The marginal probability of each of the above events:
Male (M), Female (F), Below 30 (B), and Above 30 (A) are as follows:

Pr (M) = Pr(B∩M) + Pr(A∩M) = 0.2857 + 0.2857 = 0.57

Pr (F) = Pr(B∩F)+Pr(A∩F) = 0..3333 + 0.0952 = 0.43
Pr (B) = Pr(B∩M)+Pr(B∩F) = 0.2857+0.3333 = 0.62
Pr (A) = {r(A∩M)+Pr(A∩F) = 0.2857+0.0952 = 0.38

The joint and marginal probabilities above can be summarized in a contingency table
as follows:

Table 2.4: Joint and Marginal Probability Table.

Age Male (M) Female (F) Marginal

Below 30 (B) 0.2857 0.3333 0.62
30 and Above (A) 0.2857 0.0952 0.38
Marginal Probability 0.57 0.43 1.00

2.3.3 Conditional Probability

Assuming two events, A and B, the probability of event A, given that event B has
occurred is referred to as the conditional probability of event A.
In symbolic term:

Pr(A B ) = Pr( A∩B)=

Pr(A).Pr(B)=Pr(A)P
r(B) Pr(B)

Where Pr (A/B) = conditional probability of event A

95
 Pr (A∩B) = joint probability of events A and B
Pr (B) = marginal probability of event B

In general,
Pr(A/ B ) = Joint Probability of events A and B
Marginal Probability of event B
In-text Question 2: What is Joint and Marginal Probability?

In-text Answer 2: A joint probability implies the probability of joint events and can be conveniently
analysed with the aid of joint probability tables, while Marginal Probability of an event is its simple
probability of occurrence, given the sample space.

2.3.4 The Bayes Theorem

Bayes theorem is a formula which can be thought of as “reversing” conditional
probability. That is, it finds a conditional probability, A/B given, among other
things, its inverse, B/A. According to the theorem, given events A and B,
Pr(A/ B ) = Pr(A) . Pr(( B/A )

Pr (B)

As an example in the use of Bayes theorem, if the probability of meeting a business

contract date is 0.8, the probability of good weather is 0.5 and the probability of
meeting the date given good weather is 0.9, we can calculate the probability that
there was good weather given that the contract date was met.
Let G = good weather, and M = contract date was met

96
Given that: Pr (m) = 0.8; Pr (G) = 0.5; Pr (m/G) = 0.9, we need to find Pr (G/m):
From the Bayes theorem:
Pr( Gm ) = Pr( G )⋅ Pr( m G) = (0.5)(0.9)

Pr(m) 0.8

= 0.5625 or 56.25%

2.4 Probability and Expected Values

The expected value of a set of values, with associated probabilities, is the arithmetic
mean of the set of values. If some variable, X, has its values specified with
associated probabilities, P, then:
Expected value of X = E (X) = Σ PX

Example
An ice-cream salesman divides his days into ‘Sunny’ ‘Medium’ or ‘Cold’. He
estimates that the probability of a sunny day is 0.2 and that 30% of his days are cold.
He has also calculated that his average revenue on the three types of days is N220,
N130, and N40 respectively. If his average total cost per day is N80, calculate his
expected profit per day.

Solution
We first calculate the different values of profit that are possible since we are required
to calculate expected profit per day, as well as the respective probabilities.
Given that Pr (sunny day) = 0.2; Pr (cold day) = 0.3
Since in theory, Pr (sunny day) + Pr (cold day) +Pr (medium day) = 1
97
It follows that:
Pr (medium day) = 1 - 0.2 - 0.3 = 0.5

The total costs are the same for any day (#80), so that the profits that the salesman
makes on each day of the three types of day are;
Sunny day: N(220-80) = N140
Medium day: N (130-80) = N50
Cold day: N(40-80)= -N40 (loss)

3.0 Tutor Marked Assignment

1. What do we mean by the terms “mutually exclusive events” and “independent
events?”

4.0 Summary
The issues discussed in this unit can be summarized in the following way: there are
basically two separate ways of calculating probability which are stated below:
i. Theoretical probability: this is calculated without an experiment, that is, using
only information that is known about the physical situation.
ii. Calculation based on empirical probability. This is probability calculated using
the results of an experiment that has been performed a number of times. Empirical
probability is often referred to as Relative frequency or Subjective probability.
There are four basic laws of probability:
1. addition law for mutually exclusive events
2. addition law for events that are not mutually exclusive
3. multiplication law for independent events
4. Multiplication law for dependent events.
98
The probability of an event, E occurring an X time in n number of trials is given by
the formula:
Pr (Enx) = Cn,xpxq(n – x)

WhereCn,x=n!

X !( n − x )!
p = probability of success
q = probability of failure
p+q=1

A joint probability implies the probability of joint events. Joint probabilities can
be conveniently analysed with the aid of joint probability table in which all possible
events for a variable are recorded in a row and those of other variables are recorded
in a column, with the values listed in corresponding cells.
The Marginal Probability of an event is its simple probability of occurrence, given
the sample space. Assuming two events, A and B, the probability of event A, given
that event B has occurred is referred to as the conditional probability of event A.
The expected value of a set of values, with associated probabilities, is the arithmetic
mean of the set of values. If some variable, X, has its values specified with associated
probabilities, P, then: Expected value of X = E (X) = Σ PX

5.0 Self-Assessment Questions

State, with simple examples, the four laws of probability.

99
6.0 Additional Activities
a. Visit U-tube add https://www.youtube.com/watch?v=f9XFM8YLccg
https://www.youtube.com/watch?v=-8eSOmTPUbk. Watch the video & summarise
in 1 paragraph

7.0 References/Further Reading

Francis, A. (1998). Business Mathematics and Statistics, 5th edition. Great Britain:
Ashford Colour Press

100
 STUDY SESSION 2
Decision Theory/Analysis and Types of Decision Situation
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 – Certainty and Uncertainty in decision analysis
2.2 – Analysis of the Decision Problem
2.3 – Expected Monetary Value Decisions
2.4 – Decision Making Involving Sample Information
2.5 – Elements of Decision Situation
2.6 – Decision under Conflict
6.0 Tutor Marked Assignments
7.0 Summary
5.0 Self-Assessment Questions and Answers
6.0 Additional activity
7.0 References/Further Readings

Introduction
You are welcome to another study session. Decision analysis is the modern
approach to decision making both in economics and in business. It can be defined as
the logical and quantitative analysis of all the factors influencing a decision. The
analysis forces decision makers to assume some active roles in the decision-making
process. By so doing, they rely more on rules that are consistent with their logic and
personal behaviour than on the mechanical use of a set of formulas and tabulated
probabilities. The primary aim of decision analysis is to increase the likelihood

101
of good outcomes by making good and effective decisions. A good decision
must be consistent with the information and preferences of the decision maker. It
follows that decision analysis provides decision-making framework based on
available information on the business environment, be it sample information,
judgmental information, or a combination of both.
However, this study session presents five decision criteria — Maximax, Maximin,
Laplace’s, Minimax Regret, and Hurwicz criterion. We should also state at this
point that the criteria are used for analysing decision situations under uncertainty. In
this session, we shall delve fully into considering these situations and learn how we
can use different techniques in analysing problems in certain decision situations i.e.
Certainty, Uncertainty, Risk, and Conflict situations.

1.0 Study Session Learning Outcomes

After studying this study session, I expect you to be able to do the following :
(1) Identify the four conditions under which decisions can be made
(2) Describe each decision situation, identify and analyze decision problems
(3) Analyze decisions that are made under conditions of certainty and
uncertainties
(4) Make expected monetary value decisions
(5) Identify the techniques for making decision under each decision situation
(6) Solve problems under each of the decision situation.

2.0 Main Content

2.1 Certainty and Uncertainty in Decision Analysis
Most decision-making situations involve the choice of one among several
alternative actions. The alternative actions and their corresponding payoffs are

102
usually known to the decision-maker in advance. A prospective investor choosing
one investment from several alternative investment opportunities, a store owner
determining how many of a certain type of commodity to stock, and a company
executive making capital-budgeting decisions are some examples of a business
decision maker selecting from a multitude of alternatives. The decision maker
however, does not know which alternative will be best in each case, unless he/she
also knows with certainty the values of the economic variables that affect profit.
These economic variables are referred to, in decision analysis, as states of nature as
they represent different events that may occur over which the decision maker has no
control.

The states of nature in decision problems are generally denoted by si (i = 1, 2, 3…

k), where k is the number of or different states of nature in a given business and
economic environment. It is assumed here that the states of nature are mutually
exclusive, so that no two states can be in effect at the same time, and collectively
exhaustive, so that all possible states are included within the decision analysis.
The alternatives available to the decision maker are denoted by ai (i = 1, 2, 3, …, n),
where n is the number of available alternatives. It is also generally assumed that the
alternatives constitute a mutually exclusive, collectively exhaustive set.
When the state of nature, whether known or unknown, has no influence on the
outcomes of given alternatives, we say that the decision maker is operating under
certainty. Otherwise, he/she is operating under uncertainty.

Decision making under certainty appears to be simpler than that under uncertainty.
Under certainty, the decision maker simply appraises the outcome of each
alternative and selects the one that best meets his/her objective. If the number of

103
alternatives is very high however, even in the absence of uncertainty, the best
alternative may be difficult to identify. Consider, for example, the problem of a
delivery agent who must make 100 deliveries to different residences scattered over
Lagos metropolis. There may literally be thousands of different alternative routes
the agent could choose. However, if the agent had only 3 stops to make, he/she
could easily find the least-cost route.

Decision making under uncertainty is always complicated. It is the probability

theory and mathematical expectations that offer tools for establishing logical
procedures for selecting the best decision alternatives. Though statistics provides
the structure for reaching the decision, the decision maker has to inject his/her
intuition and knowledge of the problem into the decision-making framework to
arrive at the decision that is both theoretically justifiable and intuitively appealing.
A good theoretical framework and commonsense approach are both essential
ingredients for decision making under uncertainty. To understand these concepts,
consider an investor wishing to invest N100, 000 in one of three possible
investment alternatives, A, B, and C.

Investment A is a Savings Plan with returns of 6 percent annual interest. Investment

B is a government bond with 4.5 percent annual interest. Investments A and B
involve no risks. Investment C consists of shares of mutual fund with a wide
diversity of available holdings from the securities market. The annual return from
an investment in C depends on the uncertain behaviour of the mutual fund under
varying economic conditions.

The investor’s available actions (ai; I = 1, 2, 3, 4) are as follows

104
a1: do not invest
a2: select investment A the 6% bank savings plan.
a3: select investment B, the 4.5 % government bond.
a4: select investment C, the uncertain mutual fund.

Observe that actions a1 to a3 do not involve uncertainty as the outcomes associated

with them do not depend on uncertain market conditions.
Observe also that action a2 dominates actions a1 and a3. In addition, action a1 is
clearly inferior to the risk-free positive growth investment alternatives a2 and a3 as
it provides for no growth of the principal amount.
Action a4 is associated with an uncertain outcome that, depending on the state of
the economy, may produce either a negative return or a positive return. Thus there
exists no apparent dominance relationship between action a4 and action a2, the best
among the actions involving no uncertainty.

Suppose the investor believes that if the market is down in the next year, an
investment in the mutual fund would lose 10 percent returns; if the market stays the
same, the investment would stay the same; and if the market is up, the investment
would gain 20 percent returns. The investor has thus defined the states of nature for
his/her investment decision-making problem as follows:
s1: the market is down.
s2: the market remains unchanged.
s3: the market is up.

A study of the market combined with economic expectations for the coming year
may lead the investor to attach subjective probabilities of 0.25, 0.25, and 0.50,

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respectively, the states of nature, s1, s2, and s3. The major question is then, how can
the investor use the foregoing information regarding investments A, B, and C, and
the expected market behaviour which serves as an aid in selecting the investment
that best satisfies his/her objectives? This question will be considered in the sections
that follow.
In-text Question 1: Explain decision making under certainty and uncertainty

In-text Answer 1: Decision making under certainty is seen as the situation whereby the decision
maker simply appraises the outcome of each alternative and selects the one that best meets his/her
objectives. Whereas Decision making under uncertainty is always complicated and it is the
probability theory and mathematical expectations that offer tools for establishing logical
procedures for selecting the best decision alternatives.

2.2 Analysis of the Decision Problem

In problems involving choices from many alternatives, one must identify all the
actions that may be taken and all the states of nature which occurrence may
influence decisions. The action to take none of the listed alternatives whose
outcome is known with certainty may also be included in the list of actions.
Associated with each action is a list of payoffs. If an action does not involve risk,
the payoff will be the same no matter which state of nature occurs.
The payoffs associated with each possible outcome in a decision problem should
be listed in a payoff table, defined as a listing, in tabular form, of the value payoffs
associated with all possible actions under every state of nature in a decision
problem. The payoff table is usually displayed in grid form, with the states of
nature indicated in the columns and the actions in the rows. If the actions are
labeled a1, a2… an, and the states of nature labeled s1, s2, …, sk, a payoff table
for a decision problem appears as in table below. Note that a payoff is entered in

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each of the nk cells of the payoff table, one for the payoff associated with each
action under every possible state of nature.
The Payoff Table State of Nature
ACTION s1 s2 s3 …….. sk

a1
a2
a3
.
.
An

Example
The managing director of a large manufacturing company is considering three
potential locations as sites at which to build a subsidiary plant. To decide which
location to select for the subsidiary plant, the managing director will determine the
degree to which each location satisfies the company’s objectives of minimising
transportation costs, minimising the effect of local taxation, and having access to an
ample pool of available semi-skilled workers. Construct a payoff table and payoff
measures that effectively rank each potential location according to the degree to
which each satisfies the company’s objectives.

Solution
Let the three potential locations be sites A, B, and C. To determine a payoff
measure to associate with each of the company’s objectives under each alternative,
the managing director subjectively assigns a rating on a 0 to 10 scale to measure the
degree to which each location satisfies the company’s objectives. For each
objective, a 0 rating indicates complete dissatisfaction, while a 10 rating indicates
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complete satisfaction. The results are presented in table below:
Ratings for three alternative plant sites for a Manufacturing Company

ALTERNATIVE
COMPANY OBJECTIVE Site A Site B Site C
Transportation Costs 6 4 10
Taxation Costs 6 9 5
Workforce Pool 7 6 4

To combine the components of payoff, the managing director asks himself, what
are the relative measures of importance of the three company objectives I have
considered as components of payoff? Suppose the managing director decides that
minimizing transportation costs is most important and twice as important as either
the minimization of local taxation or the size of workforce available. He/she thus
assigns a weight of 2 to the transportation costs and weights of 1 each to taxation
costs and workforce. This will give rise to the following payoff measures:
Payoff (Site A) = 6(2) + 6(1) + 7(1) = 25

Payoff (Site B) = 4(2) + 9(1) + 6(1) = 23

Payoff (Site C) = 10(2) + 5(1) + 4(1) = 29

2.3 Expected Monetary Value Decisions

A decision-making procedure, which employs both the payoff table and prior
probabilities associated with the states of nature to arrive at a decision, is referred to
as the Expected Monetary Value decision procedure. Note that by prior probability,
we mean probabilities representing the chances of occurrence of the identifiable

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states of nature in a decision problem prior to gathering any sample information.
The expected monetary value decision refers to the selection of available action
based on either the expected opportunity loss or the expected profit of the action.
Decision makers are generally interested in the optimal monetary value decisions.
The optimal expected monetary value decision involves the selection of the action
associated with the minimum expected opportunity loss or the action associated
with the maximum expected profit, depending on the objective of the decision
maker.
The concept of expected monetary value applies mathematical expectation, where
opportunity loss or profit is the random variable and the prior probabilities represent
the probability distribution associated with the random variable.
The expected opportunity loss is computed by:
E (Li) = Σall j LijP(sj), (i = 1, 2, …, n)
Where Lij is the opportunity loss for selecting action ai given that the state of
nature, sj, occurs and P (sj) is the prior probability assigned to the state of nature, sj.
The expected profit for each action is computed in a similar way:
E (πi) = Σall j πijP(sj)
Where πij represents profits for selecting action ai

Example
By recording the daily demand for a perishable commodity over a period of time, a
retailer was able to construct the following probability distribution for the daily
demand levels:

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Probability Distribution for the Daily Demand
sj P(sj)
1 0.5
2 0.3
3 0.2
4or more 0.0

The opportunity loss table for this demand-inventory situation is as follows:

The Opportunity Loss Table

State of Nature, Demand
Action, Inventory s1(1) s2(2) s3(3)
a1 (1) 0 3 6
a2 (2) 2 0 3
a3 (3) 4 2 0

We are required to find the inventory level that minimises the expected opportunity
loss.

Solution
Given the prior probabilities in the first table, the expected opportunity loss is
computed as follows:

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E (Li) = Σj=13LijP (sj), for each inventory level, I = 1, 2, 3. The expected
opportunity losses at each inventory level become: E (L1) = 0(0.5) + 3(0.3) +
6(0.2) =N2.10
E (L2) = 2(0.5) + 0(0.3) + 3(0.2) = N1.60
E (L3) = 4(0.5) + 2(0.3) + 0(0.2) = N2.60
It follows that in order to minimise the expected opportunity loss, the retailer
should stock 2 units of the perishable commodity. This is the optimal decision.

2.4 Decision Making Involving Sample Information

Prior probabilities are acquired either by subjective selection or by computation
from historical data. No current information describing the probability of
occurrence of the states of nature was assumed to be available.

In many cases, observational information or other evidences are available to the

decision maker either for purchase or at the cost of experimentation. For example, a
retailer whose business depends on the weather may consult a meteorologist before
making decisions, or an investor may hire a market consultant before investing.
Market surveys carried out before the release of a new product represent another
area in which the decision maker may seek additional information. In each of these
examples, the decision maker attempts to acquire information relative to the
occurrence of the states of nature from a source other than that from which the prior
probabilities were computed.

When such information is available, Baye’s Law can be employed to revise the
prior probabilities to reflect the new information. These revised probabilities are
referred to as posterior probabilities.

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By definition, the posterior probability represented symbolically by P (sk/x) is the
probability of occurrence of the state of nature sk, given the sample information, x.
The probabilities, P(x/si) are the conditional probabilities of observing the
observational information, x, under the states of nature, si, and the probabilities P
(si) are the prior probabilities.

The expected monetary value decisions are formulated in the same way as before,
except that the posterior probabilities are used instead of prior probabilities. If the
objective is to minimise the expected opportunity loss, the quantity is computed for
each action . The expected opportunity loss in this case is computed by:
E (Li) = Σall I LijP(si/x) I = 1, 2, 3,…,n

Example
It is known that an assembly machine operates at a 5 percent or 10 percent
defective rate. When running at a 10 percent defective rate, the machine is said to
be out of control. It is then shut down and readjusted.

From past experience, the machine is known to run at 5 percent defective rate 90
percent of the time. A sample of size n = 20 has been selected from the output of
the machine, and y = 2 defectives have been observed. Based on both the prior and
sample information, what is the probability that the assembly machine is in control
(running at 5 percent defective rate)?

Solution
The states of nature in this example relates to the assembly machine defective
rates. Thus the states of nature include:

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s1 = 0.05, and s2 = 0.10 with the assumed prior probabilities of occurrence of 0.90
and 0.10. We are required to use these prior probabilities, in line with the observed
sample information, to find the posterior probability associated with the state of
nature, s1.
In this problem, the “experimental information, x” is the observation of y = 2
defectives from a sample of n = 20 items selected from the output of the assembly
machine. We need to find the probability that the experimental information, x,
could arise under each state of nature, si. This can be done by referring to the
binomial probability distribution table found in the appendix.
Under the state of nature s1 = 0.05, we obtain:
P(x/0.05) = P(n = 20, y =2/0.05) = 0.925 – 0.736 = 0.189 (from the binomial
distribution table) Under the state of nature, s2 = 0.10,
we obtain: P(x/0.10) = P(n = 20, y = 2/0.10) = 0.677 – 0.392 = 0.285 (from the
binomial distribution table). We now employ the Baye’s Law to find the posterior
probability that the machine is in control (s1) based on both the prior and
experimental information. To make the work easy, we use the Columnar’s
approach to the use of Baye’s Law as illustrated below:

Columnar Approach to Use of Baye’s Law

(1) (2) (3) (4) (5)

State of nature S1 Prior (Ps1) Experimental Product Posterior
Information P(si)P(x/si) P(si/x)
P(x/si)

S1 0.05 0.90 0.189 0.1701 0.86

S2 0.10 0.10 0.285 0.0285 0.14

1.00 0.1986 1.00

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Looking at column (4), we observe the product of the entries in columns (2) and
(3). These values measure the joint probabilities. The sum of the entries in column
(4) is the term in the denominator of the formula for Baye’s Law and measures the
marginal probability of observing the experimental information, x. The posterior
probabilities, column (5), are obtained by taking each entry in column (4) and
dividing by the sum of the entries in column (4).
Even though we found that 10 percent of the items in the sample is defective (that
is, 2 out of the 20 items is defective), the posterior probability that the machine is
running at the 10 percent defective rate (running out of control) is only 0.14, which
is a little greater than the prior probability that the machine is out of control (0.10).
It follows that the probability that the machine is not running out of control is 0.86.

2.5 Elements of Decision Situation

Dixon – Ogbechi (2001) presents the following elements of Decision Situation:
1 The Decision Maker: The person or group of persons making the decision.
2 Value System: This is the particular preference structure of the decision
maker.
3 Environmental Factors: These are also called states of nature. They can be
i. Political v Cultural factors
ii. Legal vi. Technological factors
iii. Economic factors viii Natural Disasters
iv. Social factors
4 Alternative: There are various decision options available to the decision
maker.
5 Choice: The decision made.
6 Evaluation Criteria: These are the techniques used to evaluate the situation

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 at hand.

2.5.1 Types of decision situations

According to Gupta and Hira (2012), there are four types of environments under
which decisions can be made. These differ according to degree of certainty. The
degree of certainty may vary from complete certainty to complete uncertainty. The
region that lies between corresponds to decision making under risk.

i. Decision making under condition of certainty

In this environment, only one state of nature exits for each alternative. Under this
decision situation, the decision maker has complete and accurate information about
future outcomes. In other words, the decision maker knows with certainty the
consequence of every alternative course of action. It is easy to analyse the situation
and make good decisions. Since the decision maker has perfect knowledge about
the future outcomes, he simply chooses the alternative with the optimum payoff.
The approach to analysing such decision problem is deterministic. Decision
techniques used here include simple arithmetic for simple problem, and for complex
decision problems, methods used include cost-volume analysis when information
about them is precisely known, linear programming, transportation and assignment
models, deterministic inventory models, deterministic quelling models and network
model. We shall discuss these models later.

ii. Decision making under conditions of uncertainty

Here, more than one state of nature exists, but the decision maker lacks sufficient
knowledge to allow him assign probabilities to the various state of nature. However,
the decision maker knows the states of nature that may possibly occur but does not

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have information which will enable him to determine which of these states will
actually occur. Techniques that can be used to analyse problem under this condition
include the Maximax criterion, equally likely or Laplace’s criterion, and Hurwicz
criterion or Criterion of Realism. These techniques have earlier been discussed. We
shall consider a more difficult problem for further illustration.

Example 1: Word Problem

A farmer is considering his activity in the next farming season. He has a choice of
three crops to select from for the next planting season – Groundnuts, Maize and
Wheat. Whatever is his choice of crop, there are four weather conditions that could
prevail: heavy rain, moderate rain, light rain, and no rain. In the event that the
farmer plants Groundnuts and there is heavy rain, he expects to earn a proceed of
N650, 000 at the end of the farming season, if there is moderate rain N1, 000, 000;
high rain, N450,000 and if there is no rain, (-N1,000). If the farmer plants Maize,
the following will be his proceeds after the harvest considering the weather
condition: heavy rain: N1, 200, 000; moderate rain: N1, 500, 000, Light rain: N600,
000 and no rain N2000. And if the farmer decides to plant wheat, he expects to
make the following: heavy rain N1, 150, 000: moderate rain N1, 300, 000: Light
rain N800, 000 and No rain – N200, 000.
The farmer has contacted you, an expert in OR to help him decide on what to do.

Question: Construct a payoff matrix for the above situation, analyse completely
and advise the farmer on the course of action to adopt. Assume  = 0.6.

Solution
First, construct a contingency matrix from the above problem.

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 Contingency Matrix 1a
Alternative Crops Weather conditions
Heavy Rain Moderate Light Rain (S3) No Rain (S4)
(S1) Rain (S2)

Groundnut(d1) N750,000 N1,000.000 N450,000 N-1,000

Maize (d2) 1,200,000 1,500,000 600,000 2000
Wheat (d3) 1,150,000 1,300,000 800,000 -200,000

Fig. 1a: Pay- off Table

Contingency Matrix 1b
Alternative Weather conditions
Crops S1 S2 S3 S4 Max Min
(N’000) (N’000) (N’000) (N’000) col Col

d1 750 1,000 450 -1 1,000 -1

d2 1,200 1,500 600 2 1,500 2
d3 1,150 1,300 800 -200 1,300 -200
Fig. 1b: Pay- off Table

Regret Matrix 1
Alternative Crops Weather conditions
S1 (N’000) S2 (N’000) S3 (N’000) (S4) (N’000) Ma x Min
col Col

d1 1200 – 750 1500-1000 800-450 2-(1) 500

450 500 350 3
d2 1200 – 1200 1500-1500 800-600 2-2 200 200
0 0 200 0
d3 1200-1150 1500-1300 800-800 2-(-200) 202
50 200 0 202
Col max 1200 1500 800 2
Fig. 2: Regret Matrix1

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 1. Maximax Criterion

Alt. Max
Col.
d1 1,000

d2 1,500

d3 1,300

Recommendation: Using the maximax criterion, the farmer should select

alternative d2 and plant maize worth N1,500,000.

2. Maximin criterion
Alt. Min.
Col.
d1 -1
d2 2
d3 -200

Recommendation: Using the maximum criterion, the farmer should select

alternative d2 and plant maize worth N2,000.
3. Minimax Regret Criterion

Choice of Weather conditions

crops S1 S2 S3 (S4) Max Min
Col Col

d1 450 500 350 3 500

d2 0 0 200 0 200 200
d3 50 200 0 202 202
Fig. Pay- off Table

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 Recommendation: Using the Mini Max Regret Criterion, the decision maker
should select alternative d2 and plant maize to minimize loss worth N200, 000
Laplace Criterion

d1 = 750 + 1000 + 450– 1 =549.75

4
d2 = 1200 + 1500 + 600 + 2 =825.50
4
d3 = 1150 + 1300 + 800 – 200= 762.50
4

Recommendation: Using the Equally Likely or Savage Criterion, the farmer

should select alternative d2 to plant maize worth N825,500
Hurwicz Criterion
 = 0.6, 1 -  = 0.4
CRi = (max in row) + (1-) (min in row)
CR1 = 0.6 (1000) + (0.4) (-1) = 600 + (-0.4) = 599.6
CR2 = 0.6 (1500) + (0.4) (2) = 900 + 0.8 = 900.8
CR3 = 0.6 (1300) + (0.4) (-200) = 780 + (-80) = 700

Recommendation: Using the Hurwicz criterion the farmer should

select alternative d2 and cultivate maize worthN900,800.00.

iii. Decision making under conditions of risk

Under the risk situation, the decision maker has sufficient information to allow him
assign probabilities to the various states of nature. In other words, although the
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decision maker does not know with certainty the exact state of nature that will occur,
he knows the probability of occurrence of each state of nature. Here also, more than
one state of nature exists. Most Business decisions are made under conditions of risk.
The probabilities assigned to each state of nature are obtained from past records or
simply from the subjective judgment of the decision maker. A number of decision
criteria are available to the decision maker. These include:
(i) Expected monetary value criterion(EMV)
(ii) Expected Opportunity Loss Criterion(EOL)
(iii) Expected Value of Perfect Information(EVPI)
(Gupta and Hira,2012)

i. Expected monetary value (EMV) criterion

To apply the concept of expected value as a decision making criterion, the decision
maker must first estimate the probability of occurrence of each state of nature.
Once the estimations have been made, the expected value of each decision
alternative can be computed. The expected monetary value is computed by
multiplying each outcome (of a decision) by the corresponding probability of its
occurrence and then summing the products. The expected value of a random
variable is written symbolically as E(x), is computed as follows:

(Taylor III, 2007)

Example 3.2
A businessman has constructed the payoff matrix below. Using the EMV
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 criterion, analyse the situation and advise the businessman on the kind of
property to invest on.
Contingency Matrix 2
Decision to invest State of Nature
Good Poor Economic Turbulent Economic
Economic Condition Condition
Conditions( (N) (N)
N)
Apartment building (d1) 50,000 30,000 15,000
Office building (d2) 100,000 40,000 10,000
Warehouse (d3) 30,000 10,000 -20,000
Probabilities 0.5 0.3 0.2

Fig. 4: Pay- off Table. Adapted from Taylor, B.W. III (2007) Introduction to
Management Science, New Jersey: Pearson Education Inc.

Solution
EVd1 = 50,000 (0.5) + 30,000 (0.3) + 15,000 (0.2)
= 25,000 + 9,000 + 3,000
= N37,000
EVd2 = 100,000 (0.5) + 40,000 (0.3) + 10,000 (0.2)
=N50,000 +12,000 + 2000
=N64,000

EVd3 = 30,000 (0.5) + 10,000 (0.3) + (-20,000(0.2)

= 15,000 + 3000 - 4000
= N14,000

Recommendation: Using the EMV criterion, the businessman should select

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alternative d2 and invest in office building worth N64,000.
Under this method, the best decision is the one with the greatest expected value.
From the above EXAMPLE, the alternative with the greatest expected value is
EVd1 which has a monetary value of N37,000. This does not mean that N37,000
will result if the investor purchases apartment buildings, rather, it is assumed that
one of the payoffs values will result in N25,000 or N9,000 or N 3,000. The
expected value therefore implies that if this decision situation occurs a large number
of times, an average payoff of N37,000 would result, Alternatively, if the payoffs
were in terms of costs, the best decision would be the one with the lowest expected
value.

i. Expected opportunity less (EOL)

The expected opportunity Loss criterion is a regret criterion. It is used mostly in
minimization problems. The minimization problem involves the decision maker
either trying to minimize loss or minimize costs. It is similar to the Minimax Regret
Criterion earlier discussed. The difference however, is that is has probabilities
attached to each state of nature or occurrence.
The difference in computation between the EMV and EOL methods is that, unlike
the EMV methods, a regret matrix has to be constructed from the original matrix
before the EOL can be determined.

Example 3.3
We shall determine the best alternative EOL using contingency matrix 2 above.
First, we construct a regret matrix from contingency matrix 2 above. Remember
how the Regret matrix table is constructed? Ok. Let us do that again here.

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Quick Reminder
To construct a regret matrix, determine the highest value in each state of nature and
subtract every payoff in the same state of nature from it. Your will observe that
most of the payoff will become negative values and zero.
Regret Matrix 2
Decision to invest State of Nature
(N) (N) (N)

Apartment building (d1) (100,000 - (40,000 - 30,000) (15,000 –

50,000) 10,000 15,000)
50,000 0
Office building (d2) (100,000 - (40,000 – (15,000 -
100,000) 40,000) 10,000)
0 0 5,000
Warehouse (d3) (100,000 – (40,000 – (15,000+20,00
30,000) 40,000) 0)
70,000 30,000 35,00

Probabilities 0.5 0.3 0.2

Fig. 3.3: Regret Matrix 2

EOLd1 = 50,000 (0.5) + 10,000 (0.3) +0(2)

= 25,000 +3,000+0
= N28,000

EOLd2 = 0.(0.5) + 0(0.3) + 5,000(0.2)

= 0 + 0 + 1,000
= N1,000

EOLd3 = 70,000 (0.5) + 30,000 (0.3) + 35,000(0.2)

= 35,000 + 9,000 + 7,000

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 = N51,000

Recommendation: Using the EOL criterion, the decision maker should select
alternative d2 and invest in office building worth N1,000.
The Optimum investment option is the one which minimizes expected opportunity
losses, the action calls for investment in office building at which point the minimum
expected loss will be N1, 000.

You will notice that the decision rule under this criterion is the same with that of
the Minimax Regret criterion. This is because both methods have the same
objectives that is, the minimization of loss. They are both pessimistic in nature.
However, loss minimization is not the only form minimization problem.
Minimisation problems could also be in the form of minimisation of cost of
production or investment. In analyzing a problem involving the cost of production
you do not have to construct a regret matrix because the pay-off in the table already
represents cost.

Note: It should be pointed out that EMV and EOL decision criteria are completely
consistent and yield the same optimal decision alternative.

iii Expected value of perfect information

Taylor III (2007) is of the view that it is often possible to purchase additional
information regarding future events and thus make better decisions. For instance, a
farmer could hire a weather forecaster to analyse the weather conditions more
accurately to determine which weather condition will prevail during the next
farming season. However, it would not be wise for the farmer to pay more for this

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information than he stands to gain in extra yield from having this information.
That is, the information has some maximum yield value that represents the limit of
what the decision maker would be willing to spend. This value of information can
be computed as an expected value, hence its name, expected value of perfect
information (EVPI). The expected value of perfect information therefore is the
maximum amount a decision maker would pay for additional information. In the
view of Adebayo et al (2007), the value of perfect information is the amount by
which profit will be increased with additional information. It is the difference
between expected value of optimum quantity under risk and the expected value
under certainty. Using the EOL criterion, the value of expected loss will be the
value of the perfect information.

Expected value of perfect information can be computed as follows

EVPI = EVwPI – EMVmax
Where

EVPI = Expected value of perfect information EVwPI = Expected value with

perfect information
EMVmax = Maximum expected monetary value or Expected value without
perfect information
(Or minimum EOL for a minimization problem)

Example 3.4
Using the data on payoff matrix 3 above,

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 Decision to invest State of Nature
Good Poor Turbulent
(N) (N) (N)
Apartment building 50,000 30,000 15,000
(d1)
Office building (d2) 100,000 40,000 10,000
Warehouse (d3) 30,000 10,000 -20,000
Probabilities 0.5 0.3 0.2
Fig. 3.3: Pay-off Tale

EVwPI = Pj x best out on each state of nature (Sj).

The expected value with perfect information can be obtained by multiplying the
best outcome in each state of nature by the corresponding probabilities and
summing the results.
We can obtain the EVwPI from the table above as follows.
EVwP1 = 100,000 x 0.5 + 40,000 x 0.3 + 15,000 x 0.2
= 50,000 + 12,000 + 3,000
= N65,000

Recall that our optimum strategy as calculated earlier was

N64,000. EVP1 = EVwP1 – EMVmax
= N65000 - 64,000
= N1,000

The expected value of perfect information (EVPI) is N1000. This implies that the
maximum amount the investor can pay for extra information is N1000. Because it is
difficult to obtain perfect information, and most times unobtainable, the decision
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maker would be willing to pay some amount less than N1000 depending on how
accurate the decision maker believes the information is. Notice that the expected
value of perfect information (N1000) equals our expected opportunity loss (EOL) of
N1000 as calculated earlier.

Taylor III (2007) provides a justification for this. According to him, this will
always be the case, and logically so, because regret reflects the difference between
the best decision under a state of nature and the decision actually made. This is the
same thing determined by the expected value of perfect information.

2.6 Decision Under Conflict

Decision taken under conflict is a competitive decision situation. This environment
occurs when two or more people are engaged in a competition in which the action
taken by one person is dependent on the action taken by others in the competition.
In a typical competitive situation the player in the competition evolve strategies to
outwit one another. This could be by way of intense advertising and other
promotional efforts, location of business, new product development, market
research, recruitment of experienced executives and so on. An appropriate
techniques to use in solving problems involving conflicts is the Game Theory
(Adebayo et al 2007).

Practice Exercise
(1) Identify and discuss the situations under which decision are made.

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 (2) An investor is confronted with a decision problem as represented in the
matrix below. Analyse the problem using the EMV and EOL criteria and
advise the decision maker on the best strategy to adopt.

State of Nature Alternatives

Expand Construct Subcontract Prob.
High (N) 50,000 70,000 30,000 0.5
Moderate (N) 25,000 30,000 15,000 03
Low (N) 25,000 -40,000 -1,000 0.15
Nil (N) -45,000 -80,000 -10,000 0.05

Hint: Note that the positions of the states of nature and the alternative strategies
have changed.

3.0 Tutor Marked Assignment

(1) List and explain four situations under which decisions can be made.
(2) Identify the techniques that can be used to analyse decision problems under the
following situations
(i) Certainty
(ii) Uncertainty
(iv) Risk
(v) Conflict

4.0 Summary
The study session considered the following important elements of decision analysis:
1. Decision Problems and Analysis
In problems involving choices from many alternatives, one must identify all the
actions that may be taken and all the states of nature whose occurrence may
128
influence decisions. The action to take none of the listed alternatives whose outcome
is known with certainty may also be included in the list of actions. Associated with
each action is a list of payoffs. If an action does not involve risk, the payoff will be
the same no matter which state of nature occurs.
2. Expected Monetary Value Decisions
A decision-making procedure, which employs both the payoff table and prior
probabilities associated with the states of nature to arrive at a decision, is referred to
as the Expected Monetary Value decision procedure. Note that by prior probability
we mean probabilities representing the chances of occurrence of the identifiable
states of nature in a decision problem prior to gathering any sample information.
The expected monetary value decision refers to the selection of available action
based on either the expected opportunity loss or the expected profit of the action.
3. Decision Making Involving Sample Information
In many decisions, observational information or other evidence are available to the
decision maker either for purchase or at the cost of experimentation. For example, a
retailer whose business depends on the weather may consult a meteorologist before
making decisions, or an investor may hire a market consultant before investing.
Market surveys carried out before the release of a new product represent another area
in which the decision maker may seek additional information. In each of these
examples, the decision maker attempts to acquire information relative to the
occurrence of the states of nature from a source other than that from which the prior
probabilities were computed. When such information is available, Baye’s Law can be
employed to revise the prior probabilities to reflect the new information.
We refer to such probabilities as posterior probabilities. The study session also
discussed the different situations under which a decision maker is faced with
decision problems. These decision situations include Certainty, Uncertainty, Risk
129
and Conflict situation. Decision situations could also be referred to as decision
environments. We have also identified and discussed various techniques used in
solving problems under these situations. The deterministic approach to decision
analysis which includes simple arithmetic techniques for simple problems and cost-
volume analysis, linear programming, transportation model, assignment models
quenching modes etc. for complex problems could be used to solve problems under
situation of certainty. Techniques that can be used to solve problem under
uncertainty include: Maximax criterion, Minimax criterion Minimax Regret
criterion, Equally-Likely or Laplace criterion, and Hurwicz criterion. Decisions
under Risk Situations can be analysed using the Expected Monetary Value (EMV) or
Expected Opportunity Loss (EOL) criterion. Finally, Game theory can be used to
analyse decision under conflict with is a situation that involve competition.

5.0 Self-Assessment Questions

(1) Who is a decision maker?
(2) Identify and explain the environmental factors or states of Nature that affect
a decision situation.

6.0 Additional activities

a. Visit U-tube add https://www.youtube.com/watch?v=B7g_xB5apDA
https://www.youtube.com/watch?v=yACVFI77uuE
https://www.youtube.com/watch?v=MtBnSUIJcVI Watch the video & summarise in
1 paragraph

130
7.0 References/ Further Readings
Adebayo, O.A. et al (2006). Operations Research in Decision and Production
Management.
Dixon – Ogbechi, B.N. (2001). Decision Theory in Business, Lagos: Philglad Nig.
Ltd.
Gupta, P.K., and Hira, D.S. (2012). Operations Research, New – Delhi: S. Chand
& Company.
th
Taylor III, B.W. (2007). Introduction to Management Science,9 Edition. New
Jersey: Pearson Education Inc.
Francis, A. (1998). Business Mathematics and Statistics, 5th edition (Great Britain:
Ashford Colour Press).

131
 STUDY SESSION 3
Decision Trees
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 - Definition
2.2 – Benefits of using Decision Tree
2.3 – Disadvantage of the Decision Tree
2.4 – Components of the Decision Tree
2.5 – Structure of a Decision Tree
2.6 – How to Analyze a Decision Tree
2.7 – The Secretary Problem
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities
7.0 References/Further Readings

Introduction
So far, we have been discussing the techniques used for decision analysis. We have
demonstrated how to solve decision problems by presenting them in a tabular form.
However, if decision problems can be presented on a table, we can also represent
the problem graphically in what is known as a decision tree. Also, the decision
problems discussed so far dealt with only single stage decision problem. That is, the
payoffs, alternatives, state of nature and the associated probabilities were not

132
subject to change. We now consider situations that involve multiple stages. They
are characterized by a sequence of decisions with each decision influencing the
next. Such problems, called sequential decision problems, are analysed best with
the help of decisions trees.

1.0 Study Session Learning Outcomes

After studying this session, you should be able to do the following :
1 Describe a decision tree
2 Describe what Decision nodes and outcome nodes are
3 Represent problems in a decision trees and perform the fold back and tracing
forward analysis
4 Calculate the outcome values using the backward pass
4. Identify the optimal decision strategy

2.0 Main Content

2.1 Definition
A decision tree is a graphical representation of the decision process indicating
decision alternatives, states of nature, probabilities attached to the states of nature
and conditional benefits and losses (Gupta & Hira 2012). A decision tree is a
pictorial method of showing a sequence of inter-related decisions and outcomes. All
the possible choices are shown on the tree as branches and the possible outcomes as
subsidiary branches. In summary, a decision tree shows: the decision points, the
outcomes (usually dependent on probabilities and the outcomes values)
(Lucey,2001).

The decision tree is the simplest decision making model in the face of an uncertain

133
future. In such a model, a plan of action must account for all contingencies (Chance
outcome) that can arise. A decision tree represents the uncertainty of choice
graphically. This makes it easy to visualize the contingency plans which are called
strategies (Denardo, 2002).

2.2 Benefits of Using Decision Tree

Dixon-Ogbechi (2001) presents the following advantages of using the decision tree:
- They assist in the clarification of complex decisions making situations that
involve risk.
- Decision trees help in the quantification of situations.
- Better basis for rational decision-making are provided by decision trees.
- They simplify the decision-making process.

2.3 Disadvantage of The Decision Tree

- The disadvantage of the decision tree is that it becomes time consuming,
cumbersome and difficult to use/draw when decision options/states of nature
are many.
In-text Question 1: What is a Decision tree?
In-text Answer 1: A decision tree is a graphical representation of the decision process indicating
decision alternatives, states of nature, probabilities attached to the states of nature and
conditional benefits and losses (Gupta & Hira 2012).

2.4 Components of The Decision Tree

It is important to note the following components of the structure of a decision
problem
- The choice or Decision Node: Basically, decision trees begin with choice or
decision nodes. The decision nodes are depicted by square ( ). It is a point
134
 in the decision tree were decisions would have to be made. Decision nodes
are immediately followed by alternative courses of action in what can be
referred to as the decision fork. The decision fork is depicted by a square
with arrows or lines emanating from the right side of the square ( ). The
number of lines emanating from the box depends on the number of
Outcome X
alternatives available.
- Chance Node: The chance node can also be referred to as state of nature
(
node or event node. Each node describes a situation in which an element of
uncertainty is resolved. Each way in this uncertainty can be resolved is
represented by an arc that leads rightward from its chance node, either to
another node or to an end-point. The probability on each such arc is a
conditional probability, the condition being that one is at the chance node to
its left. These conditional probabilities sum to 1 (0ne), as they do in
probability tree (Denardo, 2002).The state of nature or chance nodes are
depicted by circles ( ). It implies that at this point, the decision maker
will have to compute the expected monetary value (EMV) of each state of
nature. Again the chance event node is depicted this( )

2.5 Structure of a Decision Tree

The structure and the typical components of a decision tree are shown in the
diagram below.

135
 Action B1
1

D2
Action B2
Action Outcome X2
A1
Outcome X
D1 3

Outcome Y1

Action A2

D3
Outcome Y2
c

Action c

Action1 c 2

Action
3

Adapted from Lucey, T (2001), Quantitative Techniques, 5thLondon:

Continuum

136
The above is a typical construction of a decision tree. The decision tree begins with
a decision node D1 signifying that the decision maker is first of all presented with a
decision to make. Immediately after the decision node, there are two courses of
action A1 and A2.If the decision maker chooses A1, there are three possible
outcomes – X1 X2, X3. And if chooses A2, there will be two possible outcomes Y1
and Y2 and so on.

2.6 How to Analyse a Decision Tree

The decision tree is a graphical representation of a decision problem. It is multi-
state in nature. As a result, a sequence of decisions are made repeatedly over a
period of time and such decisions depend on previous decisions and may lead to a
set of probabilistic outcomes. The decision tree analysis process is a form of
probabilistic dynamic programming (Dixon-Ogbechi, 2001).
Analysing a decision tree involves two states:
i. Backward Pass: This involves the following steps
- starting from the right hand side of the decision tree, identify the nearest
terminal. If it is a chance event, calculate the EMV (Expected Monetary
Value). And it is a decision node, select the alternative that satisfies your
objective.
- Repeat the same operation in each of the terminals until you get to the end
of the left hand side of the decision tree.

ii. Forward Pass: The forward pass analysis involves the following operation.
- Start from the beginning of the tree at the right hand side, at each point,
select the alternative with the largest value in the case of a minimization
problem or profit payoff, and the least payoff in the case of a minimization
137
 problem or cost payoff.
- Trace forward the optimal contingency strategy by drawing another tree
only with the desired strategy.
These steps are illustrate below

Example 4.1
Contingency Matrix 1
Alternatives
Probability
States of Nature Stock Rice Stock Maize
(A1) (A2)
High demand 8,000 12,000 0.6
(S1) (N)
Low demand 4,000 -3,000 0.4
(S2) (N)

Pay-off Matrix

Question: Represent the above payoff matrix on a decision tree and find the
optimum contingency strategy.

We can represent the above problem on a decision tree thus:

S1(high demand) 0.68,000

640
0
A1(stock rice) 4,000
S26400
(low demand) 0.4

138
12,00

A2(stock maize) 0.6

6000
S2(high demand)
0.4-3,000
A Decision Tree.

S1(high demand)
Next, we compute the EMY for alternatives A1 and A2.
EMVA1 = 8,000 x 0.6 + 4,000 x 0.4 = 6400
= 4800 x 1,600

EMVA2 = 12,000 x 0.6 + (-

3,000) x 0.4
= 7,200 – 1,200 = N6,000

EMVA1 gives the highest payoff

139
 We can now draw our optimal contingency strategy thus:

8,000
0.6 S1
6400
S2
A1 0.4
4,000

6400

Optimal Contingency Strategy

The above decision tree problem is in its simplest form. They also could be word
problem to be represented on a decision tree diagram unlike the above problem that
has already been put in tabular form. Let us try one of such problems.

Example 4.2
A client has contracted NOUNCIL, a real estate firm to help him sell three
properties A,B,C that he owns in Banana Island. The client has agreed to pay
NOUNCIL 5% commission on each sale. The agent has specified the following
conditions: NOUNCIL must sell property A first, and this he must do within
60days. If and when A is sold, NOUNCIL receives 5% commission on the sale,
NOUNCIL can then decide to back out on further sale or go ahead and try to sell the
remaining two properties B and C within 60 days. If they do not succeed in selling
the property within 60days, the contract is terminated at this stage. The following
table summarises the prices, selling Costs (incurred by NOUNCIL whenever a sale
140
is made) and the probabilities of making sales.

Property Prices of Selling Probability

property Cost
A 12,000 400 0.7
B 25,000 225 0.6
C 50,000 450 0.5

Pay-off Matrix

(i) Draw an appropriate decision tree representing the problem for NOUNCIL.
(ii) What is NOUNCIL’s best strategy under the EMV approach?
(Question Adapted from Gupta and Hira (2012))

Solution
Hint: Note that the probabilities provided in the table are probabilities of sale.
Therefore, to get the probability of no sale, we subtract the prob. Of sale from 1
Prob. of no Sales = 1 – prob. of sales
NOUNCIL gets 5% Commission if they sell the properties and satisfy the specified
conditions.

The amount they will receive as commission on sale of property A, B and C are as
follows
Commission on A = 5/100 x 12,000 = N,6000
Commission on B = 5/100 x 25,000 = N1250
Commission on C = 5/100 x 50,000 = N2500
The commission calculated above are conditional profits to NOUNCIL. To obtain
the actual profit accrued to NOUNCIL from the sale of the properties, we subtract
141
the selling cost given in the table above from the commission.
NOUNCIL’S Actual profit A = N600 – N400 = N200
B = N1250 - N225 = N1025 C = N2500 – N450 = N2050

Backward pass analysis

EMV of Node 3 = N (0.5 2050 + 0.5 x0) = N1025
EMV of Node 4 = N (0.6 x 1,025 + 0.4 x 0) =N615
EMV of Node B = [0.6 (1025 + 1025) + 0.4 x 0] = 1230
Note: 0.6 (EMV of node 3 + profit from sales of B at
node B) EMV of Node C = [0.5 (2050 + 615) + 0.5x0] =N1332.50
Note: same as EMV of B above
EMV of Node 2 =N1332.50 (Higher EMV at B and
C)
EMV of Node A = N[0.7 (200 + 1,332.50) + 0.3 x 0] =
N1072.75 EMV of Node 1 =N1072.75

Optimal contingency strategy

Sells B N1025
Sells A,N 200 takes C sells C 615
Sell A 1332.5 N 2050

N 1072.75 1072.75
1332 5 0.5
0.7

Optimal Contingency Strategy

The optimal contingency strategy path is revealed above. Thus the optimum
strategy for NOUNCIL is to sell A, if they sell A, then try sell C and if they sell
C, then try sell B to get an optimum expected amount of N1072.75.
Let us try another example as adapted from Dixon – Ogbechi (2001).
142
Example 4.3
The management of the school of Basic Remedial and Vocational Studies of
NOUN is contemplating investing in two diploma programmes- Diploma in
Business and Diploma in Law. Dip Bus will cost N9 millionwith 0.6 chance of
success. Dip Law will cost N 4.5 million, but has only 0.35 chance of success. In
the event of success, management has to decide whether or not to advertise the
product heavily or lightly. Heavy advertisement will cost N3,600,000 but has
0.65 probability of full acceptance as against partial acceptance by the market
while light advertising will cost N1,200,000 and has a probability of 0.45 of full
acceptance. Full acceptance in Dip Bus Programme would be worth N36million
while that of Dip Law programme would be worth 27 million. Partial market
acceptance will worth N21 million and N24 million respectively.
Advise the management of the school of Remedial and Vocational Studies on the
diploma programme and level of advertising to embark on.

143
 Solution
We begin by drawing the decision tree.

Full
Accept.
C 36 0.65
23.4 Heavy N30
Advert. .75
m
N4.5m 0.3521 8.4
Par.
Accept. N30
dvert.Full
.75
m
A SuccessLightA Accept.
0.63N1.2m 0.45 36
25.8
N18.45m N27.75m

DipBus D 0.55
2110.8
Par.
Accept.
2 N9
N 18.45m m
Failure 0,-9

144
 0 .4
N4.5m DipLawFull Accept.
InvestE0.65 27 18.9
4HeavyAd
BSuccess vert
N3.6m0.35 24 15.9 N25.95m
N9.082m

Par.
Accept.
Light Advert
N 18.45m

N1.2mFull
Accept. 0.65
27 21.3 N25.35m
10.3
5
FPar.
Accept.24 18.3

Failure
0 -4.5

Do not invest
0
Fig. 4.5: A Decision Tree

145
Backward Pass Analysis
EMV of Node C = N36,000,000 x 0.65 + 21,000,000 x N0.36
= N23,400,000 + 7,350,000
= N30750,000
EMV of Node D = N36,000,000 x 0.45 + N21,000,000 x 0.55
= N16,200,000 + N11,500,000
= 27,750,000

EMV of Node E =N27,000,000 x 0.65+ N24,000,000 x 0.35

= N17,550,000 + N8,400,000
= N25,950,000

EMV of Node F =N27,000 x 0.45 + 24,000,000 x 0.55

= N12,150,000 + 13,200,000
= N25,350,000

EMV of Node A =N30,750,000 x 0.6 + N0 + 0.4

= N18,450,000 + N0

= N18,450,000
EMV of Node B = N25,950,000 x 0.35 + N0 x 0.65
= N9082500 + 0
= N9,082,500

Note: Decision made at each of the decision nodes were arrived at by

comparing the values in each chance event nodes and selecting the highest value.

146
 Optimal Contingency Strategy

Full Accept
C 0.65
3Heavy N36m N30.75m
Advert ASuccessPartial N3.6m 0.35
1
0.6 m N30.75m
Accept N2

2DipBus N18.45m

1
N 18.45m
Failure
0.4 N0

The Optimum Contingency Strategy

Recommendation: Using the EMV method, the management of school of
Remedial and vocational studies should invest in DipBus and embark on heavy
advertisement to get on optimum expected amount of N18,450,000.

2.7 The Secretary Problem

The secretary problem was developed to analyse decision problems that are
complex and repetitive in nature. This type of decision tree is a modification upon
general decision tree in that it collapses the branches of the general tree and once an
option is jettisoned, it cannot be recalled.

2.7.1 Advantages of the Secretary Problem Over the General Decision Tree

147
In addition to the advantages of the general decision try the secretary problem has
the following added advantages
(1) It is easy to draw and analyse.
(2) It saves time.

2.7.2 Analysis of the Secretary Problem

The analysis of a secretary decision tree problem is similar to that of the general
decision tree. The only difference is that since the multi stage decision problem
could be cumbersome to formulate when the branches become too many, the
secretary problem collapses the different states of nature into one. This will be
demonstrated in the example below.

Example
The management of Bureau for public Enterprises (BPE) has invited bids for the
Distribution arm of the power holding company of Nigeria (PHCN) PLC. Three
categories of bids are expected – high, fair, and low.
High bid is worth N100m, a fair bid is worth N60m and a low bid is worth N30M.
The probabilities of the first prospective bidder are 0.5; 0.3; 0.2 for high; fair; and
low respectively. Those of the second prospective bidder are 0.5; 0.2; and 0.3
respectively, while those of the third bidder are 0.4; 0.2; 0.4 respectively.

Question
(i) Formulate the problem as:
(a) A general decision tree
(b) A secretary problem
(ii) Analyse the situation completely

148
 (iii) What is the optimal contingency strategy?
(Dixon – Ogechi,2001

100M
H 0.4
Solution F 60M

3rd 0.2
L30M
H0.5 0.4

2nd F 3rd
0.2
0.3 L
3rd

High 0.5

3rd

H 0.5
1st Fair2nd F3rd
0.3 0.2
L
0.3
3rd

Low 0.2
149
 3r

3r

A general Formulation of a Secretary Problem

The bids and their corresponding probabilities and worth are to be repeated

throughout the 3rd chance event fork like has been done in the first. You can try
that in your note and see how it would look like you can see how cumbersome the
general decision tree formulation of the above problem is. It is very time
consuming to formulate because it has too many branches. As a result, the
secretary formulation was developed to help analyse decision problems of this
nature without going through the process as indicated above.

150
 Now let us see the secretary formulation of the same problem.

Stop= 100m Stop =100m

2 3 100m

H 0.52nd H 0.5 3rd H 0.4

1 ABC
N 48.4m
1stF 2
nd
F 3
F N 60m
N4 r 64m
8.4m d
N 53m 3
0.3 0. 0.2

0.2L2nd 0.3 L 3rd 0.4 L

30m

Stop= 30m Stop =30m

Formulation of a Secretary Problem
EMVC =100 X 0.4 + 60 X 0.2 + 30 X 0.4
40 + 12 + 12
= N64m

161
EmVB =64 x 0.5 + 60 x 0.2 + 30 x 0.3

= 32 + 12 + 9
= N53M
EMVB = 64 x 0.5 + 60 x 0.2 + 30 x 0.3
= 32 + 12 + 9

= N53M
EMVA = 53 x0.5 + 53 x0.3 + 30 x 0.2
= 26.5 + 15.9 + 6
= N48.4M

Optimal contingency Strategy

2 3 100m

H 0.5 2nd H 0.5 3rd H 0.4

1 A B C
1st N48 4m F 2nd F F 6
3rd
03 03 02

0.2 L 0.3 L 0.4 L

0m
3

161
0m

Fig. 4.9: Optimal Contingency Strategy

We can see that the major difference between the secretary formulation and the
general decision tree formulation is that at decision nodes, instead of the tree of
proceed to different chance event nodes and develop different branches, the
branches are collapsed into one from the three decision nodes to form one change
event node.

3.0 Tutor Marked Assignment

1 Write short notes on the following:
i Decision Node
ii Chance Even Node
2 Identify and discuss the two method of analysis of a decision tree

4.0 Summary
Now let us cast our minds back to what we have learnt so far in this unit. We learnt
that the decision tree is mostly used for analysing a multi-stage decision problem.
That is, when there is a sequence of decisions to be made with each decision having
influence on the next. A decision tree is a pictorial method of showing a sequence
of inter-related decisions and outcomes. It is a graphical representation that outlines
the different states of nature, alternatives courses of actions with their
corresponding probabilities. The branches of a decision tree are made up of the
decision nodes at which point a decision is to be made, and the chance node at
which point the EMV is to be computed.
161
The decision tree assist the clarification of a complex decision problem, it helps in
the quantification of a decision situation, and to simplify the decision making
process. On the other hand, the decision tree could become time-consuming,
cumbersome and difficult to use or draw when the options and states of nature are
too many. In order to tackle this problem of the decision tree becoming too
cumbersome, the secretary formulation of the decision tree was developed. The
secretary formulation of the decision tree collapses the different states of nature into
one in situation where the states of nature are repetitive in nature. Whichever
formulation of the tree diagram, be it the general or the secretary formulation, the
decision tree has two methods of analysis – the backward pass and the forward pass.

5.0 Self-Assignment Questions

1 What do you understand by the term decision tree?
2 Identify the two formulations of the decision tree and give the difference
between them.
3 Outline the advantages and disadvantage of a decision tree.

6.0 Additional activities

a. Visit U-tube add : https://www.youtube.com/watch?v=a5yWr1hr6QY
https://www.youtube.com/watch?v=eKD5gxPPeY0
https://www.youtube.com/watch?v=ydvnVw80I_8. Watch the video & summarise in
1 paragraph

161
7.0 References/ Further Readings
Dixon – Ogbechi, B.N. (2001). Decision Theory in Business, Lagos: Philglad
Nig. Ltd.
Denardo, E.V. (2002). The Science of Decision making: A Problem-Based
Approach Using Excel. New York: John Wiley.
Gupta, P.K., and Hira, D.S. (2012). Operations Research, New-Delhi: S. Chand &
Company.
Lucey, T. (1988). Quantitative Techniques: An Instructional Manual, London: DP
Publications.

161
 STUDY SESSION 4
Operations Research (OR) and Modeling in Operation Research
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 – Development of Operations Research
2.2 – Definition of Operations Research
2.3 – Characteristics of Operations Research (OR)
2.4 – Scientific Method in Operations Research
2.5 – Necessity of Operations Research in Industry
2.6 – Scope of Operations Research
2.7 – Scope of Operations Research in Financial Management
2.8 – Definition of Modeling in Operations Research
2.9 – Classification of Models
2.10 – Characteristics of Good Models
2.11 – Advantages of a Model
2.12 – Limitations of a Model
2.13 – Constructing a Model
2.14 – Types of a Mathematical Model
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities
7.0 References/Further Readings

163
Introduction
We mentioned in Study Session 1, Module 1, that the subject, Business Decision
Analysis, takes its root from the discipline Operations Research or Operational
Research (OR). This session is devoted to giving us background knowledge of OR.
It is however, not going to be by any way exhaustive as substantial literature has not
been developed about quantitative approaches to decision making. The root of this
literature are centuries old, but much of it emerged only during the past half century
in tandem with the digital computer (Denardo, 2002). The above assertion relates
only to the development of the digital computer for use in solving OR problems.
The proper roots of OR can be traced to the early 1800s. But it was in 1885 when
Ferderick Taylor emphasized the application’s scientific analysis to methods of
production, that it really began (Gupta & Hira2012).

This session provides only an overview of OR with emphasis on the definition of

OR, characteristics, Scope, application, objectives, and phases of OR.
The construction and use of models is at the core of operations research. Operations
research is concerned with scientifically deciding how to best design and operate
man-machine systems, usually under conditions requiring the allocation of scarce
resources. Modelling is a scientific activity that aims to make a particular part or
feature of the world easier to understand, define, quantify, visualize, or simulate.
Models are typically used when it is either impossible or impractical to create
experimental conditions in which scientists can directly measure outcomes. Direct
measurement of outcomes under controlled conditions will always be more reliable
than modelled estimates of outcomes.

This study session also introduces us to the subject of modelling and exposes us to

164
characterisation, classification, uses, and construction of scientific models.

1.0 Study Session Learning Outcomes

By the end of this study session, you should be able to do the following:
1 Briefly trace the development of OR.
2 Define OR.
3 Outline the characteristics of OR.
4 Define a Model
5 Describe modelling
6 Give a classification of models
7 Give reasons why operations research is necessary in industries.
8 Discuss the scope of OR.
9 List and explain the areas of application of OR.
10 Outline the objectives of OR.
11 Outline the advantages and disadvantages of models
12 Explain the limitations of model
13 Describe how models are constructed.

2.0maincontent
2.1 Development Of Operations Research
Gupta and Hira (2012) traced the development of Operations Research (OR) thus:

2.1.1 The period before world war II

The roots of OR are as old as science and society. Though the roots of OR extend to
even early 1800s, it was in 1885 when Ferderick, W. Taylor emphasized the
application of scientific analysis to methods of production, that the real start took

165
place. Taylor conducted experiments in connection with a simple shovel. His aim
was to find that weight load of Ore moved by shovel would result in the maximum
amount of ore move with minimum fatigue. After many experiments with varying
weights, he obtained the optimum weight load, which though much lighter than
that commonly used, provided maximum movement of ore during a day. For a
“first-class man” the proper load turned out to be 20 pounds. Since the density of
Ore differs greatly, a shovel was designed for each density of Ore so as to assume
the proper weight when the shovel was correctly filled. Productivity rose
substantially after this change.

Henry L. Gantt, also of the scientific management era, developed job sequencing
and scheduling methods by mapping out each job from machine to machine, in
order to minimize delay. Now, with the Gantt procedure, it is possible to plan
machine loading months in advance and still quote delivery dates accurately.
Another notable contributor is A.K. Erlang a Danish Mathematician who published
his work on the problem of congestion of telephone traffic. During that period,
operators were unable to handle the calls the moment they were made, resulting in
delayed calls. A few years after its appearance, his work was accepted by the
British Post Office as the basis calculating circuit facilities.
Other early contributors include F.W. Harris, who published his work in the area of
inventory control in 1915, H.C. Levinson an American Astronomer who applied
scientific analysis to the problems of merchandizing.

However, the first industrial Revolution was the main contributing factor towards
the development of OR. Before this period, most of the industries were small scale,
employing only a handful of men. The advent of machine tools – the replacement of

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man by machine as a source of power and improved means of transportation and
communication resulted in fast flourishing industries. If became increasingly
difficult for a single man to perform all the managerial functions (Planning, sales,
purchasing production, etc). Consequently, a division of management functions
took place. Managers of production marketing, finance, personal, research and
development etc. began to appear. For example, production department was sub-
divided into sections like maintenance, quality control, procurement, production
planning etc.

2.1.2 World war II

During War II, the military management in England called on a team of scientists to
study the strategic and tactical problems of air and land defence. This team was
under the leadership of Professor P. M. S. Blackett of University of Manchester
and a former Naval Officer. “Blackett’s circus”, as the group was called, included
three Physiologists, two Mathematical Physicists, one Astrophysicist, one Army
officer, one Surveyor, one general physicist and two Mathematicians. The
objective of this team was to find out the most effective allocation of limited
military resources to the various military operations and to activities within each
operation. The application included effective use of newly invented radar,
allocation of British Air Force Planes to missions and the determination of the best
patterns for searching submarines. This group of scientist formed the first OR team.
The name Operations Research (or Operational Research) was coined in 1940
because the team was carrying out research on military operations. The encouraging
results of the team’s efforts led to the formation of more of such teams in the British
Armed services and the use of such scientific teams soon spread to the western
allies — United States, Canada, and France. Although the science of Operations

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Research originated in England, the United States soon took the lead. In the United
States, OR teams helped in developing strategies for mining operations, inventing
new flight patterns, and planning of sea mines.

2.1.3 Post world war II

Immediately after the war, the success of the military teams attracted the attention
of industrial managers who were seeking solutions to their problems. Industrial
operations research in U.K and USA developed along different lines.
Nationalisation of new key industries further increased the potential field for OR.
Consequently OR soon spread from military to government, industrial, social and
economic planning.

In the USA, the situation was different impressed by is dramatic success in UK,
defence operations research in USA was increased. Most of the war-experienced
OR workers remained in the military services. Industrial executives did not call for
much help because they were returning to peace and many of them believed that it
was merely a new applicati0on of an old technique. Operations research has been
known by a variety of names in that country such as Operational Analysis,
Operations Evaluation, Systems Analysis, Systems Evaluation, Systems Research,
Decision Analysis, Quantitative Analysis, Decision Science, and Management
Science.

In 1950, OR was introduced as a subject for academic study in American

Universities. They were generally schools of Engineering, Public Administration,
Business Management, Applied Mathematics, Economics, Computer Sciences, etc.
Since this subject has been gaining ever-increasing importance for the student in

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Mathematics, statistics, commerce, Economics, Management and Engineering, to
increase the impact of operations research, the Operations Research Society of
America (ORSA) was formed in 1950. In 1953 the Institute of Management
Science (IMS) was established. Other countries followed suit and in 1959,
International Federation of OR Societies was established, and in many countries,
International Journals OR began to appear.

Today, the impact of Operations Research can be felt in many areas. This is shown
by the ever increasing member of educational institutions offering it at degree level.
The fast increase in the number of management consulting firms speak of the
popularity of OR. Lately, OR activities have spread to diverse fields such as
hospitals,libraries,cityplanning,transportationssystems,crimeinvestigationetc.

2.2 Definition of Operations Research

Many definitions of OR have been suggested by writers and experts in the field of
operations Research. We shall consider a few of them.
1 Operations Research is the applications 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 purpose of the
organisation as a whole (Ackoff & Sasieni,1991).
2 Operations Research is applied decision theory. It uses any scientific,
Mathematical or Logical means to attempt to cope with the problems that
confront the executive when he tries to achieve a thorough going rationality in
dealing with his decision problems (Miller and Starr,1973).
3 Operations research is a scientific approach to problem solving for executive
management (Wagner,1973).

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4 Operations Research is the art of giving bad answers to problems, to which,
otherwise, worse answers are given (Saaty,1959).
5 OR, in the most general sense, can be characterized as the application of
scientific methods, tools, and techniques to problems involving the operations
of systems so as to provide those in control of the operations with optimum
solutions to the problems. (Churchman, Ackoff, and Arnoff,1957).

It could be noticed that most of the above definitions are not satisfactory. This is
because of the following reasons.
i They have been suggested at different times in the development of
operations research and hence emphasis only one other aspect.
ii The interdisciplinary approach which is an important characteristic of
operations research is not included in most of the definitions.
iii It is not easy to define operations research precisely as it is not a science
representing any well-defined social, biological or physical phenomenon.

In-text Question 1: Define Operation Research.

In-text Answer 1: Operation research is a scientific approach to problem solving for executive
management (Wagner, 1973).

2.3 Characteristics of Operation Research (OR)

Ihemeje (2002) presents four vital characteristics of OR.
1 The OR approach is to develop a scientific model of the system under
investigation with which to compare the probable outcomes of alternative
management decision or strategies.
2 OR is essentially an aid to decision making. The result of an operation study
should have a direct effect on managerial action, management decision based on
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 the finding of an OR model are likely to be more scientific and better informed.
3 It is based on the scientific method. It involves the use of carefully constructed
models based on some measurable variables. It is, in essence, a quantitative
and logical approach rather than a qualitative one. The dominant techniques of
OR are mathematical and statistical.
4 OR model will be constructed for a particular “problem area”. This means that
the model has “boundaries” and only considers a small part of a large
organisation or system. This may result in sub-optimisation of solution to a
problem. An OR project is often a team effort involving people drawn from
many different backgrounds including accountants, economists, engineers as
well as OR experts themselves.

Other characteristics of OR are:

5 It is system Executive-oriented
6 It makes use of interdisciplinary teams
7 Application of scientific method
8 Uncovering of new problems
9 Improvement in quality of decision
10 Use of computer
11 Quantitative solution
12 Human factors
(Gupta & Hira, 2012)

2.4 Scientific Method in Operations Research

Of these three phases, the research phase is the longest. The other two phases are
equally important as they provide the basis of the research phase. We now consider

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each phase briefly as presented by Gupta & Hira (2012).

i. The judgement phase

The judgement phases of the scientific method of OR consists of the following:

A Determination of the operation: An operation is the combination of

different actions dealing with resources (e.g. men and machines) which form a
structure from which an action with regards to broader objectives is maintained.
For example an act of assembling an engine is an operation.
B Determination of objectives and values associated with the operation: In
the judgement phase, due care must be given to define correctly the frame of
references of operations. Efforts should be made to find the type of situation, e.g
manufacturing, engineering, tactical, strategic etc.
C Determination of effectiveness measures: The measure of effectiveness
implies the measure of success of a model in representing a problem and providing
a solution. It is the connecting link between the objectives and the analysis
required for corrective action.
D Formulation of the problem relative to the objective: Operation analysis
must determine the type of problem, its origin, and causes. The following are some
types of problems:
i Remedial type with its origin in actual or threatened accidents e.g. air
crashes, job performance hazards.
ii Optimization type e.g. performing a job more efficiently.
iii Transference type consisting of applying the new advances, improvements
and inventions in one field to other fields.
iv Prediction type e.g. forecasting and problems associated with future

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 developments and inventions.

2.4.1 The research phase

The research phase of OR includes the following:
a. Observation and Data Collection: This enhances better understanding of the
problem.
b. Formulation of Relevant Hypothesis: Tentative explanations, when
formulated as propositions are called hypothesis. The formulation of a good
hypothesis depends upon the sound knowledge of the subject–matter. A
hypothesis must provide an answer to the problem in question.
c. Analysis of Available Information and Verification of Hypothesis:
Quantitative as well as qualitative methods may be used to analyse available
data.
d. Prediction and Generalisation of Results and Consideration of Alternative
Methods: Once a model has been verified, a theory is developed from the
model to obtain a complete description of the problem. This is done by
studying the effect of changes in the parameters of the model. The theory so
developed may be used to extrapolate into the future.

2.4.2 The action phase

The action phase consists of making recommendations for remedial action to those
who first posed the problem and who control the operations directly. These
recommendations consists of a clear statement of the assumptions made, scope and
limitations of the information presented about the situation, alternative courses of
action, effects of each alternative as well as the preferred course of action.
A primary function of OR group is to provide an administrator with better

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understanding of the implications of the decisions he makes. The scientific method
supplements his ideas and experiences and helps him to attain his goals fully.

2.5 Necessity of Operations Research in Industry

Having studied the scientific methods of operations research, we now focus on why
OR is important or necessary in industries. OR came into existence in connection
with war operations, to decide the strategy by which enemies could be harmed to
the maximum possible extent with the help of the available equipment. War
situations required reliable decision making. But the need for reliable decision
techniques is also needed by industries for the following reasons:
• Complexity: Today, industrial undertakings have become large and complex.
This is because the scope of operations has increased. Many factors interact
with each other in a complex way. There is therefore a great uncertainty about
the outcome of interaction of factors like technological, environmental,
competitive etc. For instance, a factory production schedule will take the
following factors into account:

i Customer demand.
ii Raw material requirement.
iii Equipment Capacity and possibility of equipment failure.
iv Restrictions on manufacturing processes.

It could be seen that, it is not easy to prepare a schedule which is both economical
and realistic. This needs mathematical models, which in addition to optimization,
help to analyse the complex situation. With such models, complex problems can be
split into simpler parts, each part can be analysed separately and then the results can

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 be synthesized to give insights into the problem.
• Scattered Responsibility and Authority: In a big industry, responsibility and
authority of decision-making is scattered throughout the organisation and thus
the organisation, if it is not conscious, may be following inconsistent goals.
Mathematical quantification of OR overcomes this difficulty to a great extent.
• Uncertainty: There is a lot of uncertainty about economic growth. This makes
each decision costlier and time consuming. OR is essential from the point of
view of reliability.
• Knowledge Explosion: Knowledge is increasing at a very fast pace. Majority of
industries are not up-to-date with the latest knowledge and are therefore, at a
disadvantage. OR teams collect the latest information for analysis purpose which
is quit useful for the industries.

2.6 Scope of Operations Research

We now turn our attention towards learning about the areas that OR covers. OR as
a discipline is very broad and is relevant in the following areas:
• In Industry: OR is relevant in the field or industrial management where there is a
chain of problems or decisions starting from the purchase of raw materials to the
dispatch of finished goods. The management is interested in having an overall
view of the method of optimizing profits. In order to take scientific decisions, an
OR team will have to consider various alternative methods of producing the goods
and the returns in each case. OR should point out the possible changes in overall
structure like installation of a new machine, introduction of more automation etc.
Also, OR has been successfully applied in production, blending, product mix,
inventory control, demand forecast, sales and purchases, transportation, repair and
maintenance, scheduling and sequencing, planning, product control, etc.
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• In Defence: OR has wide application in defence operations. In modern warfare,
the defence operations are carried out by a number of different agencies, namely –
Air force, Army, and Navy. The activities perfumed by each of these agencies can
further be divided into sub-activities viz: operations, intelligence, administration,
training, etc. There is thus a need to coordinate the various activities involved in
order to arrive at an optimum strategy and to achieve consistent goals.

• In Management: Operations Research is a problem-solving and decision-making

science. It is a toolkit for scientific and programmable rules providing the
management a qualitative basis for decision making regarding the operations
under its control. Some of the area of management where OR techniques have
been successfully applied are as follows:

A Allocation and distribution

i Optimal allocation of limited resources such as men, machines, materials, time,
and money.
ii Location and size of warehouses, distribution centres retail depots etc.
iii Distribution policy

B Production and facility planning

i Selection, location and design of production plants, distribution centre and
retail outlets.
ii Project-scheduling and allocation of resources.
iii Preparation of forecast for the various inventory items and computing
economic order quantities and reorder levels.
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iv Determination of number and size of the items to be produced.
v Maintenances policy and preventive maintenance.
vi Scheduling and sequencing of production runs by proper allocation of
machines.

C Procurement
i What, how, and when to purchase at minimum purchase cost.
ii Bidding and replacement policies.
iii Transportation planning and vendor analysis.

D Marketing
i Product selection, timing, and competitive actions.
ii Selection of advertisement media.
iii Demand forecast and stock levels.
iv Customer preference for size, colour and packaging of various products.
v Best time to launch a product.

E Finance
i Capital requirement, cash-flow analysis.
ii Credit policy, credit risks etc.
iii Profit plan for the organisation.
iv Determination of optimum replacement policies.
v Financial planning, dividend policies, investment and portfolio management,
auditing etc.

F Personnel

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 i Selection of personnel, determination of retirement age and skills.
ii Recruitment policies and assignment of jobs.
iii Wages/salaries administration.

G Research and Development

i Determination of areas for research and development.
ii Reliability and control of development projects.
iii Selection of projects and preparation of budgets.

Scope of operations research in financial management

The scope of OR in financial management covers the following areas
i Cash management: Linear programming techniques are helpful in
determining the allocation of funds to each section. Linear programming techniques
have also been applied to identify sections having excess funds; these funds may be
diverted to the sections that need them.
ii Inventory control: Inventory control techniques of OR can help
management to develop better inventory policies and bring down the investment in
inventories. These techniques help to achieve optimum balance between inventory
carrying costs and shortage cost. They help to determine which items to hold, how
much to hold, when to order, and how much to order.
iii Simulation technique: Simulation considers various factors that affect and
present and projected cost of borrowing money from commercial banks, and tax
rates etc. and provides an optimum combination of finance (debt, equity, retained
earnings) for the desired amount of capital. Simulation replaces subjective
estimates, judgement and hunches of the management by providing reliable
information.

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iv Capital budgeting
It involves evaluation of various investment proposals (viz, market introduction of
new products and replacement of equipment with a new one). Often, decisions
have been made by considering internal rate of return or net present values. Also
the EMV method as discussed early can be used to evaluate investment
proposals/project.

2.8 Definition of Modeling in Operation Research

Scientific modeling is an activity the aim of which is to make a particular part or
feature of the world easier to understand, define, quantify, visualize, or simulate. It
requires selecting and identifying relevant aspects of a situation in the real world
and then using different types of models for different aims, such as conceptual
models to better understand, operational models to operationalize, mathematical
models to quantify, and graphical models to visualize the subject
(http://en.wikipedia.org/wiki/Scientific_modelling)
Adebayo et al (2010) define Modelling as a process whereby a complex life
problem situation is converted into simple representation of the problem situation.
They further describe a model as a simplified representation of complex reality.
Thus, the basic objective of any model is to use simple inexpensive objects to
represent complex and uncertain situations. Models are developed in such a way
that they concentrate on exploring the key aspects or properties of the real object
and ignore the other objects considered as being insignificant. Models are useful not
only in science and technology but also in business decision making by focusing on
the key aspects of the business decisions(Adebayo et al, 2010).
A model as used in Operations Research is defined as an idealised representation of
real life situation. It represents one of the few aspects of reality. Diverse items such

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as maps, multiple activity charts, an autobiography, PERT network, break- even
equations, balance sheets, etc, are all models because they each one of them
represent a few aspects of the real life situation. A map for instance represents the
physical boundaries but ignores the heights and the various places above sea levels
(Gupta and Hira, 2012). According to Reeb and Leavengood (1998), Models can
be defined as representations of real systems. They can be iconic (made to look like
the real system), abstract, or somewhere in-between.

In-text Question 2: Define the word Model as use in OR.

In-text Answer 2: A model as used in Operations Research is defined as an idealised
representation of real life situation. It represents one of the few aspects of reality.

2.9 Classification of Models

The following are the various schemes by which models can be classified:
2.9.1 By degree of abstraction
2.9.2 By function
2.9.3 By structure
2.9.4 By nature of the environment
2.9.5 By the extent of generality
2.9.6 By the time horizon
Let us now briefly discuss the above classifications of models as presented by
Gupta and Hira (2012).

i. By Degree of Abstraction.
Mathematical models such as Linear Programming formulation of the blending
problem, or transportation problem are among the most abstract types of models

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since they require not only mathematical knowledge, but also great concentration to
the real idea of the real-life situation they represent.
Language models such as languages used in cricket or hockey match commentaries
are also abstract models.
Concrete models such as models of the earth, dam, building, or plane are the least
abstract models since they instantaneously suggest the shape or characteristics of
the modelled entity.

ii. By Function
The types of models involved here include
Descriptive models which explain the various operations in non-mathematical
language and try to define the functional relationships and interactions between
various operations. They simply describe some aspects of the system on the basis of
observation, survey, questionnaire, etc. but do not predict its behaviour.
Organisational charts, pie charts, and layout plan describe the features of their
respective systems.
Predictive models explain or predict the behaviour of the system. Exponential
smoothing forecast model, for instance, predict the future demand
Normative or prescriptive models develop decision rules or criteria for optimal
solutions. They are applicable to repetitive problems, the solution process of which
can be programmed without managerial involvement. Liner programming is also a
prescriptive or normative model as it prescribes what the managers must follow.

iii. By Structure
• Iconic or physical models
In iconic or physical models, properties of real systems are represented by the

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properties themselves. Iconic models look like the real objects but could be scaled
downward or upward, or could employ change in materials of real object. Thus,
iconic models resemble the system they represent but differ in size, they are
images. They thus could be full replicas or scaled models like architectural building,
model plane, model train, car, etc.

• Analogue or Schematic Models

Analogue models can represent dynamic situations and are used more often than
iconic models since they are analogous to the characteristics of the system being
studied. They use a set of properties which the system under study possesses. They
are physical models but unlike iconic models, they may or may not look like the
reality of interest. They explain specific few characteristics of an idea and ignore
other details of the object. Examples of analogue models are flow diagrams, maps,
circuit diagrams, organisational chart etc.

• Symbolic or mathematical models

Symbolic models employ a set of mathematical symbols (letters, numbers etc.) to
represent the decision variables of the system under study. These variables are
related together by mathematical equations/inequalities which describe the
properties of the system. A solution from the model is, then, obtained by applying
well-developed mathematical techniques. The relationship between velocity,
acceleration, and distance is an example of a mathematical model. Similarly, cost-
volume-profit relationship is a mathematical model used in investment analysis.

iv. By Nature of Environment

• Deterministic models
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In deterministic models, variables are completely defined and the outcomes are
certain. Certainty is the state of nature assumed in these models. They represent
completely closed systems and the parameters of the systems have a single value
that does not change with time. For any given set of input variables, the same
output variables always result. E.O.Q model is deterministic because the effect of
changes in batch size on total cost is known. Similarly, linear programming,
transportation, and assignment models are deterministic models.

• Probabilistic Models
These are the products of the environment of risk and uncertainty. The input and/or
output variables take the form of probability distributions. They are semi-closed
models and represent the likelihood of occurrence of an event. Thus, they represent
to an extent the complexity of the real world and uncertainty prevailing in it. As an
example, the exponential smoothing method for forecasting demand is a
probabilistic model.

v. By Extent of Generality
• General Models: Linear programming model is known as a general model
since it can be used for a number of functions e.g. product mix, production
scheduling, and marketing of an organisation.
• Specific Models: Sales response curve or equation as a function of
advertising is applicable to the marketing function alone.

vi. By the Time Horizon

a. Static Models: These are one-time decision models. They represent the
system at specified time and do not take into account the changes over time.
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 In this model, cause and effect occur almost simultaneously and the lag
between the two is zero. They are easier to formulate, manipulate and solve.
EOQ is a static model.

b. Dynamic Models: These are models for situations for which time often
plays an important role. They are used for optimisation of multi-stage
decision problems which require a series of decisions with the outcome of
each depending upon the results of the previous decisions in the series.
Dynamic programming is a dynamic model

2.10 Characteristics of Good Models

The following are characteristics of good models as presented by Gupta and Hira
(2012)
1. The number of simplifying assumptions should be as few as possible.
2. The number of relevant variables should be as few as possible. This means
the model should be simple yet close to reality.
3. It should assimilate the system’s environmental changes without change in
its framework.
4. It should be adaptable to parametric type of treatment.
5. It should be easy and economical to construct.

2.11 Advantages of a Model

1 It provides a logical and systematic approach to the problem.
2. It indicates the scope as well as limitation of the problem.
3. It helps in finding avenues for new research and improvement in a system.
4. It makes the overall structure of the problem more comprehensible and helps

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 in dealing with the problem in its entirety.
5. It permits experimentation in analysis of a complex system without directly
interfering in the working and environment of the system
2.12 Limitations of a Model
1. Models are more idealised representations of reality and should not be
regarded as absolute in any case.
2. The reality of a model for a particular situation can be ascertained only by
conducting experiments on it.

2.13 Constructing a Model

Formulating a problem requires an analysis of the system under study. This
analysis shows the various phases of the system and the way it can be controlled.
Problem formulation is the first stage in constructing a model. The next step
involves the definition of the measure of effectiveness that is, constructing a model
in which the effectiveness of the system is expressed as a function of the variables
defining the system. The general Operations Research form is

E = f(xi, yi),
Where E = effectiveness of the system,
xi = controllable variables,
yi = uncontrollable variables but do affect E.
Deriving a solution from such a model consists of determining those values of
control variables xi, for which the measure of effectiveness is optimised.
Optimization includes both maximisation (in case of profit, production capacity,
etc.) and minimisation (in case of losses, cost of production, etc.).

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The following steps are involved in the construction of a model
1. Selecting components of the system
2. Pertinence of components
3. Combining the components
4. Substituting symbols

2.14 Types of Mathematical Models

The following are the types of mathematical models available:
1. Mathematical techniques
2. Statistical techniques
3. Inventory models
4. Allocation models
5. Sequencing models
6. Project scheduling by PERT and CPM
7. Routing models
8. Competitive models
9. Queuing models
10. Simulation techniques.

3.0 Tutor Marked Assignment

1. List and explain the classification of models by structure.
2. Give two definitions of operations research with identified authors.
3. Identify the four main characteristics of operations research.

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4.0 Summary
This has provided us with background information on the area of Operations
Research. As stated in the opening session of this study material, the discipline
Business Decision Analysis or Analysis for Business Decisions takes its root from
operations research. The History and Development of operations research which is
as old as science and society. Though the roots of or extend to even early 1800s, it
was in 1885 when Frederick .W. Taylor emphasized the application of scientific
analysis to methods of production, that the real start took place. Taylor conducted
experiments in connection with a simple shovel. However, Operations Research as
we know it today can be traced to the period during War II, when the military
management in England called on a team of scientists to study the strategic and
tactical problems of air and land defence.

This team was under the leadership of Professor P. M. S. Blackett of University of

Manchester and a former Naval Officer. Immediately after the war, the success of
military teams attracted the attention of industrial managers who were seeking
solutions to their problems. Industrial operations research in U.K and USA
developed along different lines, and in UK the critical economic efficiency and
creation of new markets. The modern day Operations Research is defined as the
applications 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 purpose of the organisation as a whole (Ackoff & Sasieni, 1991). The
Characteristics of OR include the fact that its approach is to develop a scientific
model of the system under investigation with which to compare the probable
outcomes of alternative management decision or strategies.

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This study session also introduced us to the concept of models. We have learnt
about the importance of models to operations research. The session opened with a
consideration of various definitions of models. Among the definitions is that by
Adebayo et al (2010) who defined modelling as a process whereby a complex life
problem situation is converted into simple representation of the problem situation.
A model as used in Operations Research is defined as an idealised representation of
real life situation. It represents one of the few aspects of reality. Next, we gave the
following categorisation of models- by degree of abstraction, by structure, by nature
of the environment, by the extent of generality, by the time horizon. Further, we
considered the advantages of a model, limitations of a model, characteristics of
good model, constructing a model, and types of mathematical models.

The above topics have helped us in developing introductory knowledge of models,

how they are constructed, their uses and characteristics. In subsequent chapters, we
shall consider in details, some models and how they are applied in solving practical
problems in operations research.

4.0 Self –Assignment Questions

1. Differentiate between model and modeling.
2. List the different classifications of models we have.
3. Identify and briefly discuss the phases involved in the Scientific Method in
Operations research.

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6.0 Additional activities
a. Visit U-tube add https://www.youtube.com/watch?v=3I5Z-BJcN3I
https://www.youtube.com/watch?v=escNII3CDFY
https://www.youtube.com/watch?v=YJr-2Bqbce0. Watch the video & summarise in
1 paragraph

7.0 References/Further Readings

Adebayo, O.A. et al (2006). Operations Research in Decision and Production
Management.
Gupta, P.K., and Hira, D.S. (2012). Operations Research, New-Delhi: S. Chand &
Company.
Reeb, J., and Leavengood , S. (1998). “Operations Research, Performance
Excellence in the Wood Products Industry”, October EM 8718
Ackoff, R., and Sisieni, M. (1991). Fundamentals of Operations Research, New
York: John Wiley and Sons Inc.
Churchman, C.W., Ackoff, R.L., and Arnoff, E.L.(1957). Introduction to
Operations Research, New York: John Wiley and Sons Inc.
Denardo, E.V. (2002). The Science of Decision making: A Problem-Based
Approach Using Excel. New York: John Wiley.
Ihemeje, J.C. (2002). Fundamentals of Business Decision Analysis, Lagos- Sibon
Books
Miller, D.W., and Starr, M.K. (1973). Executive Decision and Operations

Research, 2nd ed., New Jersey, Englewood Cliff: Prentice-Hall, Inc.

Wagner, H.M. (1973). Principles of Operations Research, New Delhi-
India: Prentice-Hall

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 MODULES 3
Contents
Study Session 1: Simulation.
Study Session 2: System Analysis.
Study Session 3: Sequencing.
Study Session 4: Games Theory.
Study Session 5: Inventory Control and Case Analysis.

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 STUDY SESSION 1
Simulation
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 - Definition
2.2 – Advantages of Simulation Technique
2.3 – Application of Simulation
2.4 – Limitations of Simulation Technique
2.5 – Monte Carlo Simulation
3.0 Tutor Marked Assignments
4.0Summary
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities
7.0 References/Further Readings

Introduction
You are welcome to this study session. Simulation is primarily concerned with
experimentally predicting the behaviour of a real system for the purpose of
designing the system or modifying behaviour (Budnick et al., 1988). The main
reason for a researcher to resort to simulation is twofold. First of all, simulation is
probably the most flexible tool imaginable. Take queuing as an example. While it is
very difficult to incorporate reneging, jumping queues and other types of customer
behaviour in the usual analytical models this presents no problem for simulation. A
system may have to run for a very long time to reach a steady state. As a result, a

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modeller may be more interested in transient states, which are easily available in a
simulation.
The second reason is that simulation is very cheap. Building a model that simulates
the opening of a new restaurant will most certainly be a lot less expensive than trying
it out. Even if costs are no subject, the time frame can be compressed in a simulation.
For instance, if we were to observe the demand structure of a product, a long time
would be required, so that results would probably be available when the product has
become technologically obsolete anyway (Eiselt and Sandblom, 2012). This session
exposes us to the subject of simulation, and its various components.

1.0 Study Session Learning Outcomes

At the end of this session, you should be able to do the following:
1. Define Simulation
2. Identify when to use simulation
3. Outline the advantages of simulation technique
4. Identify the areas of application of simulation
5. Describe the limitations of simulation
6. Explain the Monte Carlo Simulation

2.0 Main Content:

2.1 Definition
According Budnick et al (1988), Simulation is primarily concerned with
experimentally predicting the behaviour of a real system for the purpose of
designing the system or modifying behaviour. In other words, simulation is a tool
that builds a model of a real operation that is to be investigated, and then feeds the
system with externally generated data. We generally distinguish between

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deterministic and stochastic simulation. The difference is that the data that are fed
into the system are either deterministic or stochastic. This session will deal only
with stochastic simulation, which is sometimes also referred to as Monte Carlo
simulation in reference to the Monte Carlo Casinos and the (hopefully) random
outcome of their games of chance.

According to Gupta and Hira (2012), simulation is an imitation of reality. “They

further stated that simulation is the representation of reality through the use of
models or other device which will react in the same manner as reality under given
set of conditions. Simulation has also been defined the use of a system model that
has the designed characteristics of reality in order to produce the essence of actual
operation. According to Donald G. Malcom, a simulated model may be defined as
one which depicts the working of a large scale system of men, machine, materials,
and information operating over a period of time in a simulated environment of the
actual real world condition.

A good example of simulation is a children amusement or a cyclical park where

children enjoy themselves in a simulated environment, e.g., Amusement Parks,
Disney Land, Planetarium shows where boats, train rides, etc. are done to simulate
actual experience.

In simulation, operational information of the behaviour of a system which aides in

decision making is obtained unlike that which exist in analytical modelling
technique where optimal solution attempt is made to obtain descriptive information
through experimentation. Generally, a simulation model is the totality of many
simple models, and model interrelationship among system variables and

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components. A model can thus, be decomposed into many simple but related
models. Models can be used for predicting the behaviour of a system under varying
conditions. It focuses mainly on detailed physical or financial operations of a
system. Model development through the use of computers for simulation has
resulted in techniques for identifying possible optimal solution for a decision
problem by evaluating various suggested alternatives and then suggesting results
(Adebayo et al, 2010).

2.2 Advantages of Simulation Technique

When the simulation technique is compared with the mathematical programming
and slandered probability analysis, offers a number of advantages over these
techniques. Some of the advantages are:
1. Simulation offers solution by allowing experimentation with models of a
system without interfering with the real system. Simulation is therefore a
bypass for complex mathematical analysis.
2. Through simulation, management can foresee the difficulties and bottlenecks
which may come up due to the introduction of new machines, equipment or
process. It therefore eliminates the need for costly trial and error method of
trying out the new concept on real methods and equipment.
3. Simulation is relatively free from mathematics, and thus, can be easily
understood by the operating personnel and non-technical managers. This
helps in getting the proposed plan accepted and implemented.
4. Simulation models are comparatively flexible and can be modified to
accommodate the changing environment of the real situation.
5. Simulation technique is easier to use than mathematical models and its
considered quite superior to mathematical analysis.

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 6. Computer simulation can compress the performance of a system over several
years and involving large calculation into few minutes of computer running
time.
7. Simulation has the advantage of being used in training the operating and
managerial staff in the operation of complex plans.
In-text Question 1: Define Simulation.

In-text Answer 1: simulation is the representation of reality through the use of models or other
device which will react in the same manner as reality under given set of conditions.

2.3Application of Simulation
Simulation is quite versatile and commonly applied technique for solving decision
problems. It has been applied successfully to a wide range of problems of science
and technology as given below:
1. In the field of basic sciences, it has been used to evaluate the area under a curve,
to estimate the value of , in matrix inversion and study of particle diffusion.
2. In industrial problems including shop floor management, design of computer
systems, design of queuing systems, inventory control, communication networks,
chemicalprocesses,nuclearreactors,andschedulingofproductionprocesses.
3. In business and economic problems, including customer behaviour, price
determination, economic forecasting, portfolio selection and capital budgeting.
4. In social problems, including population growth, effect of environment on health
and group behaviour.
5. In biomedical systems, including fluid balance, distribution of electrolyte in
human body, and brain activities.
6. In the design of weapon systems, war strategies and tactics.
7. In the study of projects involving risky investments.

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2.4 Limitations of Simulation Technique
Despite the many advantages of simulation, it might suffer from some deficiencies
in in large and complex problems. Some of these limitations are given as follows:
i. Simulation does not produce optimum results when the model deals with
uncertainties, the results of simulation only reliable approximations subject
to statistical errors.
ii. Quantification of variables is difficult in a number of situations; it is not
possible to quantify all the variables that affect the behaviour of the system.
iii. In very large and complex problems, the large number of variables and the
interrelationship between them make the problem very unwieldy and hard
to programme.
iv. Simulation is by no means, a cheap method of analysis.
v. Simulation has too much tendency to rely on simulation models. This results
in application of the technique to some simple problems which can more
appropriately be handled by other techniques of mathematical
programming.

2.5 Monte Carlo Simulation

The Monte Carlo method of simulation was developed by two mathematicians, Jon
Von Neumann and Stainslaw Ulam, during World War II, to study how far neuron
would travel through different materials. The technique provides an approximate
but quite workable solution to the problem. With the remarkable success of this
technique on the neutron problem, it soon became popular and found many
applications in business and industry, and at present, forms a very important tool of
operation researcher’s toolkit.
The technique employs random number and is used to solve problems that involve

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probability and where physical experimentation is impracticable, and formulation of
mathematical model is impossible. It is a method of simulation by sampling
technique. The following are steps involved in carrying out Monte Carlo
simulation:-
7.1.1 Select the measure of effectiveness (objective function) of the problem. It is
either to be minimised or maximised.
7.1.2 Identify the variables that affect the measure of effectiveness significantly.
For example, a number of service facilities in a queuing problem or demand,
lead time and safety stock in inventory problem.
7.1.3 Determine the cumulative probability distribution of each variable selected
in step 2. Plot these distributions with the values of the variables along the
x- axis and cumulative probability values along they-axis.
7.1.4 Get a set of random numbers.
7.1.5 Consider each random number as a decimal value of the cumulative
probability distribution. Enter the cumulative distribution along the y-axis.
Project this point horizontally till it meets the distribution curve. Then
project the point of distribution down on the x-axis.
7.1.6 Record the value (or values if several variables are being simulated)
generated in step 5. Substitute the formula chosen for measure of
effectiveness and find its simulated value.
7.1.7 Repeat steps 5 and 6 until sample is large enough to the satisfaction of the
decision maker.
Let us consider a simple example as presented by Gupta and Hira (2012).

Example
Customers arrive at a service facility to get required service. The interval and

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service times are constant and are 1.8 minutes and minutes respectively. Simulate
the system for 14 minutes. Determine the average waiting time of a customer and
the idle time of the service facility.

Solution
The arrival times of customers at the service station within 14 minutes will be:

Customer : 1 2 3 4 5 6 7 8
Arrival time : 0 1.8 3.6 5.4 7.2 9.0 10.8 12.6
(minutes)

The time at which the service station begins and ends within time period of 14
minutes is shown below. Waiting time of customers and idle time of service facility
are also calculated

Customer Service Waiting time of Idle time of

Begins ends customer service facility
1 0 4 0 0
2 4 8 4-1.8 = 2.2 0
3 8 12 8-3.6 = 4.4 0
4 12 16 12-5.4 = 6.6 0

The waiting time of the first four customers is calculated above. For the remaining,
it is calculated below.

Customer : 5 6 7 8
Waiting time (min) : 14 – 7.2 = 6.8 5.0 3.2 1.4

Therefore, average waiting time of a customer

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 = 0 + 2.2 + 4.4 + 6.6 + 6.8 + 5 + 3.2 +1.4 =29.6 = 3.7 minutes
8 8

Idle time of facility = nil.

3.0 Tutor Marked Assignment

1. Explain six (6) advantages of Simulation.
2. Identify and explain five (5) areas of application of Simulation.
3. Give five limitations of Simulation.

4.0 Summary
This study session provides for us an overview of simulation. It takes us through
various conceptualisations on the definition of simulation. Simulation has been
defined as the representation of reality through the use of models or other device
which will react in the same manner as reality under given set of conditions. A good
example of simulation is a children amusement or a cyclical park where children
enjoy themselves in a simulated environment. Places like Amusement Parks,
Disney Land, Planetarium shows where boats, train rides, etc. are done to simulate
actual experience. It is quite versatile and commonly applied technique for solving
decision problems such as basic sciences, in industrial problems including shop
floor management, in business and economic problems etc.

However, simulation does not produce optimum results when the model deals with
uncertainties, the results of simulation only reliable approximations subject to
statistical errors. Quantification of variables is difficult in a number of situations; it

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is not possible to quantify all the variables that affect the behaviour of the system.
Finally, we discussed the concept of Monte Carlo Simulation which was developed
by two mathematicians Jon Von Neumann and Stainslaw Ulam, during World War
II, to study how far neuron would travel through different materials. The technique
provides an approximate but quite workable solution to the problem. With the
remarkable success of this technique on the neutron problem, it soon became
popular and found many applications in business and industry, and at present, forms
a very important tool of operation researcher’s toolkit.

5.0 Self–Assessment Questions

1. What is Monte Carlo Simulation?

6.0 Additional Activities

a. Visit U-tube add https://www.youtube.com/watch?v=9o48duEfm3c
https://www.youtube.com/watch?v=Wp3jyLkfBQs. Watch the video & summarise
in 1 paragraph

References
Adebayo, O.A. et al (2006). Operations Research in Decision and Production
Management.
Gupta, P.K., and Hira, D.S. (2012). Operations Research, New-Delhi: S. Chand &
Company.
Jawahar, S. (2006). Overview of System Analysis & Design- Lesson Note no. 1,
Ashok Educational Foundation
Eiselt, H.A., and Sandblom, C. ( 2012). Operations Research: A Model Based

Approach, 2nd ed.,New York: Springer Heidelberg

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 STUDY SESSION 2
System Analysis
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 – Definition
2.2 – The Systems Theory
2.3 – Elements of a System
2.4 – Types of Systems
2.5 – Forms of Systems
2.6 – The concept of Entropy in a System
3.0Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities
7.0 References/Further Readings

Introduction
You are welcome to this study session. The word system has a long history which
can be traced back to Plato (Philebus), Aristotle (Politics) and Euclid (Elements). It
had meant "total", "crowd" or "union" in even more ancient times, as it derives from
the verb sunìstemi, uniting, putting together.

"System" means "something to look at". You must have a very high visual gradient
to have systematization. In philosophy, before Descartes, there was no "system".

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Plato had no "system". Aristotle had no "system"(McLuhan. 1967)
In the 19th century the first to develop the concept of a "system" in the natural
sciences was the French physicist Nicolas Léonard Sadi Carnot who studied
thermodynamics. In 1824 he studied the system which he called the working
substance, i.e. typically a body of water vapour, in steam engines, in regards to the
system's ability to do work when heat is applied to it. The working substance could
be put in contact with either a boiler, a cold reservoir (a stream of cold water), or a
piston (to which the working body could do work by pushing on it). In 1850, the
German physicist Rudolf Clausius generalized this picture to include the concept of
the surroundings and began to use the term "working body" when referring to the
system.

One of the pioneers of the general systems theory was the biologist Ludwig von
Bertalanffy. In 1945 he introduced models, principles, and laws that apply to
generalized systems or their subclasses, irrespective of their particular kind, the
nature of their component elements, and the relation or 'forces' between them.
Significant development to the concept of a system was done by Norbert Wiener
and Ross Ashby who pioneered the use of mathematics to study systems.
(Cybernetics, 1948 )( Chapman& Hall, 1956)

In business, System Analysis and Design refers to the process of examining a

business situation with the intent of improving it through better procedures and
methods. System analysis and design relates to shaping organisations, improving
performance and achieving objectives for profitability and growth. The emphasis is
on systems in action, the relationships among subsystems and their contribution to
meeting a common goal.

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1.0 Study Session Learning Outcome
After studying this session, you should be able to do the following:
1. Define a system
2. Identify and describe the types of systems
3. Highlight the different forms of systems we have
4. Describe how a system is analysed
5. Discuss the concept of entropy

2.0 Main Content:

2.1 Definition
The term system is derived from the Greek word systema, which means an
organized relationship among functioning units or components. A system exists
because it is designed to achieve one or more objectives. We come into daily
contact with the transportation system, the telephone system, the accounting
system, the production system, and, for over two decades, the computer system.
Similarly, we talk of the business system and of the organisation as a system
consisting of interrelated departments (subsystems) such as production, sales,
personnel, and an information system. None of these subsystems is of much use as a
single, independent unit. When they are properly coordinated, however, the firm
can function effectively and profitably.

There are more than a hundred definitions of the word “system”, but most seem to
have a common thread that suggests that a system is an orderly grouping of
interdependent components linked together according to a plan to achieve a
specific objective. The word “component” may refer to physical parts (engines,
wings of aircraft, car), managerial steps (planning, organizing and controlling), or a

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system in a multi-level structure. The component may be simple or complex, basic
or advanced. They may be single computer with a keyboard, memory, and printer or
a series of intelligent terminals linked to a mainframe. In either case, each
component is part of the total system and has to do its share of work for the system
to achieve the intended goal. This orientation requires an orderly grouping of the
components for the design of a successful system.

The study of systems concepts, then, has three basic implications:

1. A system must be designed to achieve a predetermined objective.
2. Interrelationships and interdependence must exist among the components.
3. The objectives of the organisation as a whole have a higher priority than the
objectives of its subsystems. For example, computerizing personnel applications
must conform to the organisation’s policy on privacy, confidentiality and security,
as well as making selected data (e.g. payroll) available to the accounting division
on request.(Jawahar,2006)

A system can also be defined is a collection of elements or components or units that

are organized for a common purpose. The word sometimes describes the
organisation or plan itself (and is similar in meaning to method, as in "I have my
own little system") and sometimes describes the parts in the system (as in
"computer system").

According to the International Council of Systems Engineers (INCOSE), a system

can be broadly defined as an integrated set of elements that accomplish a defined
objective. People from different engineering disciplines have different perspectives
of what a "system" is. For example, software engineers often refer to an integrated

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set of computer programs as a "system." Electrical engineers might refer to
complex integrated circuits or an integrated set of electrical units as a "system." As
can be seen, "system" depends on one’s perspective, and the “integrated set of
elements that accomplish a defined objective” is an appropriate definition.

In-text Question 1: Mention the three Implications that consists in system concepts.

In-text Answer 1:
1. A system must be designed to achieve a predetermined objective.
2. Interrelationships and interdependence must exist among the components.
3. The objectives of the organisation as a whole have a higher priority than the objectives of its
subsystems.

a. The Systems theory

The general systems theory states that a system is composed of inputs, a
process, outputs, and control. A general graphic representation of such a system
is shown below.

X
CONTROL

INPUT TRANSFORMATION PROCESS OUTPUT

An Operational System
Adapted from Ihemeje, (2002), Fundamentals of Business Decision Analysis,
Lagos- Sibon Books Limited.
The input usually consists of people, material or objectives. The process consists of
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plant, equipment and personnel. While the output usually consists of finished
goods, semi-finished goods, policies, new products, ideas, etc.

The purpose of a system is to transform inputs into outputs. The system theory is
relevant in the areas of systems design, systems operation and system control. The
systems approach helps in resolving organisational problems by looking at the
organisation as a whole, integrating its numerous complex operations,
environment, technologies, human and material resources. The need to look at the
organisation in totality is premised on the fact that the objective if the different
units of the organisation when pursued in isolation conflict with one another. For
instance, the operation of a manufacturing department favours long and
uninterrupted production runs with a view to minimising unit cost of production,
including set-up costs. However, this will result in large inventories, and leading to
high inventory costs. The finance department seeks to minimise costs as well as
capital tied down in inventories. Thus, there is a desire for rapid inventory turnover
resulting in lower inventory levels. The marketing department seeks favourable
customer service and as a result, will not support any policy that encourages stock
outs or back ordering. Back ordering is a method of producing later to satisfy a
previously unfulfilled order. Consequently, marketing favours the maintenance of
high inventory levels in a wide variety of easily accessible locations which in
effect means some type of capital investment in warehouse or sales outlets. Finally,
personnel department aims at stabilizing labour, minimizing the cost of firing and
hiring as well as employee discontentment. Hence, it is desirable from the point of
view of personnel to maintain high inventory level of producing even during
periods of fall in demand.

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Therefore, pursuing the interest of a section of the organisation can result in
solution which will not be optional from the point of view of the total organisation,
yet ‘optimal’ from the point of view of the section concerned. Such a situation is
called sub-optimization. Adoption of the systems approach will eliminate this. The
systems approach will produce an optimal solution, which attempts to resolve the
conflicting objectives of the various sub-units of the organisation. The adoption of
the systems approach in OR methodology therefore puts its shoulder above other
focus mainly on the solution of functional areas-based management problems only,
i.e. those that adopt the piecemeal approach.

2.3 Elements of a System

The following are considered as the elements of a system in terms of Information
systems:
i. Input
ii. Output
iii. Processor
iv. Control
v. Feedback
vi. Boundary and interface
vii. Environment

a) Input: Input involves capturing and assembling elements that enter the system
to be processed. The inputs are said to be fed to the systems in order to get the
output. For example, input of a 'computer system' is input unit consisting of various
input devices like keyboard, mouse, joystick etc.
1. Output: The element that exists in the system due to the processing of the

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inputs is known as output. A major objective of a system is to produce output that
has value to its user. The output of the system may be in the form of cash,
information, knowledge, reports, documents etc. The system is defined as output is
required from it. It is the anticipatory recognition of output that helps in defining
the input of the system. For example, output of a 'computer system' is output unit
consisting of various output devices like screen and printer etc.
2. Processor(S): The processor is the element of a system that involves the actual
transformation of input into output. It is the operational component of a system.
For example, processor of a 'computer system' is central processing unit
that further consists of arithmetic and logic unit (ALU), control unit and memory
unit etc.
3. Control: The control element guides the system. It is the decision- making sub-
system that controls the pattern of activities governing input, processing and
output. It also keeps the system within the boundary set. For example, control in a
'computer system' is maintained by the control unit that controls and coordinates
various units by means of passing different signals through wires.
4. Feedback: Control in a dynamic system is achieved by feedback. Feedback
measures output against a standard in some form of cybernetic procedure that
includes communication and control. The feedback may generally be of three types
viz., positive, negative and informational. The positive feedback motivates the
persons in the system. The negative indicates need of an action, while the
information. The feedback is a reactive form of control. Outputs from the process
of the system are fed back to the control mechanism. The control mechanism then
adjusts the control signals to the process on the basis of the data it receives. Feed
forward is a protective form of control. For example, in a 'computer system' when
logical decisions are taken, the logic unit concludes by comparing the calculated

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results and the required results.
5. Boundary And Interface: A system should be defined by its boundaries — the
limits that identify its components, processes and interrelationships when it
interfaces with another system. For example, in a 'computer system' there is
boundary for number of bits, the memory size etc. that is responsible for different
levels of accuracy on different machines (like 16-bit,32-bit etc.). The interface in a
'computer system' may be CUI (Character User Interface) or GUI (Graphical User
Interface).
6. Environment: The environment is the 'super system' within which an
organisation operates. It excludes input, processes and outputs. It is the source of
external elements that impinge on the system. For example, if the results
calculated/the output generated by the 'computer system' are to be used for decision-
making purposes in the factory, in a business concern, in an organisation, in a
school, in a college or in a government office then the system is the same but its
environment is different.

In-text Question 2: List out the major element of a system

In-text Answer 2: This includes Inputs, output processors, control, feedbacks, boundary/ interface
and environment.

2.5 Types of Systems

Systems are classified in different ways:
1. Physical or abstract systems.
2. Open or closed systems.
3. 'Man-made' information systems.
4. Formal information systems.
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 5. Informal information systems.
6. Computer-based information systems.
7. Real-time system.
Physical systems are tangible entities that may be static or dynamic in operation.
An open system has many interfaces with its environment. i.e. system that interacts
freely with its environment, taking input and returning output. It permits
interaction across its boundary; it receives inputs from and delivers outputs to the
outside. A closed system does not interact with the environment; changes in the
environment and adaptability are not issues for closed system.

2.6 Forms of systems

A system can be conceptual, mechanical or social. A system can also be
deterministic or probabilistic. A system can be closed or open.
2.6.1 Conceptual system
A system is conceptual when it contains abstracts that are linked to communicate
ideas. An example of a conceptual system is a language system as in English
language, which contains words, and how they are linked to communicate ideas.
The elements of a conceptual system are words.

2.6.2 Mechanical system

A system is mechanical when it consists of many parts working together to do a
work. An example of a social system is a typewriter or a computer, which consists
of many parts working together to type words and symbols. The elements of the
mechanical system are objects.

2.6.3 Social system

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A system is social when it comprises policies, institutions and people. An example
of a social system is a football team comprising 11 players, or an educational
system consisting of policies, schools and teachers. The elements of a social system
are subjects or people.

2.6.4 Deterministic system

A system is deterministic when it operates according to a predetermined set of rules.
Its future behaviour can therefore be predicted exactly if it’s present state and
operating characteristics are accurately known. Examples of deterministic systems
are computer programmes and a planet in orbit. Business systems are not
deterministic owing to the fact that they interfere with a number of indeterminant
factors, such as customer and supplier behaviour, national and international
situations, and climatic and political conditions.

2.6.5 Probabilistic system

A system is probabilistic when the system is controlled by chance events and so its
future behaviour is a matter of probability rather than certainty. This is true of all
social systems, particularly business enterprises. Information systems are
deterministic enterprises in the sense that a pre-known type and content of
information emerges as a result of the input of a given set of data. This assumes that
the information system operates according to pre-decided and formulated rules
— which it generally would do. In a broader sense, information systems can be
regarded as probabilistic because the wide variability in the nature of their input
introduces many indeterminate and of their future behaviour i.e. output is not
absolutely certain.

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2.6.6 Closed system
A system is closed when it does not interface with its environment i.e. it has no
input or output. This concept is more relevant to scientific systems that to social
systems. The nearest we can get to a closed social system would be a completely
self-contained community that provides all its own food, materials and power, and
does not trade, communicate or come into contact with other communities.

2.6.7 Open system

A system is open when it has many interfaces with its environment, and so needs to
be capable of adopting their behaviour in order to continue to exist in changing
environments. An information system falls into this category since it needs to adapt
to the changing demands for information. Similarly, a business system must be
capable of reorganizing itself to meet the conditions of its environment, as detected
from its input; it will more rapidly tend towards a state of disorganisation. When
functioning properly, an open system reaches a state of dynamic equilibrium. This
is a steady state in which the system readily adapts to environmental factors by re-
organising itself according to the internal forces of its sub-systems. With a
manufacturing company, for instance, the steady state can be thought of as the
purchasing of materials and productive means, and the manufacturing and selling
of products. An environmental factor could be an increase in the selling prices of
its products (Ihemeje,2002)

2.7 The Concept of Entropy in a System

The term entropy is used as a measure of disorganisation. Thus, we can regard open
systems as tending to increase their entropy unless they receive negative entropy in
the form of information from their environment. In the above example, if increased

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cost of cost of materials were ignored, the product will become unprofitable and as
a result, the organisation may become insolvent, that is, a state of disorganisation.
Systems analysis is an activity, process, or study of critically examining the ways
performing frequently occurring tasks that depend on the movement processing of
information by a number of people within an organisation. System analysis may be
carried out to either install a new system or overhaul an already existing one. This
implies that a system is analysed for three main purposes- system design, system
operation, and system control (Ihemeje, 2002).

3.0 Tutor Marked Assignment

1 With the aid of a well labelled diagram, describe how a system works.
2 What understand by the concept of entropy of a system?
3 List and explain the elements of a system.

4.0 Summary
This study session discusses the concept of systems analysis. The origin of system
analysis has been traced to the Greek word systema, which means an organized
relationship among functioning units or components. A system exists because it is
designed to achieve one or more objectives. It can be defined is a collection of
elements or components or units that are organized for a common purpose. The
general systems theory states that a system is composed of inputs, a process,
outputs, and control. The input usually consists of people, material or objectives.
The process consists of plant, equipment and personnel. While the output usually
consists of finished goods, semi-finished goods, policies, new products, ideas, etc.
A system consists of the following element: input, output, processor, control,
feedback, boundary and interface, and environment.

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Depending on the usage, a system has the following are types of systems: Physical
or abstract systems, Open or closed systems, Man-made information systems,
Formal information systems, Informal information systems, Computer-based
information systems and Real-time system. A system can be conceptual,
mechanical or social. A system can also exist in the following forms- it can be
deterministic or probabilistic, closed or open, mechanical, social, and conceptual.
It has been quite an exciting journey through the world of systems analysis.

5.0 Self –Assessment Question

1. What do you understand term system?

6.0 Additional Activities

a. Visit U-tube add : https://www.youtube.com/watch?v=pOzSlT2Chi0
https://www.youtube.com/watch?v=muvHcJVTcdA
https://www.youtube.com/watch?v=SR4MzMsrASQ. Watch the video & summarise
in 1 paragraph

7.0 References/ Further Readings

Ihemeje, J.C. (2002). Fundamentals of Business Decision Analysis, Lagos- Sibon
Books.
INCOSE Systems Engineering Handbook (2000). International Council on Systems
Engineering Handbook Working Group Version 2.0 (Approved) July
Jawahar, S. (2006). Overview of System Analysis & Design — Lesson Note no. 1,
Ashok Educational Foundation

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 STUDY SESSION 3
Sequencing
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 - Definition
2.2 – Assumptions Made in Sequencing Problems
2.3 – Nature of Scheduling
2.4 – Loading Jobs in Work Centres
2.5 – Priority rules for Job Sequencing
2.6 – Types of Sequencing Problems
2.8 – Sequencing Jobs in two Machines
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities
7.0 References/Further Readings

Introduction
You are welcome to this study session. Sequencing problems involves the
determination of an optimal order or sequence of performing a series jobs by a
number of facilities (that are arranged in specific order) so as to optimize the total
time or cost. Sequencing problems can be classified into two groups:
The first group involves n different jobs to be performed, and these jobs require
processing on some or all of m different types of machines. The order in which

215
these machines are to be used for processing each job (for example, each job is to be
processed first on machine A, then B, and thereafter on C i.e., in the order ABC) is
given. Also, the expected actual processing time of each job on each machine is
known. We can also determine the effectiveness for any given sequence of jobs on

each of the machines and we wish to select from the (n!)m theoretically feasible
alternatives, the one which is both technologically feasible and optimises the
effectiveness measure.
The second group of problems deal with the shops having a number of machines
and a list of tasks to be performed. Each time a task is completed by a machine, the
next task to be started on it has to be decided. Thus, the list of tasks will change as
fresh orders are received.
Unfortunately, types of problems are intrinsically difficult. While solutions are
possible for some simple cases of the first type, only some empirical rules have
been developed for the second type till now (Gupta and Hira, 2012).

1.0 Study Session Learning Outcome

After completing this study session, you should be able to do the following :
1. Explain what scheduling involves and the nature of scheduling.
2. Understand the use of Gantt charts and assignment method for loading jobs
in work centres.
3. Discuss what sequencing involves and the use of priority rules.
4. Solve simple problems on scheduling and sequencing.

2.0 Main Content

2.1 Definition
Scheduling refers to establishing the timing of the use of equipment, facilities and
216
human activities in an organisation, that is, it deals with the timing of operations.
Scheduling occurs in every organisation, regardless of the nature of its operation.
For example, manufacturing organisations, hospitals, colleges, airlines e.t.c.
schedule their activities to achieve greater efficiency. Effective scheduling helps
companies to use assets more efficiently, which leads to cost savings and increase in
productivity. The flexibility in operation provides faster delivery and therefore,
better customer service. In general, the objectives of scheduling are to achieve
trade-offs among conflicting goals, which include efficient utilization of staff,
equipment and facilities and minimization of customer waiting tune, inventories and
process times (Adebayo et al, 2006).

Job sequencing refers to the order in which jobs should be processed at each
workstation. Sequencing decisions determine both the order in which jobs are
processed at various work centres and the order in which jobs are processed at
individual workstations within the work centres. For example, suppose that 20
computers are to be repaired. In what order should they be repaired? Should it be
done on the basis of urgency or first come first served? Job sequencing methods
provide such detailed information. Typically, a number of jobs will be waiting for
processing. Priority rules are the methods used for dispatching jobs to work centres
(Adebayo et al, 2006).

A general sequencing problem may be defined as follows:

Let there be ‘n’ jobs (J1, J2, J3 ………Jn) which are to be processed on ‘m’
machines (A, B, C,…), where the order of processing on machines i.e. for example,
ABC means first on machine A, second on machine B and third on machine C or
CBA means first on machine C, second on machine B and third on machine A etc.
217
and the processing time of jobs on machines (actual or expected) is known to us,
then our job is to find the optimal sequence of processing jobs that minimizes the
total processing time or cost. Hence our job is to find that sequence out of (n!)m
sequences, which minimizes the total elapsed time ( i.e.. time taken to process all
the jobs). The usual notations used in this problem are:
Ai = Time taken by i the job on machine A where i = I, 2,3…n. Similarly we can
interpret for machine B and C i.e. Bi and Ci etc.
T = Total elapsed time which includes the idle time of machines if any and set up
time and transfer time.

In-text Question 1: What do we refer as Job sequencing?

In-text Answer 1: Job sequencing refers to the order in which jobs should be processed at each
workstation.

2.2 Assumptions Made In Sequencing Problems

Principal assumptions made for convenience in solving the sequencing problems
are as follows:
1 The processing times Ai and Bi etc. are exactly known to us and they are
independent of order of processing the job on the machine. That is whether
job is done first on the machine, last on the machine, the time taken to
process the job will not vary it remains constant.
2 The time taken by the job from one machine to other after processing on the
previous machine is negligible. (Or we assume that the processing time
given also includes the transfer time and setup time).
3 Only one operation can be carried out on a machine at a particular time.
4 Each job once started on the machine, we should not stop the processing in
the middle. It is to be processed completely before loading the next job.
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5 The job starts on the machine as soon as the job and the machine both
become idle (vacant). This is written as job is next to the machine and the
machine is next to the job. (This is exactly the meaning of transfer time is
negligible).
6 No machine may process more than one job simultaneously. (This means to
say that the job once started on a machine, it should be done until
completion of the processing on that machine).
7 The cost of keeping the semi-finished job in inventory when next machine
on which the job is to be processed is busy is assumed to be same for all jobs
or it is assumed that it is too small and is negligible. That is, in process
inventory, cost is negligible.
8 While processing, no job is given priority i.e. the order of completion of jobs
has no significance. The processing times are independent of sequence of
jobs.
9 There is only one machine of each type.

2.3 Nature of Scheduling

Scheduling technique depends on the volume of system output, the nature of
operations and the overall complexity of jobs. Flow shop systems require
approaches substantially different from those required by job shops. The complexity
of operations varies under these two situations.

1. Flow Shop
Flow shop is a high-volume system, which is characterized by a continuous flow of
jobs to produce standardized products. Also, flow shop uses standardized equipment
(i.e. special purposed machines) and activities that provide mass production. The

219
goal is to obtain a smooth rate of flow of goods or customer through the system in
order to get high utilization of labour and equipment. Examples are refineries,
production of detergents etc.

2. Job Shop
This is a low volume system, which periodically shift from one job to another. The
production is according to customer’s specifications and orders or jobs usually in
small lots. General-purpose machines characterize Job shop. For example, in a
designer shop, a customer can place order for different designs.
Job-shop processing gives rise to two basic issues for schedulers: how to distribute
the workload among work centre and what job processing sequence to use.

2.4 Loading Jobs in Work Centres

Loading refers to the assignment of jobs to work centres. The operation managers
are confronted with the decision of assigning jobs to work centres to minimize
costs, idle time or completion time.
The two main methods that can be used to assign jobs to work centres or to
allocate resources are:
1. Gantt chart
2. Assignment method of linear programming

2.8.1 Gantt Charts

Gantt charts are bar charts that show the relationship of activities over some time
periods. Gantt charts are named after Henry Gantt, the pioneer who used charts for
industrial scheduling in the early 1900s. A typical Gantt chart presents time scale
horizontally, and resources to be scheduled are listed vertically, the use and idle

220
times of resources are reflected in the chart.
The two most commonly used Gantt charts are the schedule chart and the load
chart.

2.8.2 Assignment Method

Assignment Model (AM) is concerned specifically with the problem of job
allocation in a multiple facility production configuration. That is, it is useful in
situations that call for assigning tasks or jobs to resources. Typical examples
include assigning jobs to machines or workers, territories to sales people e.t.c. One
important characteristic of assignment problems is that only one job (or worker) is
assigned to one machine (or project). The idea is to obtain an optimum matching of
tasks and resources. A chapter in this book has treated the assignment method.

2.9 Priority Rules For Job Sequencing

Priority rules provide means for selecting the order in which jobs should be done
(processed). In using these rules, it is assumed that job setup cost and time are
independent of processing sequence. The main objective of priority rules is to
minimize completion time, number of jobs in the system, and job lateness, while
maximizing facility utilization. The most popular priority rules are:
I. First Come, First Serve (FCFS): Job is worked or processed in the order of
arrivals at the work centre.
2. Shortest Processing Time (SPT): Here, jobs are processed based on the
length of processing time. The job with the least processing time is done first.
3. Earliest Due Date (EDD): This rule sequences jobs according to their due
dates, that is, the job with the earliest due date is processed first.
4. Longest Processing Time (LPT): The job with the longest processing time is

221
 started first.
5. Critical Ratio: Jobs are processed according to smallest ratio of time
remaining until due date to processing time remaining.
The effectiveness of the priority rules is frequently measured in the light of one or
more performance measures namely; average number of jobs, job flow time, job
lateness, make span, facility utilisation etc.

Applicability
The sequencing problem is very much common in Job workshops and Batch
production shops. There will be a number of jobs which are to be processed on a
series of machine in a specified order depending on the physical changes required
on the job. We can find the same situation in computer centre where a number of
problems waiting for a solution. We can also see the same situation when a number
of critical patients are waiting for treatment in a clinic, and in Xerox centres where a
number of jobs is in queue, which are to be processed on the Xerox machines. Like
this, we may find a number of situations in real world.

2.10 Types of Sequencing Problems

Various types of sequencing problems arise in real world. All sequencing problems
cannot be solved, though mathematicians and Operations Research scholars are
working hard on the problem. Satisfactory methods of solving problem is available
for few cases only. The problems, which can be solved, are:

(a) ‘n’ jobs are to be processed on two machines, say machine A and machine B
in the order AB. This means that the job is to be processed first on machine
A and then on machine B.

222
 (b) ‘n’ jobs are to be processed on three machines A, B and C in the order ABC
i.e. first on machine A, second on machine B and third on machine C.
(c) ‘n’ jobs are to be processed on ‘m’ machines in the given order.
(d) Two jobs are to be processed on ‘m’ machines in the given order.
(Murthy, 2007)
In-text Question 2: What is Grantt charts?

In-text Answer 2: Gantt charts are bar charts that show the relationship of activities over some
time periods. Gantt charts are named after Henry Gantt, the pioneer who used charts for industrial
scheduling in the early 1900s.

• Single Machine Scheduling Models

The models in this section deal with the simplest of scheduling problems: there is
only a single machine on which tasks are to be processed.

• ‘N’ Jobs and Two Machines

If the problem given has two machines and two or three jobs, then it can be solved
by using the Gantt chart. But if the numbers of jobs are more, then this method
becomes less practical. (For understanding about the Gantt chart, the students are
advised to refer to a book on Production and Operations Management (chapter on
Scheduling). Gantt chart consists of X -axis on which the time is noted and Y-axis
on which jobs or machines are shown. For each machine a horizontal bar is drawn.
On these bars the processing of jobs in given sequence is marked. Let us take a small
example and see how Gantt chart can be used to solve the same.

Example 13.1
There are two jobs job 1 and job 2. They are to be processed on two machines,
machine A and Machine B in the order AB. Job 1 takes 2 hours on machine A and 3

223
hours on machine B. Job 2 takes 3 hours on machine A and 4 hours on machine B.
Find the optimal sequence which minimizes the total elapsed time by using Gantt
chart.

Solution

Jobs. Machines (Time in

A B
1 2 3
2 3 4

(a) Total elapsed time for sequence 1, 2 i.e. first job 1 is processed on machine A
and then on second machine and so on.
Draw X-axis and Y-axis, represent the time on X-axis and two machines by two bars
on Y-axis. Then mark the times on the bars to show processing of each job on that
machine.

Machin
es
Sequenc
e 1, 2
T =
Elapse
Time =
9 hours
(Optim
al)

224
 J1 J2
A

J1 J2
B

0 1 2 3 4 5 6 7 8 9

Time in hours
Sequence 1, 2
T = Elapse Time = 9 hours (Optimal sequence)
Machines

J1 J2
A

J1 J2

0 1 2 3 4 5 6 7 8 9
Time in hours
Gantt chart.

Source: Murthy, R. P. (2007), Operations Research, 2nd ed., New Delhi: New Age
International (P) Limited Publisher
225
Both the sequences show the elapsed time = 9 hours.

The drawback of this method is that for all the sequences, we have to write the
Gantt chart and find the total elapsed times and then identify the optimal solution.
This is laborious and time consuming. If we have more jobs and more machines,
then it is tedious work to draw the chart for all sequences.
Hence we have to go for analytical methods to find the optimal solution without
drawing charts.

1 Analytical Method
A method has been developed by Johnson and Bellman for simple problems to
determine a sequence of jobs, which minimizes the total elapsed time. The method:
1. ‘n’ jobs are to be processed on two machines A and B in the order AB ( i.e. each
job is to be processed first on A and then on B) and passing is not allowed. That is
whichever job is processed first on machine A is to be first processed on machine B
also, whichever job is processed second on machine A is to be processed second on
machine B also and so on. That means each job will first go to machine A, get
processed and then go to machine B and get processed. This rule is known as no
passing rule.
2. Johnson and Bellman method concentrates on minimizing the idle time of
machines. Johnson and Bellman have proved that optimal sequence of ‘n’ jobs
which are to be processed on two machines A and B in the order AB necessarily
involves the same ordering of jobs on each machine. This result also holds for three
machines but does not necessarily hold for more than three machines. Thus total
elapsed time is minimum when the sequence of jobs is the same for both the
machines.

226
3. Let the number of jobs be1,2,3,… n
The processing time of jobs on machine A be A1, A2, A3 … An
The processing time of jobs on machine B be B1, B2, B3 … Bn

Jobs Machine Time in Hours

Machine A Machine B Order of Processing is AB
1 A1 B1
2 A2 B2
3 A3 B3

I AI BI

S AS BS

T AT BT

N AN BN

4. Johnson and Bellman algorithm for optimal sequence states that identify the
smallest element in the given matrix. If the smallest element falls under column 1,
i.e under machine 1, then do that job first. As the job after processing on machine 1
goes to machine 2, it reduces the idle time or waiting time of machine 2. If the
smallest element falls under column 2 i.e under machine 2, then do that job last.
This reduces the idle time of machine 1. i.e. if rth job is having the smallest element

in the first column, then do the rth job first. If the sth job has the smallest element,
which falls under second column, then do the sth job last. Hence, the basis for
Johnson and Bellman method is to keep the idle time of machines as low as
227
possible. Continue the above process until all the jobs are over.

1 2 3… n-1 n
r s

If there are ‘n’ jobs, first write ‘n’ number of rectangles as shown. Whenever the
smallest elements falls in column 1 then enter the job number in first rectangle. If it
falls in the second column, then write the job number in the last rectangle. Once the
job number is entered, the second rectangle will become first rectangle and last but
one rectangle will be the last rectangle.

Now calculate the total elapsed time as discussed. Write the table as shown. Let us
assume that the first job starts at 0th time. Then add the processing time of job (first
in the optimal sequence) and write it out in the column under machine 1.This is the
time when the first job in the optimal sequence leaves machine 1 and enters the
machine 2. Now add processing time of job on machine 2. This is the time by which
the processing of the job on the two machines is over. Next consider the job, which is
in second place in optimal sequence. This job enters the machine 1 as soon the
machine becomes vacant, i.e. first job leaves to second machine. Hence enter the
time in-out column for first job under machine 1 as the starting time of job two on
machine 1. Continue until all the jobs are over. Be careful to see whether the
machines are vacant before loading. Total elapsed time may be worked out by
drawing Gantt chart for the optimal sequence.
6. Points to remember:

228
 (a) If there is a tie i.e. we have smallest elements of the same value in both
columns, then:
(i) Minimum of all the processing times is Ar which is equal to Bs i.e. Min
(Ai, Bi)= Ar = Bs
(ii)then do the rth job first and sth job last.
(iii) If Min (Ai, Bi) = Ar and also Ar = Ak (say). Here tie occurs between the
two jobs having same minimum element in the same column i.e. first
column, we can do either rth job or kth job first. There will be two
solutions. When the ties occur due to the element in the same column,
then the problem will have alternate solution. If more number of jobs have
the same minimum element in the same column, then the problem will
have many alternative solutions. If we start writing all the solutions, it is a
tedious job. Hence it is enough that the students can mention that the
problem has alternate solutions. The same is true with Bis also. If more
number of jobs have same minimum element in second column, the
problem will have alternate solutions.

Example 1.2
There are five jobs, which are to be processed on two machines A and B in the
order AB. The processing times in hours for the jobs are given below. Find the
optimal sequence and total elapsed time. (Remember in sequencing problems if
optimal sequence is asked, it is your duty to find the total elapsed time also).

Jobs: 1 2 3 4 5
Machine A (Time 2 6 4 8 10
in Hrs)
Machine B
(Time in Hrs) 3 1 5 9 7

229
 The smallest element is 1 and it falls under machine B hence do this job last i.e. in
5th position. Cancel job 2 from the matrix. The next smallest element is 2, it falls
under machine A hence do this job first, i.e. in the first position. Cancel the job two
from matrix. Then the next smallest element is 3 and it falls under machine B.
Hence do this job in fourth position. Cancel the job from the matrix. Proceed like
this until all jobs are over.

1 3 4 5 2
Total elapsed time:

OPTIMAL MACHINE –A MACHINE - B MACHINE IDLE JOB REMARKS

IDLE
SEQUENCE IN OUT IN OUT A B
1 0 2 2 5 2 As the Machine B
3 2 6 6 11 1 Finishes Work at 5 th
hour it will be Idle
for 1 Hour.
-do- 3 hr.
-do- 1 hr. 1 hr as job
finished early 1 hr
idle

4 6 1 14 23 3
5 14 4 24 24 1
2 24 2 31 32 1 2
4
3
0

Total elapsed time = 32 hours (This includes idle time of job and idle time of
machines).
The procedure: Let Job 1 be loaded on machine A first at zero th time. It takes two
hours to process on the machine. Job 1 leaves the machine A at two hours and enters
230
the machine 2 at 2-nd hour. Up to the time, i.e., first two hours, the machine B is
idle. Then the job 1 is processed on machine B for 3 hours and it will be unloaded.
As soon as the machine A becomes idle, i.e. at 2nd hour then next job 3 is loaded on
machine A. It takes 4 hours and the job leaves the machine at 6 the hour and enters
the machine B and is processed for 6 hours and the job is completed by 11 th hour.
(Remember if the job is completed early and the Machine B is still busy, then the
job has to wait and the time is entered in job idle column. In case the machine B
completes the previous job earlier, and the machine A is still processing the next
job, the machine has to wait for the job.
This will be shown as machine idle time for machine B.). Job 4 enters the machine
A at 6th hour and is processed for 8 hours and leaves the machine at 14th hour. As
the machine B finishes the job 3 by 11 the hour, the machine has to wait for the next
job (job 4) up to 14 th hour. Hence 3 hours is the idle time for the machine B. In this
manner we have to calculate the total elapsed time until all the jobs are over.

Example 13.3
There are seven jobs, each of which has to be processed on machine A and then on
Machine B (order of machining is AB). Processing time is given in hour. Find the
optimal sequence in which the jobs are to be processed so as to minimize the total
time elapsed.

JOB: 1 2 3 4 5 6 7
MACHINE: A (TIME IN HOURS). 3 12 15 6 10 11 9
MACHINE: B (TIME IN HOURS). 8 10 10 6 12 1 3

231
Solution
By Johnson and Bellman method the optimal sequence is:

1 4 5 3 2 7 6

Optima Machine: A Machine: B Machine idle Job idle Remarks.

l time time
Sequen
In out In out A B
1 0 3 3 11 3 -
4 3 9 11 17 2 Job finished early

5 9 19 19 31 2 Machine A take
more time

3 19 34 34 44 3 Machine A takes
more time.

2 34 46 46 56 2 - do-

7 46 55 56 59 1 Job finished early.

6 55 66 66 67 1 7 Machine A takes
more time. Last is
finished
on machine A at 66
th hour.
Total Elapsed Time = 67
h N

Example 13.4
Assuming eight jobs are waiting to be processed. The processing time and due
dates for the jobs are given below: Determine the sequence processing according
to
(a) FCFS (b) SPT (c) EDD and (d) LPT in the light of the following criteria:
(i) Average flow time,
(ii) Average number of jobs in the system,
232
 (iii) Average job lateness,
(iv) Utilization of the workers

JOB PROCESSING TIME DUE DATE (DAYS)

A
B

C 10 18

D
E

F
G

H
18 28

Solution:
(a) To determine the sequence processing according to FCFS
The FCFS sequence is simply A-B-C-D-E-F-G-H- as shown below

Job Processing Time Flow time Job due date Job lateness (0 of
negative)
A 4 4 9 0
B 10 14 18 0
C 6 20 6 14
D 12 32 19 13
E 7 39 17 22
F 14 53 20 33
G 9 62 24 38
H 18 80 28 52
80 304 172

The first come, first served rule results is the following measures of effectiveness:
233
 1. Average flowtime= Sum of total flowtime
Number of jobs
= 304days = 38jobs
2. Average number of jobs in the system = Sum of total flowtime
Total processing time

=304days
=3.8jobs
80
3. Average job lateness = Total late days = 172 x 21.5 =22days
Number of days 8

4. Utilization = Total processing time = 80 =0.2631579

Sum of total flow time 304
0.2631579 x 100% = 26.31579 = 26.32%
(b) To determine the sequence processing according to SPT
SPT processes jobs based on their processing times with the highest priority given
to the job with shortest time as shown below:
Job Processing Time Flow Job due date Job lateness (0
time of negative)

A 4 4 9 0
B 6 10 6 4
C 7 17 17 0
D 9 26 24 2
E 10 36 18 18
F 12 48 19 29
G 14 62 20 42
H 18 80 28 52
80 283 147
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The measure of effectiveness are:
1. Average flowtime= Sum of total flowtime =283
Number of jobs 8
= 35.375days = 35.38 days
2. Average number of jobs in the system = Sum of total flowtime
Total processing time

=283days
=3.54jobs8
0
3. Average job lateness= Total late days= 147
Number of days 8

= 18.375days
=18.38days

4. Utilization = Total processing time=80

Sum of total flowtime 283

0.2826855 x 100%

= 28.27%
(c) To determine the sequence processing according to EDD
Using EDD, you are processing based on their due dates as shown below:

235
 Job Processing Time Flow time Job due date Job lateness (0 of
negative)

A 6 6 6 0
B 4 10 9 1
C 7 17 17 0
D 9 27 18 9
E 10 39 19 20
F 12 53 20 33
G 14 62 24 38
H 18 80 28 52
80 294 153

The measure of effectiveness are:

1. Average flowtime= 294 =36.75days

2. Average number of jobs in the system=294

80
3.675 = 3.68days

3. Average job lateness= 153 =19.125

8
= 19.13days
=18.38days

4. Utilization = 80= 0.272108843

294

0.282108843 x 100

236
 = 27.21%

(d) To Determine the Sequence Processing According to LPT

LPT selects the longer, bigger jobs first as presented below:
Job Processing Time Flow time Job due date Job lateness (0 of
negative)
A 18 18 28 0
B 14 32 20 12
C 12 44 19 25
D 10 54 18 36
E 9 63 24 39
F 7 70 17 53
G 6 76 6 70
H 4 80 9 71
80 437 306

The measure of effectiveness are:

1. Average flowtime= 437 = 54.625days
8
= 54.63days

2. Average number of jobs in the system =437 =5.4625

80
= 5.46days

3. Average job lateness= 306 = 38.25 days

8

4. Utilization = 80= 0.183066361

437 0.183066361 x100%
237
 = 18.31%

The summary of the rules are shown in the table below:

Average Average Average job Utilization%

flowtime number of lateness job
(days) jobs in the
system
FCFS 38 3.8 21.5 26.32
SPT 35.38 3.54 18.38 28.27
EDD 36.75 3.68 19.13 27.21
LPT 54.63 5.46 38.25 18.31

As it can be seen from the table, SPT rule is the best of the four measures and is
also the most superior in utilization of the system. On the other hand, LPT is the
least effective measure of the three.

2.11 Sequencing Jobs in Two Machines

Johnson’s rule is used to sequence two or more jobs in two different machines or
work centres in the same order. Managers use Johnson rule method to minimize total
timer for sequencing jobs through two facilities. In the process, machine total idle
time is minimised. The rule does not use job priorities.
Johnson’s rule involves the following procedures

1) List the jobs and their respective time requirement on a machine.

2) Choose the job with the shortest time. if the shortest time falls with the
first machine, schedule that job first; if the time is at the second machine,
schedule the job last. Select arbitrary any job if tie activity time occur.
3) Eliminate the scheduled job and its time
238
 4) Repeat steps 2 and 3 to the remaining jobs, working toward the centre of
the sequence until all the jobs are properly scheduled.

Example 13.5
Eight jobs have the following information

Job Work Centre 1 Work Centre 2

Time (Hours) Time (Hours)
A 9 6
B 7 10
C 12 8
D 14 14
E 11 16
F 5 5
G 15 13
H 16 4

Determine the sequence that will minimize the total completion time for these jobs.
Solution: (a) Steps Iteration 1

1st 2nd 3rd 4th 5th 6t7h 7th 8th

(b) The remaining jobs and their times are

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 Job Work Centre 1 Work Centre 2
Time (Hours) Time (Hours)
A 9 6
B 7 10
C 12 8
D 14 14
E 11 16
G 15 13

1st 2nd 3rd 4th 5th 6t7h 7th 8th

(d) Liberation 3:

1st 2nd 3rd 4th 5th 6t7h 7th 8th

(d) The remaining jobs and their times are

Job Work Centre 1 Work Centre 2

Time (Hours) Time (Hours)
D 14 14
G 15 13

There is a tie (at 14 hours) for the shortest remaining time. We can place job D in
the first work centre or second work centre. Suppose it is placed in work centre 1.

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 (f)1st Liberation 4 3rd 4th 5th 6t7h 7th 8th
2nd

(g) The sequential times are:

Work 5 7 11 14 15 12 9 16
centre 1

Work 5 10 16 14 13 8 6 4
Centre 2

Determination of throughput time and idle time at the work centres.

Thus the eight jobs will be completed in 93 hours. The work centre 2 will wait
for (5) hours for its first job, and also wait for two (2), one (1) and nine (9)
hours after finishing jobs F,B and A respectively.

Method 2
We can also solve this problem using the tabulation method shown below:-

Job I Centre II III IV V VI VII

sequence 1 Centre1 Centre1 Centre 2 Centre2 Centre2 Idle
Duration in out Duration Out Time
F 5 0 5 5 5 10 5
B 7 5 12 10 12 22 2
E 11 12 23 16 23 39 1
D 14 23 37 14 39 53 0
G 15 37 52 13 53 66 0
C 12 52 64 8 66 74 0
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 A 9 64 73 6 74 80 0
H 16 73 89 4 89 93 9
17

• Columns I and IV are the durations for the jobs as given in the question
• In column II the starting point for F is 0; 5 + 0 5 for job B; 7 + 5 = 12 for
job 11 ± 12=23 for job D etc.,
• In column UT we obtain the cumulative time for I i.e. first value is 5, next
is + 7 = 12 etc. we can also obtain it by adding columns I and II
• In column V, we realize that the job at Centre 2 cannot start until the job
Centre 1 ends. Thus the first value is 5 representing the duration of job F.
The next value is the maximum of the sum of IV and V in Centre II and
the out time for the next job in Centre I i.e. max (5+5,12) 12. The value of
2 obtained next is max 10+12, 23) while the value of 39 obtained is max
(16+23, 37) other values are similarly obtained using the same technique.
• Column VI is the sum of IV and V i.e. 5 + 5 = 10, 10 + 12 = 22etc.
• In column VII the first value is the duration of job F in Centre I. This
represents the period that Centre II has to wait before starting its first job.
The next value of 2 is obtained by subtracting the time out for F from the
time in for B i.e. 12 - 10 = 2. This represents the time Centre II will wait
before starting job 13. Similarly 23 -22 = I is the time Centre II will wait
before starting job F. All other values are obtained in a similar manner.

Total idle time = 5 + 2 + 1 ±9 = 17

Total time for completion of all the job is 93

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 Example 13.6
You are given the operation times in Hours for 6 jobs in two machines as follow:
Job Machine 1 Time Machines 2
(Hours) Time (Hours)
P 20 20
Q 16 12
R 33 36
S 8 28
T 25 33
U 48 60

(a) Determine the sequence that will minimize idle times on the two
machines.
(b) The time machine I will complete its jobs.
(c) The total completion time for all the jobs.
(d) The total idle time.

Solution
Using the steps outlined earlier for optimum sequencing of jobs, we obtained

1st 2nd 3rd 4th 5th 6t7h

S T R U E Q

We then used tabular method to solve the remaining questions

Job 1 II III IV V VI VII
sequence Machine 1 Machine 1 Machine I Machine 2 Machine 2 Machine Idle
Duration in Out Duration In 2 Out Time
S 8 0 8 28 8 36 8
T 25 8 33 33 36 69 0
R 33 33 66 36 69 105 0
U 48 66 114 60 114 174 9

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P 20 114 134 20 174 194 0
Q 16 134 150 12 194 206 0

(a) Machine 1 will complete his job in 150 hours

(b) Total completion time is 206 hours
(c) Total idle time is 17 hours

Note that machine 2 will wait 8 hours for its first job and also wait 9 hours after
completing job R.
In general, idle time can occur either at the beginning of the job or at the end of the
sequence of jobs. In manufacturing organisations, idle times can be used to do other
jobs like maintenance, dismantling or setting up of other equipment.

3.0 Tutor Marked Assignment

1. Define the following (a) Average flow time (b) Average number of jobs in the
system (c) Utilization
2. State the priority rules for sequencing
State the procedures for using Johnson’s rules in sequencing N jobs in two
machines
3. The following seven jobs are waiting to be processed at a machine centre
Job Due date Processing time
A 13 8
B 20 14
C 10 10
D 23 16
E 21 11
F 24 18
G 28 13

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In what sequence would the job be ranked according to the following decision rules
(1) EDD, (2) SPT, (3) LPT, (4)FCFS)

4.0 Summary
Scheduling, which occurs in every organisation, refers to establishing the timing of
the use of equipment, facilities and human activities in an organisation and so it
deals with the timing of operations. Scheduling technique depends on the volume
of system output, the nature of operations and the overall complexity of jobs. The
complexity of operation varies under two situations, namely, Flow Shop system and
Job Shop system. Flow Shop is a high volume system while Job Shop is a low
volume system. Loading refers to assignment of jobs to work centres. The two main
methods that can be used to assign jobs to work centres are Gant chart and
Assignment Method. Job sequencing refers to the order in which jobs should be
processed at each work station. Priority rules enable us to select the order in which
jobs should be done.

The main objective of priority rules is to cover completion time, number of jobs in
the system, and job lateness, while maximizing facility utilization. In FCFS, which
means First Come First Served, job is processed in the order of arrivals at work
centres. In Short Processing Time (SPT) jobs are processed based on the length of
the processing time with the job with the least processing time being done first. In
Earliest Due Date (EDD) the job with the earliest due data is processed first. In
Longest Processing Time (LPT) the job with longest processing time are started
first. Johnson’s rule is used to sequence two more jobs in two different work centres
in the same order.

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5.0 Self–Assignment Questions
1. Explain the following concepts(a)Scheduling(b) Flow shop(c) Job shop (d)
Sequencing
2. Describe two main methods used to assign jobs to work centres
3. Information concerning six jobs that are to be processed at a work centre is
given below.
Job Processing time Due date (days)
(days)
A 11 17
B 7 13
C 4 12
D 3 14
E 5 2
F 14 11

Determine the sequence processing according to

i) Average flowtime
ii) Average number of jobs in the system
iii) Average job lateness
iv) Utilization of the work centre

4. Given the following processing time about six jobs in two machines,
Job Machine 1 Machine 2
A 13 8
B 10 7
C 8 10
D 6 11
E 5 9
F 7 6

Determine the sequence that will minimize the total completion time for these jobs.
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6.0 Additional Activities
a. Visit U-tube add https://www.youtube.com/watch?v=Z-YqfAA9lew
https://www.youtube.com/watch?v=ksCFPRVRTfE. Watch the video & summarize
in 1 paragraph

7.0 References/Further Readings

Adebayo, O.A., Ojo, O., and Obamire, J.K. (2006). Operations Research in
Decision Analysis, Lagos: Pumark Nigeria Limited.
Denardo, Eric V. (2002). The Science of Decision making: A Problem-Based
Approach Using Excel. New York: John Wiley.
Gupta, P.K., and Hira, D.S. (2012) Operations Research, New-Delhi: S. Chand &
Company.
Lucey, T. (1988). Quantitative Techniques: An Instructional Manual, London: DP
Publications.

Murthy, R.P. (2007). Operations Research, 2nd ed., New Delhi: New
Age International (P) Limited Publishers

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 STUDY SESSION 4
Games Theory
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 – Decision Theory
2.2 – Description of a Game
2.3 – Assumptions made in Game Theory
2.4 – Description and Types of Games
3.0 Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities
7.0 References/Further Readings

Introduction
You are welcome to this study session. The theory of games (or game theory or
competitive strategies) is a mathematical theory that deals with the general features
of competitive situations. This theory is helpful when two or more individuals or
organisations with conflicting objectives try to make decisions. In such a situation, a
decision made by on person affects the decision made by one or more of the
remaining decision makers, and the final outcome depends upon the decision of all
the parties. (Gupta and Hira, 2012)

According to Adebayo et al (2006), Game theory is a branch of mathematical

248
analysis used for decision making in conflict situations. It is very useful for
selecting an optimal strategy or sequence of decision in the face of an intelligent
opponent who has his own strategy.
Since more than one person is usually involved in playing of games, games theory
can be described as the theory of multiplayer decision problem. The Competitive
strategy is a system for describing games and using mathematical techniques to
convert practical problems into games that need to be solved. Game theory can be
described as a distinct and interdisciplinary approach to the study of human
behaviour and such disciplines include mathematics, economics, psychology and
other social and behavioural sciences. If properly understood it is a good law for
studying decision-making in conflict situations and it also provides mathematical
techniques for selecting optimum strategy and most rational solution by a player in
the face of an opponent who already has his own strategy.

Adebayo et al (2006), attributed the development of game theory to John von

Neumann, the great mathematician, in the last decade of 1940, whose first important
theory, written in partnership with the great economist Oskar Morgan Stein is titled
“the theory of games and economic behaviour”. Oskar Morgan stein brought ideas
from neo-classical economics into games theory. The key word between neo-
economics and game theory is rationality, with emphasis being placed on the
absolute rationality of men in making economic choices. It specifically advocates
that human beings are rational in economic choices with each person aiming at
maximising each of his or her rewards (profit, income or other subjective benefits)
in the circumstances he or she faces.

John von Neumann studied how players in Poker games maximize their rewards

249
and found that they did it by bluffing and by being unpredictable. He was able to
discover a new, unique and unequivocal answer to the question of how players can
maximise their payoffs in the game without any market forces, properties right,
prices or other economic indicators in the picture. His discovery led to a very major
extension to the concept of absolute rationality in neoclassical economics. However
the discovery only applied to zero-sum games. Other games theorists have since
expanded the scope of the research on games theory.

The theory of games is based on the minimax principle put forward by J. Von
Neumann which implies that each competitor will act to minimise his maximum
loss (or maximise his minimum gain) or achieve best of the worst. So far, only
simple competitive problems have been analysed by this mathematical theory. The
theory does not describe how a game should be played; it describes only the
procedure and principles by which players should be selected (Gupta and Hira,
2012).

1.0 Study Session Learning Outcome

By the end of this study session, you will be able to:
1. Define the concept of a game
2. State the assumptions of games theory
3. Describe the two-person zero-sum games
4. Explain the concept of saddle point solution in a game
5. Find pure and mixed strategies in games
6. Use the simplex method to find the optimal strategies and value of a game

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2.0 Main Content
2.1 Decision Making
Making decision is an integral and continuous aspect of human life. For child or
adult, man or woman, government official or business executive, worker or
supervisor, participation in the process of decision-making is a common feature of
everyday life. What does this process of decision making involve? What is a
decision? How can we analyse and systematise the solving of certain types of
decision problems? Answers of all such question are the subject matter of decision
theory. Decision-making involves listing the various alternatives and evaluating
them economically and selecting best among them. Two important stages in
decision-making are: (i) making the decision and (ii) implementation of the
decision.

Analytical approach to decision making classifies decisions according to the amount

and nature of the available information, which is to be fed as input data for a
particular decision problems. Since future implementations are integral part of
decision-making, available information is classified according to the degree of
certainty or uncertainty expected in a particular future situation. With this criterion
in mind, three types of decisions can be identified. First one is that these decisions
are made when the future can be predicted with certainty. In this case the decision
maker assumes that there is only one possible future in conjunction with a particular
course of action. The second one is that decision-making under conditions of risk. In
this case, the future can bring more than one state of affairs in conjunction with a
specific course of action.
The third one is decision making under uncertainty. In this case a particular course
of action may face different possible futures, but the probability of such occurrence

251
cannot be estimated objectively.
The Game theory models differ from decision-making under certainty (DMUC) and
decision making under risk (DMUR) models in two respects. First, the opponent to
the decision-maker in a game theory model is an active and rational opponent in
DMUC and in DMUR models the opponent is the passive state of nature. The
second point of importance in decision criterion in game model is the maximin or
the minimax criterion. In DMUC and DMUR models, the criterion is the
maximization or minimization of some measure of effectiveness such as profit or
cost.

2.2 Description Of A Game

In our day-to-day life we see many games like Chess, Poker, Football, Baseball etc.
All these games are pleasure-giving games, which have the character of a
competition and are played according to well-structured rules and regulations and
end in a victory of one or the other team or group or a player. But we refer to the
word “game” in this study session as the competition between two business
organisations, which has more earning competitive situations. In this session game
is described as:
A competitive situation is called a game if it has the following characteristics
(Assumption made to define a game):
1. There is finite number of competitors called Players. This is to say that the
game is played by two or more number of business houses. The game may be for
creating new market or to increase the market share or to increase the
competitiveness of the product.
2. A list of finite or infinite number of possible courses of action is available to
each player.

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 The list need not be the same for each player. Such a game is said to be in normal
form. To explain this we can consider two business houses A and B. Suppose that
player A has three strategies:- strategy I is to offer a car for the customer who is
selected through advertising campaign. Strategy II may be a house for the winning
customer, and strategy III may be a cash prize of N10,000,000 for the winning
customer. This means to say that the competitor A has three strategies or courses of
action. Similarly, the player B may have two strategies, for example, strategy I is a
pleasure trip to America for 10 days and strategy II may be an offer to spend time
with a cricket star for two days. In this, game A has three courses of action and B
has two courses of actions. The game can be represented by means of a matrix as
shown below:

B
I II
A II

III

3. A play is played when each player chooses one of his courses of actions. The
choices are made simultaneously, so that no player knows his opponent's choice
until he has decided his own course of action. But in the real world, a player makes
the choices after the opponent has announced his course of action.
Every play, i.e. combination of courses of action, is associated with an outcome
known as payoff (generally money or some other quantitative measure for the
satisfaction) which determines a set of gains, one to each player. Here also

253
 considered to be negative gain. Thus after each play of the game, one player pays
to the other an amount determined by the courses of action chosen. For
example
consider the following matrix:

B
I II III

I 2 4 –3

A –1 2 2

II
In the given matrix, we have two players. Among these the player who is named
on the left side matrix is known as winner, i.e. here A is the winner and the matrix
given is the matrix of the winner. The player named above is known as the loser.
The loser’s matrix is the negative version of the given matrix. In the above matrix,
which is the matrix of A, a winner, we can describe as follows. If A selects the first
strategy, and B selects the second strategy, the outcome is +4 i.e. A will get 4 units
of money and B loses 4 units of money. i.e. B has to give 4 units of money to A.
Suppose A selects second strategy and B selects first strategy A’s outcome is –1, i.e.
A loses one unit of money and he has to give that to B. It means B wins one unit of
money.
4. All players act rationally and intelligently.
5. Each player is interested in maximizing his gains or minimising his losses. The
winner, i.e. the player on the left side of the matrix always tries to maximise his
gains and is known as Maximin player. He is interested in maximizing his
minimum gains. Similarly, the player B, who is at the top of the matrix, a loser,

254
always tries to minimize his losses and is known as Minimax player-i.e. who tries
to minimize his maximum losses.
6. Each player makes individual decisions without direct communication
between the players. By principle we assume that the player plays a strategy
individually, without knowing the opponent's strategy. But in real world situations,
the players play strategy after knowing the opponent's choice to maximin or
minimax his returns.
7. It is assumed that each player knows the complete relevant information.
Game theory models can be classified in a number of ways, depending on such
factors as the: (i) Number of players, (ii) Algebraic sum of gains and losses (iii)
Number of strategies of each player, which decides the size of matrix.
Number of players: If number of players is two it is known as Two-person game. If
the number of players is ‘n’ (where n3) it is known as n-person game. In real
world two person games are more popular. If the number of players is ‘n’, it has to
be reduced to two person game by two constant collations, and then we have to
solve the game, this is because, the method of solving n-person games are not yet
fully developed.

Algebraic Sum of Gains and Losses: A game in which the gains of one player are
the losses of other player or the algebraic sum of gains of both players is equal to
zero, the game is known as Zero-sum game (ZSG). In a zero-sum game the
algebraic sum of the gains of all players after play is bound to be zero, i.e. If gi is
the payoff to a player in a n-person game, then the game will be a zero-sum game
if the sum of all gi is equal to zero.
In games theory, the resulting gains can easily be represented in the form of a
matrix called pay–off matrix or gain matrix as discussed in 3 above. A pay-off
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 matrix is a table, which shows how payments should be made at the end of a play or
the game. Zero-sum game is also known as constant sum game. Conversely, if the
sum of gains and losses does not equal to zero, the game is a non-zero-sum game. A
game where two persons are playing the game and the sum of gains and losses
is equal to zero, the game is known as Two-Person Zero-Sum Game (TPZSG). A
good example of two-person game is the game of chess. A good example of n-
person game is the situation when several companies are engaged in an intensive
advertising campaign to capture a larger share of the market (Murthy, 2007)
In-text Question 1: What do we refer to as a game in this session?

In-text Answer 1: The word game in this study session is the competition between two business
organisations, which has more earning competitive situations.

Adebayo et al (2010) provide the following important definitions in game theory.

1.0.1 Player: A player is an active participant in a game. The game can have two persons
(Two-person game) or more than two persons (Multi-person or n-person game).
1.0.2 Moves: A move could be a decision by a player or the result of a chance
event.
1.0.3 Game: A game is a sequence of moves that are defined by a set of rules that
governs the players’ moves. The sequence of moves may be simultaneous.
1.0.4 Decision maker: A decision-maker is a person or group of people in a committee
who makes the final choice among the alternatives. A decision-maker is then a
player in the game.
1.0.5 Objective: An objective is what a decision-maker aims at accomplishing by means
of his decision. The decision-maker may end up with more than one objective.
1.0.6 Behaviour: This could be any sequence of states in a system. The behaviours of a
system are overt while state trajectories are covert.
1.0.7 Decision: The forceful imposition of a constraint on a set of initially possible
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 alternatives.
1.0.8 Conflict: A condition in which two or more parties claim possession of something
they cannot all have simultaneously. It could also be described as a state in which
two or more decision-makers who have different objectives act in the same system
or share the same resources. Examples are value conflicts, territorial conflict,
conflicts of interests etc.
1.0.9 Strategy: it is the predetermined rule by which a player decides his course of
action from a list of courses of action during the game. To decide a particular
strategy, the player needs to know the other’s strategy.
1.0.10 Perfect information. A game is said to have perfect information if at every move
in the game all players know the move that have already been made. This includes
any random outcomes.
1.0.11 Payoffs. This is the numerical return received by a player at the end of a game and
this return is associated with each combination of actions taken by the player. We
talk of “expected payoff’ if its move has a random outcome.
• Zero-sum Game. A game is said to be zero-sum if the sum of players’ payoff is
zero. The zero value is obtained by treating losses as negatives and adding up the
wins and the losses in the game. Common examples are baseball and poker games.

2.3 Assumptions Made In Games Theory

The following are assumptions made in games theory.
1. Each player (Decision-maker) has available to him two or more clearly specified
choices or sequence of choices (plays).
2. A game usually leads to a well-defined end-state that terminates the game. The
end state could be a win, a loss or a draw.
3. Simultaneous decisions by players are assumed in all games.

257
4. A specified payoff for each player is associated with an end state (e.g. sum of
payoffs for zero-sum games is zero in every end-state).
5. Repetition is assumed. A series of repetitive decisions or plays results in a game
6. Each decision-maker (player) has perfect knowledge of the game and of his
opposition i.e. he knows the rules of the game in details and also the payoffs of
all other players. The cost of collecting or knowing this information is not
considered in games theory.
7. All decision-makers are rational and will therefore always select among
alternatives, the alternative that gives him the greater payoff.

The last two assumptions are obviously not always practicable in real life situation.
These assumptions have revealed that game theory is a general theory of rational
behaviour involving two or more decision-makers who have a limited number of
courses of action of plays, each leading to a well-defined outcome or ending with
gains and losses that can be expressed as payoffs associated with each courses of
action and for each decision-maker. The players have perfect knowledge of the
opponent’s moves and are rational in taking decision that optimises their individual
gain. The various conflicts can be represented by a matrix of payoffs. Game theory
also proposes several solutions to the game. Two of the proposed solutions are:
1. Minimax or pure Strategy: In a minimax strategy each player selects a
strategy that minimises the maximum loss his opponent can impose upon him.
2. Mixed Strategy: A mixed strategy which involves probability choices.
Lot of experiments have been performed on games with results showing conditions
for (i) Co-operation (ii) Defection and (iii) Persistence of conflict.

258
 2.5 Description and Types Of Games
Games can be described in terms of the number of players and the type of sum
obtained for each set of strategies employed. To this end we have the following
types of games:
2.5.1 Two-person zero-sum games. Here two players are involved and the sum of the
payoffs for every set of strategies by the two players is zero
2.5.2 Two-person non zero-sum games. Here two players are involved and there is one
strategy set for which the sum of the payoffs is not equal to zero.
2.5.3 Non-Constant sum games. The values of payoffs for this game vary.
2.5.4 Multi-Person Non-Constant-Sum games. Many players are involved in the game
and the payoffs for the players vary.
2.5.5 Co-operative Games. In this game there is cooperation between some of the
players and there are rules guiding the co-operation within the players. Politics
can be modelled as a co-operative game with some players forming alliance with
prospective successful political parties while others defect from parties that they
feel can fail in an election.
2.5.6 Combinatorial games which makes use of combinatorial analysis
2.5.7 Stochastic Games which is probabilistic in nature
2.5.8 Two-person Zero-sum Stochastic Games
2.5.9 Stochastic multi-generation game
Some other games are given interesting names to emphasise the issues being
portrayed.
Operations Research in Decision Analysis and Production Management Examples
are:
2.5.10 Matching Penny Game
2.5.11 Prisoners Dilemma

259
2.5.12 Ultimatum
2.5.13 Angel Problem
2.5.14 Tragedy of the Commons
2.5.15 Majority Rule (Adebayo et al,2006)

2.4.1 Two-Person Zero-Sum Game

This game involves two players in which losses are treated as negatives and wins
as positives and the sum of the wins and losses for each set of strategies in the
game is zero. Whatever player 1 wins player 2 loses and vice versa. Each player
seeks to select a strategy that will maximise his payoffs although he does not know
what his intelligent opponent will do. A two-person zero-sum game with one move
for each player is called a rectangular game.

Formally, a two-person zero-sum game can be represented as a triple (A, B, y)

where A [al, a2…an] and B [b1, b2, … bn] and a payoff function, eij such that y [ai
bj = eij. This game can be represented as an m x n matrix of payoffs from player 2
to player 1 as follows:

[γ [a1, b1]  [aj, b2] ……..  [ai, bn]

(am, b1] y [am b2] ……..  [am, bn]
γ

The two-person zero-sum games can also be represented as follows:

Suppose the choices or alternatives that are available for player 1 can be represented
as l,2,3...m. While the options for player 2 can be represented as 1, 2, 3, ...n. If
player 1 selects alternative i and player 2 selects alternative j then the payoff can be
written as a. The table of payoffs is as follows:
260
 Alternatives for player 1
1 2 3 … n
1 a11 a12 a13 ...
a1n
Alternative forplayer2 2 a21 a22 a23 ... a2n
3 a31 a32 a33 ... a3n
.
.
m am1 am2 am3 … amn

A saddle point solution is obtained if the maximum of the minimum of rows equals
the minimum of the maximum of columns i.e. maximin = minimax
i.e max(min a9) = min(max a9)

Example 2.1
Investigate if a saddle point solution exists in this matrix

2 1 -4
-3 6 2
Solution
min
2 1 1 -4
-3 6 2 -3
Max 2 6 3

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maxi (minij) = max (-4, -3) = -3

A man planning for the coming winter during summer time has a home heating tank
which has capacity for 200 gallons. Over the years, he observed that the heating oil
consumption depends on the severity of the winter as follows
Mild winter: 100 gallons
Average winter: 150 gallons
Severe winter: 200 gallons
The price of oil also seems to fluctuate with severity of the winters as follows:
Mild winter: $1 per gallon
Average winter: $1.50 per gallon
Severe winter: $2 per gallon
He has to decide whether to stockpile 100 gallons, 150 gallons or 200 gallons at the
present price of $ 1. If he stockpiles more than he needs, the unused will be wasted
since he will be moving next summer. What is the best decision to take?
Solution:
You must recognise who the two players are. They are Nature and Man. Nature’s
strategies are three, based on severity: namely mild severity, average seventy and
severe winter. Man’s strategies are also those based on sizes of stockpile i.e. 100
gallons, 150 gallons, 200 gallons. The matrix of payoffs are obtained, using the
value given and we get
Nature
Mild winter Average winter Severe winter
100 gal. -100 - 175 - 300
Max 150 gal. - 150 - 150 - 250
200 gal - 200 - 200 - 200

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The payoffs are negative since man is playing the row.
Note that for the 100 gallons stockpile in average winter, since 150 gallons are
consumed, 50 extra gallons are needed at 1.50 per gallon = 75. So total is 175. No
extra is needed for 150 gallons and 200 gallons.
(ii) For severe winter, 200 gallons are needed. So for 100 gallons stockpile, one
needs I00 extra gallons at $2 per gallon = 200. So total = 300. Same argument goes
for 150 stockpi1es: no extra is needed for 200 gallons stockpile.
[-100 -175 -300] -300
[-150 -150 -250] -250
[1-200 -200 -200]-200
Maximum ofcolumns-100 -150 -200

v = max [-300, -250 -200] -200

v=min [-100, -150 -200] = -200
So the saddle point is at [a3, b3J

This implies that stockpiling 200 gallons is the optimal strategy.

2.4.1.1 Dominating strategies

In a pay-off matrix row dominance of i often occurs if ai > aj, while column
dominance of I often occurs if b1 b1. If dominance occurs, column j is not
considered and we reduce the matrix by dominance until we are left with 1 x I
matrix whose saddle point solution can be easily found. We consider the matrix

3 4 5 3

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 3 1 2 3
1 3 4 4

Observation shows that every element in column 1 is less than or equal to that of
column 4 and we may remove column 4 as the dominating column. Similarly b3
dominates b2 and we remove the dominating column b3. The game is reduced to

3 4
3 1
1 3
In row dominance, we eliminate the dominated rows a, (where a > a,) while in
column dominance we eliminate the dominating column bj (where I ≤ bj) since
player 2 desires to concede the least payoff to the row player and thus minimise his
losses.
This procedure is iterated using row dominance. Since a1 dominates a2 and also
dominates a3 we remove the dominated rows a2 and a3. This is due to the fact that
player 1, the row player, wishes to maximise his payoffs. We then have a 1 x 1
reduced game [3 4] which has a saddle point solution. Generally if a dominated
strategy is reduced for a game, the solution of the reduced game is the solution of
the original game.

2.4.1.2 Mixed strategies

Suppose the matrix of a game is given by

2 -1 3
A=
-1 3 -2
264
 Inspection shows that i column dominance cannot be used to obtain a saddle point
solution. If no saddle point solution exists we randomise the strategies. Random
choice of strategies is the main idea behind a mixed strategy. Generally a mixed
strategy for player is defined as a probability distribution on the set of pure
strategies. The minimax theorem put forward by von Neumann enables one to find
the optimal strategies and values of a game that has no saddle point solution and he
was able to prove that every two-person zero-sum game has a solution in mixed if
not in pure strategy.

2.4.2 Optimal strategies in 2 x 2 matrix game

Linear optimisation in linear programming enables one to calculate the value and
optimal actions especially when the elements of A are more than 2. We now
demonstrate how to solve the matching pennies matrix with a simple method
applicable when A has two elements and B is finite. Here the value is given as
maximin ( [a1,b1] + (1-)  (a2 b2),  ,(a1,b2) + (1-)  (a2, b2) )
The matricis odd
1 11
1 -1
1--1 1
We note here that the maximin criterion cannot hold since max (min of row) = max
(-1, -1) -1 while min (max of columns) = min (1,1) 1 and no saddle point solution
exists.
Let “even” choose randomised action (, 1 -) i.e  = a (a1) and (1-) =  (a2).
Using the formula above, we have max min ( - 1 + , -  + 1 - )
265
 + -l (1 - ) = -+ 1 (1 —) using principle of equalising expectations.
This gives 2 -1, 1 -2

4 =2. And  = 1/2

Similarly if optimal randomised action by player 2=
1, then we get 1 + (1-1)-1, ,+1 -1)
1(1) + -1(1- 1) = 1 (-1) + (1 - 1).

Simplify both sides of the equation to get 21- 1 = 1 - 211=1/2

and so randomised action by player 1 is ( 1/2, 1/2) and also ( 1/2, 1/2) by player 1.

The value can be obtained by substituting = 1/2 into 2 - 1 or I - 2 or by

substituting 1 = 1/2 into 21 - I or 1 -21. If we do this we get a value of zero.

So the solution is as follows:

Optimal strategies of (1/2,1/2) for player 1 and (1/2, 1/2) for player 2 and the value
of the game is 0.
It is Obvious that there is no optimal mixed strategy that is independent of the
opponent.

Example 14.5
Two competing telecommunications companies, MTN and Airtel, both have the
objective of maintaining large share in the telecommunications industry. They wish
to take a decision concerning investment in a new promotional campaign. Airtel
wishes to consider the following options:
r1: advertise on the Internet
r2: advertise in all mass media

266
MTN wishes to consider these alternatives:-
c1: advertise in newspapers only
c2: run a big promo
If Airtel advertises on the Internet and MTN advertises in newspapers, MTN will
increase its market share by 3% at the expense of Airtel. If MTN runs a big promo
and Airtel advertises on the Internet, Airtel will lose 2% of the market share. If
Airtel advertises in mass media only and MTN advertises in newspapers, Airtel will
lose 4%. However, if Airtel advertises in mass media only and MTN runs a big
promo, Airtel will gain 5% of the market share.
a) Arrange this information on a payoff table
b) What is the best policy that each of the two companies should take?

Solution
a) The matrix of payoff is as
follows:-

MTN
c1 c2
Airtel r1 3 -2
-4 5

We first cheek if a saddle point solution exists. We use the minimax criterion to do
this. Now for the rows, Minimax (3,5) = 3
while for the columns Maximin = Max (-4, -2) = -2.

Since minimax is not equal to maximin, no saddle point solution exists. We then
267
randomise and use the mixed strategy.
Let (, 1 - ) be the mixed strategies adopted by Airtel while (8, 1-8 ) be the
strategies adopted by MTN
Then for Airtel.  (3)+-4(1 - )-2+5(1 -) 3 - 4+4 = -2 +5 - 5
7 - 4 -7 +5.
Solving, we obtain

 = 9/14 and 1 - 5/14

The randomised strategies by Airtel will be (9/4)

For MTN, 3 -2(1-) = -41i+5(1-1)

3+21 - 2=-4+5-51
51 -2= -91+5.

Solving, we obtain 1= 1/2and 1-1=1/2

The value of the game can be found by substituting 9/14 into 78-4 or – 79+5; or V2

into 5 -2 or -9+5. When we do this we obtain the value 1/2.

So Airtel should advertise on the Internet 9/14 of the time and advertise on the mass

media 5/14 of the time. On the other hand, MTN should advertise in the newspapers

only 50% (1/2) of the time and run a big promo 1/2 of the time. The expected gain of

Airtel is 1/2 of the market share.

2.4.2.1 Equilibrium pairs

In mixed strategies, a pair of optimal strategies a* and b* is in equilibrium if for any
other a and b, E(a,b*) < E(a*,b*) < E(a*, b)

268
A pair of strategies (a*, b*) in a two-person zero-sum game is in equilibrium if and
only if {(a*, b*), E(a*, b*)} is a solution to the game.
Nash Theory states that any two-person game (whether zero-sum or non-zero-sum)
with a finite number of pure strategies has at least one equilibrium pair. No player
can do better by changing strategies, given that the other players continue to follow
the equilibrium strategy.

2.4.3 Optimal Strategies n 2 X N Matrix Game

Suppose we have a matrix game of

5 2 4
3 4 5/
Now

269
maxi (minjaij)= max(2,3)=3 while = min(max) 4.

The two players now have to look for ways of assuring themselves of the largest
possible shares of the difference

maxi (minj aij) - mini (maxj aij) ≥0

They will therefore need to select strategies randomly to confuse each other. When
a player chooses any two or more strategies at random according to specific
probabilities this device is known as a mixed strategy.
There are various methods employed in solving 2x2, 2xn, mx2 and m x n game
matrix and hence finding optimal strategies as we shall discuss in this and the next
few sections. Suppose the matrix of a game is m x n. If player 1 is allowed to select
strategy I with probability pi and player 2 selects strategy II with probability q, then
we can say player 1 uses strategy P=(P1,P2…Pm) while player 2 selects strategy
q=(q1,q2,...qn).
The expected payoffs for player 1 by player 2 can be explained in
E  * pi (pi)
m n

 
i j
 
1 1
In this game the row player has strategy q = (q1, q2...q). The max-mm reasoning is
used to find the optimal strategies to be employed by both players. We demonstrate
this with a practical example:
270
Example 14.6
Let the matrix game be

5 2 4
3 4 5

Solution
Inspection shows that this does not have a saddle point solution. The optimal
strategy “p” for the row player is the one that will give him the maximum payoff.
Since p = (p p2), let the expected value of the row be represented by E1player. If
player 2 plays column 1 is = 5p+3(l .p) 2p+3p
If player 2 plays column 2 we have E2(p) = 2P+ 4 (l-P) = -2P+4
and if player 2 plays colunm 3 we have E3(p) 4(p)+5(1-p) =p+5.
So, E1(p) = 2p +3; E2(p) = 2p+4 and E3(p) = p+5 are the payoffs for player 1 against
the three-part strategies of player 2, we give arbitrary values for p to check which of
these strategies by player2 will yield the largest payoff for player 1.

Let p 3/4 … E1= -2x3/4+3=41/2

E2(p) = 2x¼+421/2

E2(p) =-3/4+5=41/4.

So the two largest are E1(p), E3(p) and we equate them to get 2p = 3 = p+5

So, 3p= 2,p=2/3

Ej(p) = (2 x 2/3) + 3 41/3

E = -2(p) -2 x 22/3 + 4 = 22/3 and E3(p) = 2/3 + 5 = 741/3

271
So (2/3, 1/3) is optimal for player 1. To get the optimal strategy for player 2, we
observe that it is advisable for player 2 to play column 2 in other to ensure that the
payoff to row player is minimal.

So the game is reduced to

5 4
3 5

Let (q, l-q) be the strategy for player 2 in a required game.

So 5q + 4 (1-q) 3q +5(l-q)
5q+4-4q=3q+5-5q
q +45-2q
3q=l q=1/3

So it is optimal for player 2 to play mixed strategy with probability q(1/3,O,2/3).If

we substitute q = 1/3 into q+4 or 5-2q, we obtain 41/3 as before. This is the value of
the game.

2.4.4 Optimal Strategies for M X 2 Zero-Sum Games

The procedure here is to convert to 2 x m game by finding the transpose of the
matrix of the payoffs and then multiplying 2 x m matrix by = 1. The new game
matrix is then solved using the procedure for 2 x m matrix described earlier.

272
Example 14.7
Find the optimal strategies for the matrix game

-1 1 -2
X= 1 -1 -2 2

Solution

XT =

-1 1 -2

1 -2 2

Next, multiply each element by - ,to obtain the matrix game

1 -1 2
-1 2 -2
We then solve this using the method described earlier to obtain randomised optimal

strategies (3/5,2/5) for player 1 and (3/5, 2/5,0) for player 2 with values of the
games being V5. Graphical methods can also be employed to solve 2xn and mx2
games. Here the expected payoffs are plotted as the functions and the intersection of
the lines gives the value of p(or q).

2.4.5 Optimal strategies in M x N two-persons zero-sum game using the

273
simplex method:
In this type of games the method usually used is the simplex method of linear
programming. It involves converting the two persons zero-sum game into a
Standard Maximum Problem (SMP). If any negative number exists in the payoff
matrix we eliminate by adding a suitable constant to every entry to ensure that all
the entries are positive. From the prime the dual of the matrix of payoffs is formed,
and both are solved using the Simplex method. The optimal strategy for both row
and column players are obtained by dividing each of the optimal value obtained by
their sum. We now give details on how this method can be used to solve the next
example.

Example 14.8
Find the randomised optimal strategies for the matrix of payoffs

1 0 0
-1 1 -1
0 -1 1

Solution:- This matrix does not have a saddle point and it cannot be solved by using
the concept of dominating strategies. As a 3x3 matrix of payoff, we can use the
simplex linear programming method to solve it. Since there are negative entries, we
convert it to a matrix of positive entries by adding constant c 2, we then obtain
3 2 2
P2 = 1 3 1
2 1 3

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3.0 Tutor Marked Assignment
1. Write short notes on the following
• Player
• Moves
• Game
• Decision-maker
• Objective
• Behaviour
• Decision
• Conflict
• Strategy
• Perfect information
• Pay-offs
• Zero-sum Game

4.0 Summary
Making decision is an integral and continuous aspect of human life. For child or
adult, man or woman, government official or business executive, worker or
supervisor, participation in the process of decision-making is a common feature of
everyday life. A competitive situation is called a game if it has the following
characteristics:- there is finite number of competitors called Players; a list of finite
or infinite number of possible courses of action is available to each player; a list of
finite or infinite number of possible courses of action is available to each player; a
play is played when each player chooses one of his courses of actions; all players
act rationally and intelligently. Each player is interested in maximizing his gains or
minimizing his losses; each player makes individual decisions without direct

275
communication between the players; it is assumed that each player knows the
complete relevant information. A game in which the gains of one player are the
losses of other player or the algebraic sum of gains of both players is equal to zero,
the game is known as Zero-sum game (ZSG). Next we defined some important
elements in games theory like players, moves, game, decision-maker, objective,
behaviour, decision, conflict, strategy, perfect information, payoffs, zero-sum and
game. Finally, we solved problems involving Two-Person Zero-Sum Game, Pure
Strategies, Dominating Strategies, Mixed Strategies, Optimal Strategies in 2 X 2
Matrix Game, Equilibrium Pairs, Optimal Strategies in 2 X N Matrix Game,
Optimal Strategies For M X 2 Zero - Sum Games.

5.0 Self– Assessment Questions

1. What do you understand by a game?
2. Find the optimal strategies for the matrix game

2
-2
X= 3 -2
3

6.0 Additional Activities

a. Visit U-tube add https://www.youtube.com/watch?v=xvDdrswAj8M
https://www.youtube.com/watch?v=LV7TLjIFBYY&list=PLMGRv4j_3EZa1IvjfPR
wSBCwpZLu0Oa0V
https://www.youtube.com/watch?v=ve6_e8Lh8u4. Watch the video & summarise in
1 paragraph

276
7.0 References/ Further Readings
Adebayo, O.A., Ojo, O., and Obamire, J. K. (2006). Operations Research in
Decision Analysis, Lagos: Pumark Nigeria Limited.

Murthy, R. P. (2007). Operations Research, 2nd ed., New Delhi: New Age
International (P) Limited Publishers.

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 STUDY SESSION 5
Inventory Control and Case Analysis
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 – Definition of Inventory and Inventory Control
2.2 – Basic Concepts in Inventory Planning
2.3 – Necessity for Maintaining Inventory
2.4 – Causes of Poor Inventory Control Systems
2.5 – Classification of Inventories
2.6 – Costs Associated with Inventory
2.7 – Purpose of Maintaining Inventory or Objectives of Inventory Cost Control
2.8 – Other Factors to be considered in Inventory Control
2.9 – Inventory Control Problem
2.10 – What is a Case Study?
3.0Tutor Marked Assignments
4.0 Summary
5.0 Self-Assessment Questions and Answers
6.0 Additional Activities
7.0 References/Further Readings

Introduction
You are welcome to another study session. One of the basic functions of
management is to employ capital efficiently so as to yield the maximum returns. This
can be done in either of two ways or by both, i.e.

278
(a) by maximizing the margin of profit; or (b) by maximizing the production with a
given amount of capital, i.e. to increase the productivity of capital. This means that
the management should try to make its capital work as hard as possible. However,
this is all too often neglected much time and ingenuity is devoted to make only
labour work harder. In the process, the capital turnover and hence the productivity
of capital is often totally neglected.

Several new techniques have been developed and employed by modern

management to remedy this deficiency. Among these, Materials Management has
become one of the most effective. In Materials Management, Inventory Control
play a vital role in increasing the productivity of capital.
Inventory management or Inventory Control is one of the techniques of Materials
Management which helps the management to improve the productivity of capital by
reducing the material costs, preventing the large amounts of capital being locked
up for long periods, and improving the capital turnover ratio. The techniques of
inventory control were evolved and developed during and after the Second World
War and have helped the more industrially developed countries to make spectacular
progress in improving their productivity.

The importance of materials management/inventory control arises from the fact

that materials account for 60 to 65 percent of the sales value of a product, that is to
say, from every naira of the sales revenue, 65 kobo are spent on materials. Hence,
small change in material costs can result in large sums of money saved or lost.
Inventory control should, therefore, be considered as a function of prime
importance for our industrial economy.
Inventory control provides tools and techniques, most of which are very simple to

279
use to reduce/control the materials cost substantially. A large portion of revenue
(65 percent) is exposed to the techniques, correspondingly large savings result
when they are applied than when attempts are made to save on other items of
expenditure like wages and salaries which are about 16 percent or overheads which
may be 20 percent. By careful financial analysis, it is shown that a 5 percent
reduction in material costs will result in increased profits equivalent to a 36
percent increase in sales (Murthy, 2007).

This study session also introduces us to case analysis. A case study is a description
of an actual administrative situation involving a decision to be made or a problem
to be solved. It can be a real situation that actually happened just as described, or
portions that have been disguised for reasons of privacy. It is a learning tool in
which students and instructors participate in direct discussion of case studies, as
opposed to the lecture method, where the instructor speaks and students listen and
take notes. In the case method, students teach themselves, with the instructor being
an active guide, rather than just a talking head delivering content.

1.0 Study Session Learning Outcome

After studying this session, I expect you to be able to do the following :
1. Discuss what case analysis involves
2. Analyse a case as a learning tool
3. Define inventory control
4. Explain the basic concepts in inventory control
5. Identify the issues that necessitate maintaining inventory
6. Identify causes of poor inventory control systems
7. Discuss the various classifications of inventories

280
 8. Highlight the costs associated with inventory
9. Identify objective of inventory cost control
10. Discuss the problems associated with inventory control
11. Solve problems associated with the classical EOQ model.
12. Highlight the stages in preparing a case.
13. Analyse case data.
14. Outline key decision criteria in a case.

2.0 Main Content

2.1 Definition of Inventory and Inventory Control
The word inventory means a physical stock of material or goods or commodities or
other economic resources that are stored or reserved or kept in stock or in hand for
smooth and efficient running of future affairs of an organisation at the minimum
cost of funds or capital blocked in the form of materials or goods (inventories). The
function of directing the movement of goods through the entire manufacturing cycle
from the requisitioning of raw materials to the inventory of finished goods in an
orderly manner to meet the objectives of maximum customer service with
minimum investment and efficient (low cost) plant operation is termed as inventory
control. (Murthy, 2007).

Gupta and Hira (2012) defined an inventory as consisting of usable but idle
resources such as men, machines, materials, or money. When the resources
involved are material, the inventory is called stock. An inventory problem is said to
exist if either the resources are subject to control or if there is at least one such cost
that decreases as inventory increases. The objective is to minimise total (actual or
expected) cost. However, in situations where inventory affects demand, the

281
objective may also be to minimise profit.

2.2 Basic Concepts in Inventory Planning

For many organisations, inventories represent a major capital cost, in some cases
the dominant cost, so that the management of this capital becomes of the utmost
importance. When considering the inventories, we need to distinguish different
classes of items that are kept in stock. In practice, it turns out that about 10% of the
items that are kept in stock usually account for something in the order of 60% of the
value of all inventories. Such items are therefore of prime concern to the company,
and the stock of these items will need close attention. These most important items
are usually referred to as “A items” in the ABC classification system developed by
the General Electric Company in the 1950s. The items next in line are the B items,
which are of intermediate importance.

They typically represent 30% of the items, corresponding to about 30% of the total
inventory value. Clearly, B items do require some attention, but obviously less than
A items. Finally, the bottom 60% of the items are the C items. They usually
represent maybe 10% of the monetary value of the total inventory. The control of C
items in inventory planning is less crucial than that of the A and B items. The
models in this chapter are mostly aimed at A items.

Due to the economic importance of the management of inventories, a considerable

body of knowledge has developed as a specialty of operations research. We may
mention just-in-time (JIT) systems that attempt to keep inventory levels in a
production system at an absolute minimum, and put to work in Toyota’s so-called
kanban system. There are also material requirements planning (MRP) aimed at

282
using the estimated demand for a final product in order to determine the need for
materials and components that are part of a final product. Multi-echelon and
supply-chain management systems also consider similar aspects of production-
inventory control systems. Such topics are beyond the scope of this text, in which
we can only cover some basic inventory models (Eiselt and Sandblom, 2012).

In-text Question 1: What is an inventory?

In-text Answer 1: The word inventory means a physical stock of material or goods or commodities
or other economic resources that are stored or reserved or kept in stock or in hand for smooth and
efficient running of future affairs of an organisation at the minimum cost of funds or capital
blocked in the form of materials or goods (Inventories).

2.2 Necessity for Maintaining Inventory

Though inventory of materials is an idle resource (since materials lie idle and are
not to be used immediately). Without it, no business activity can be performed,
whether it is service organisation like a hospital or a bank or a manufacturing or
trading organisation. Gupta and Hira (2012) present the following reasons for
maintain inventories in organisations.
1. It helps in the smooth and efficient running of an enterprise.
2. It helps in providing service to the customer at short notice.
3. In the absence of inventory, the enterprise may have to pay high prices due
to piecemeal purchasing.
4. It reduces product cost since there is an added advantage of batching and
long, uninterrupted production runs.
5. It acts as a buffer stock when raw materials are received late and shop
rejection is too many.
6. Process and movement inventories (also called pipeline stock) are quite
necessary in big enterprises where significant amount of time is required to
283
 tranship items from one location to another.
7. Bulk purchases will entail fewer orders and, therefore, less clerical cost.
8. An organisation may have to deal with several customers and vendors who
may not be necessarily near it. Inventories therefore have to be built to meet
the demand at least during the transit period.
9. It helps in maintaining economy by absorbing some of the fluctuations when
the demand for an item fluctuates or is seasonal.

2.4 Causes of Poor Inventory Control Systems

a. Overbuying without regard to the forecast or proper estimate of demand to
take advantages of favourable market.
b. Overproduction or production of goods much before the customer requires
them
c. Overstocking may also result from the desire to provide better service to the
customer.
d. Cancellation of orders and minimum quantity stipulations by the suppliers
may also give rise to large inventories. (Gupta and Hira, 2012)

2.5 Classification of Inventories

Inventories may be classified as those which play direct role during manufacture or
which can be identified on the product and the second one are those which are
required for manufacturing but not as a part of production or cannot be identified on
the product. The first type is labelled as direct inventories and the second are
labelled as indirect inventories. Further classification of direct and indirect
inventories is as follows:

284
2.5.1 Direct inventories
(i) Raw material inventories or Production Inventories: The inventory of raw
materials is the materials used in the manufacture of product and can be identified
on the product
(a) Bulk purchase of materials to save the investment,
(b) To meet the changes in production rate,
(c) To plan for buffer stock or safety stock to serve against the delay in delivery of
inventory against orders placed and also against seasonal fluctuations.

Direct inventories include the following:

• Production Inventories:- items such as raw materials, components and
subassemblies used to produce the final products.
• Work-in-progress Inventory:- items in semi-finished form or products at
different stages of production.
• Finished Goods Inventory
• Miscellaneous Inventory:- all other items such as scrap, obsolete and
unsaleable products, stationary and other items used in office, factory and
sales department, etc.

(ii) Work-in-process inventories or in-process inventories: These inventories are

of semi-finished type, which are accumulated between operations or facilities. As
far as possible, holding of materials between operations is to be minimized if not
avoided. This is because; as we process the materials the economic value (added
labour cost) and use values are added to the raw material, which is drawn from
stores. Hence, if we hold these semi-finished material for a long time the inventory
carrying cost goes on increasing, which is not advisable in inventory control.
285
These inventories serve the following purposes:-
(a) Provide economical lot production,
(b) Cater to the variety of products,
(c) Replacement of wastages,
(d) To maintain uniform production even if sales varies.

(iii) Finished goods inventories: After finishing the production process and
packing, the finished products are stocked in stock room. These are known as
finished goods inventory. These are maintained to:
(a) To ensure the adequate supply to the customers,
(b) To allow stabilization of the production level and
(c) To help sales promotion programme.

(iv) MRO Inventory or Spare parts inventories: Maintenance, Repair and

Operation items such as spare parts and consumable stores that do not go into final
products but are consumed during the production process. Any product sold to the
customer will be subjected to wear-and-tear due to usage and the customer has to
replace the worn-out part. Hence the manufacturers always calculate the life of the
various components of his product and try to supply the spare components to the
market to help after sales service. The use of such spare parts inventory is:
(a) To provide after-sales service to the customer,
(b) To utilize the product fully and economically by the customer.

(iv) Scrap or waste inventory or Miscellaneous Inventory: While processing the

materials, we may come across certain wastages and certain bad components
(scrap), which are of no use. These may be used by some other industries as raw

286
material. These are to be collected and kept in a place away from main stores and
are disposed of periodically by auctioning.

2.5.2 Indirect Inventories

Inventories or materials like oils, grease, lubricants, cotton waste and such other
materials are required during the production process. But we cannot identify them
on the product. These are known as indirect inventories. In our discussion of
inventories, in this chapter, we only discuss about the direct inventories.
Inventories may also be classified depending on their nature of use. They are:

(i) Fluctuation Inventories: These inventories are carried out to safeguard the
fluctuation in demand, non-delivery of material in time due to extended lead-time.
These are sometimes called Safety stock or reserves. In real world inventory
situations, the material may not be received in time as expected due to trouble in
transport system or some times, the demand for a certain material may increase
unexpectedly. To safeguard such situations, safety stocks are maintained. The level
of this stock will fluctuate depending on the demand and lead-time etc.

(ii) Anticipation inventory: When there is an indication that the demand for
company’s product is going to be increased in the coming season, a large stock of
material is stored in anticipation. Sometimes in anticipation of raising prices, the
material is stocked. Such inventories, which are stocked in anticipation of raising
demand or rising prices, are known as anticipation inventories.

(iii) Lot size inventory or Cycle inventories: This situation happens in batch
production system. In this system products are produced in economic batch
quantities. It sometimes happens that the materials are procured in quantities larger
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than the economic quantities to meet the fluctuation in demand. In such cases the
excess materials are stocked, which are known as lot size or cycle inventories.

(iv) Transportation Inventories: When an item is ordered and purchased they are
to be received from the supplier, who is at a far of distance. The materials are
shipped or loaded to a transport vehicle and it will be in the vehicle until it is
delivered to the receiver. Similarly, when a finished product is sent to the customer
by a transport vehicle it cannot be used by the purchaser until he receives it. Such
inventories, which are in transit, are known as Transportation inventories.

(v) Decoupling inventories: These inventories are stocked in the manufacturing

plant as a precaution, in case the semi-finished from one machine does not come to
the next machine, this stock is used to continue a production. Such items are
known as decoupling inventories.

2.6 Costs Associated With Inventory

While maintaining the inventories, we will come across certain costs associated
with inventory, which are known as economic parameters. Most important of them
are discussed below:
A. Inventory Carrying Charges, or Inventory Carrying Cost or Holding
Cost or Storage Cost (C1) or (i%)
This cost arises due to holding of stock of material in stock. This cost includes the
cost of maintaining the inventory and is proportional to the quantity of material held
in stock and the time for which the material is maintained in stock. The components
of inventory carrying cost are:
(i) Rent for the building in which the stock is maintained if it is a rented building. In

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 case it is an owned building, depreciation cost of the building is taken into
consideration. Sometimes for own buildings, the nominal rent is calculated
depending on the local rate of rent and is taken into consideration.
(ii) It includes the cost of equipment if any and cost of racks and any special
facilities used in the stores.
(iii) Interest on the money locked in the form of inventory or on the money
invested in purchasing the inventory.
(iv) The cost of stationery used for maintaining the inventory.
(v) The wages of personnel working in the stores.
(vi) Cost of depreciation, insurance.
(vii) Cost of deterioration due to evaporation, spoilage of material etc.
(viii) Cost of obsolescence due to change in requirement of material or change
in process or change in design and item stored as a result of becomes old
stock and become sales.
(ix) Cost of theft and pilferage i.e. indenting for the material in excess of
requirement.
This is generally represented by C1naira per unit quantity per unit of time for
production model. That is for manufacturing of items model. For purchase models it
is represented by i% of average inventory cost. If we take practical situation
into consideration, many a time we see that the inventory carrying cost (some of the
components of the cost) cannot be taken proportional to the quantity of stock on
hand. For example, take rent of the stores building. As and when the stock is
consumed, it is very difficult to calculate proportion of rent in proportion to the
stock in the stores as the rent will not vary day to day due to change in inventory
level. Another logic is that the money invested in inventory may be invested in
other business or may be deposited in the bank to earn interest.

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As the money is in the form of inventory, we cannot earn interest but losing the
expected interest on the money. This cost of money invested, is generally compared
to the interest rate i% and is taken as the inventory carrying cost. Hence the value of
‘i’ will be a fraction of a and will be 0 <i < 1. In many instances, the bank rate of
interest is somewhere between 16 to 20% and other components like salary,
insurance, depreciation etc. may work out to 3 to 5%. Hence, the total of all
components will be around 22 to 25% and this is taken as the cost of inventory
carrying cost and is expressed as i % of average inventory cost.

B. Shortage cost or Stock - out - cost-(C2)

Sometimes it so happens that the material may not be available when needed or
when the demand arises. In such cases the production has to be stopped until the
procurement of the material, which may lead to miss of the delivery dates or
delayed production. When the organisation could not meet the delivery promises, it
has to pay penalty to the customer. If the situation of stock-out will occur very
often, then the customer may not come to the organisation to place orders, that is,
the organisation is losing customers. In other words, the organisation is losing the
goodwill of the customers. The cost of goodwill cannot be estimated. In some cases
it will be very heavy to such an extent that the organisation has to forego its
business.

Here to avoid the stock-out situation, if the organisation stocks more material,
inventory carrying cost increases. And to take care of inventory cost, if the
organisation purchases just sufficient or less quantity, then the stock-out position
may arise. Hence the inventory manager must have sound knowledge of various
factors that are related to inventory carrying cost and stock out cost and estimate the

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quantity of material to be purchased or else he must have effective strategies to face
grave situations. The cost is generally represented in naira and is represented by C2.

C. Set-up cost or Ordering cost or Replenishment Cost (C3)

For purchase models, the cost is termed as ordering cost or procurement cost and
for manufacturing cost it is termed as set-up cost and is represented by C3.

(i) Set-up cost: The term set-up cost is used for production or manufacturing
models. Whenever a job is to be produced, the machine is to be set to produce the
job. That is, the tool is to be set and the material is to be fixed in the job holder.
This consumes some time. During this time the machine will be idle and the labour
is working. The cost of idle machine and cost of labour charges are to be added to
the cost of production. If we produce only one job in one set-up, the entire set-up
cost is to be charged to one job only. In case we produce ‘n’ number of jobs in one
set-up, the set-up cost is shared by ‘n’ jobs. In case of certain machines like N.C
machines, or Jig boarding machine, the set-up time may be 15 to 20 hours. The idle
cost of the machine and labour charges may work out to few thousands of Naira.
Once the machine set-up is over, the entire production can be completed in few
hours. If we produce more number of products in one set-up, the set-up cost is
allocated to all the jobs equally. This reduces the production cost of the product. For
example let us assume that the set-up cost is N1000/-. If we produce 10 jobs in one
set up, each job is charged with N100/- towards the set up cost. In case, if we
produce 100 jobs, the set up cost per job will be N10/-. If we produce, 1000 jobs in
one set up, the set up cost per job will be N1/- only. This can be shown by means of
a graph as shown in figure 15.1.

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(ii) Ordering Cost or Replenishment Cost: The term Ordering cost or Replenishment
cost is used in purchase models. Whenever any material is to be procured by an
organisation, it has to place an order with the supplier. The cost of stationary used
for placing the order, the cost of salary of officials involved in preparing the order
and the postal expenses and after placing the order enquiry charges all put together,
is known as ordering cost. In Small Scale Units, this may be around N25/- to N30/-
per order. In Larger Scale Industries, it will be around N150 to N200 /- per order. In
Government organisations, it may work out to N500/- and above per order. If the
organisation purchases more items per order, all the items share the ordering cost.
Hence the materials manager must decide how much to purchase per order so as to
keep the ordering cost per item at minimum.

One point we have to remember here is that, to reduce the ordering cost per item, if
we purchase more items, the inventory carrying cost increases. To keep inventory
carrying cost under control, if we purchase less quantity, the ordering cost increase.
Hence one must be careful enough to decide how much to purchase. The nature of
ordering cost can also be shown by a graph as shown in figure 8.1. If the ordering
cost is C3 per order (can be equally applied to set-up cost) and the quantity ordered
or produced is ‘q’ then the ordering cost or set-up cost per unit will be C3/q which
is inversely proportional to the quantity ordered, i.e. decreases with the increase in
‘q’ as shown in the graph below:

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 C0

(q/2)C1

Order C3/q

Ordering cost

Fig. 15.1: Ordering Cost

Source : Murthy, P. R. (2007) Operations Research 2nded. New Delhi: New Age
International Publishers

(iii) Procurement Cost: These costs are very much similar to the ordering cost /
set-up cost. This cost includes cost of inspection of materials, cost of returning the
low quality materials, transportation cost from the source of material to the
purchaser’s site. This is proportional to the quantity of materials involved. This
cost is generally represented by ‘b’ and is expressed as so many naira per unit of
material. For convenience, it is always taken as a part of ordering cost and many a
time it is included in the ordering cost/set-up cost.

D. Purchase price or direct production cost

This is the actual purchase price of the material or the direct production cost of the
product. It is represented by ‘p’. i.e. the cost of material is N ‘p’ per unit. This may

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be constant or variable. Say for example the cost of an item is N10/- item if we
purchase 1 to 10 units. In case we purchase more than 10 units, 10 percent discount
is allowed. i.e. the cost of item will be N9/- per unit. The purchase manager can
take advantage of discount allowed by purchasing more. But this will increase the
inventory carrying charges. As we are purchasing more per order, ordering cost is
reduced and because of discount, material cost is reduced. Materials manager has to
take into consideration these cost-quantity relationships and decide how much to
purchase to keep the inventory cost at low level.

2.7 Purpose of Maintaining Inventory or Objective of Inventory Cost

Control
The purpose of maintaining the inventory or controlling the cost of inventory is to
use the available capital optimally (efficiently) so that inventory cost per item of
material will be as small as possible. For this the materials manager has to strike a
balance between the interrelated inventory costs in the process of balancing the
interrelated costs i.e. inventory carrying cost, ordering cost or set-up cost, stock-out
cost and the actual material cost. Hence we can say that the objective of controlling
the inventories is to enable the materials manager to place an order at the right
time with the right source at right price to purchase the right quantity. The benefits
derived from efficient inventory control are:
(i) It ensures adequate supply of goods to the customer or adequate quantity of raw
materials to the manufacturing department so that the situation of stock-out
may be reduced or avoided.
(ii) By proper inventory cost control, the available capital may be used efficiently
or optimally, by avoiding the unnecessary expenditure on inventory.
(iii) In production models, while estimating the cost of the product the material cost

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 is to be added. The manager has to decide whether he has to take the actual
purchase price of the material or the current market price of the material. The
current market price may be less than or greater than the purchase price of the
material which has been purchased some period back. Proper inventory control
reduces such risks.
(iv) It ensures smooth and efficient running of an organisation and provides safety
against late delivery times to the customer due to uncontrollable factors
(v) A careful materials manager may take advantage of price discounts and make
bulk purchase at the same time he can keep the inventory cost at minimum.
(vi) It enables a manager to select a proper transportation mode to reduce the cost of
transportation.
(vii) Avoids the chances of duplicate ordering.
(viii) It avoids losses due to deterioration and obsolescence etc.
(ix) Causes of surplus stock may be controlled or totally avoided.
(x) Proper inventory control will ensure the availability of the required
material in required quantity at required time with the minimum inventory
cost.

Though many managers consider inventory as an enemy as it locks up the available

capital, but by proper inventory control they can enjoy the benefits of inventory
control and then they can realize that inventory is a real friend of a manager in
utilizing the available capital efficiently.

2.8 Other Factors to Be Considered in Inventory Control

There are many factors, which have influence on the inventory, which draws the
attention of an inventory manager. They are:

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(i) Demand
The demand for raw material or components for production or demand for goods to
satisfy the needs of the customer, can be assessed from the past consumption/supply
pattern of material or goods. We find that the demand may be deterministic in
nature i.e., we can specify that the demand for the item is so many units for example
say ‘q’ units per unit of time. Also the demand may be static, i.e. it means constant
for each time period (uniform over equal period of times). Further, the demand
may follow several patterns and so why it is uncontrolled variable, such as it may
be uniformly distributed over a period or instantaneous at the beginning of the
period or it may be large in the beginning and less in the end etc. These patterns
directly affect the total carrying cost of inventory.

(ii) Production of goods or Supply of goods to the inventory

The supply of inventory to the stock may be deterministic or probabilistic
(stochastic) in nature and many a times it is uncontrollable, because, the rate of
production depends on the production, which once again depends on so many
factors which are uncontrollable/controllable factors. Similarly, supply of inventory
depends on the type of supplier, mode of supply, mode of transformation etc. The
properties of supply mode have its effect in the level of inventory maintained and
inventory costs.

(iii) Lead-Time or Delivery Lags or Procurement Time

Lead-time is the time between placing the order and receipt of material to the
stock. In production models, it is the time between the decisions made to take up the
order and starting of production. This time in purchase models depends on many
uncontrollable factors like transport mode, transport route, agitations etc. It may

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vary from few days to few months depending on the nature of delay. The materials
manager has to refer to the past records and approximately estimate the lead period
and estimate the quantity of safety stock to be maintained. In production models, it
may depend on the labour absenteeism, arrival of material to the stores, power
supply, etc.

(iv) Type of goods

The inventory items may be discrete or continuous. Sometimes the discrete items
are to be considered as continuous items for the sake of convenience.

(i) Time horizon

The time period for which the optimal policy is to be formulated or the inventory
cost which is to be optimized is generally termed as the Inventory planning period
of Time horizon. This time is represented on the X-axis while drawing graphs.
This time may be finite or infinite.

(ii) Safety stock or Buffer stock

Whatever care taken by the materials manager, one cannot avoid the stock-out
situation due to many factors. To avoid the stock-out position the manager
sometimes maintains some extra stock, which is generally known as Buffer Stock,
or Safety Stock. The level of this stock depends on the demand pattern and the lead-
time. This should be judiciously calculated because, if we stock more the inventory
carrying cost increases and there is chance of pilferage or theft. If we maintain less
stock, we may have to face stock-out position. The buffer stock or safety stock is
generally the consumption at the maximum rate during the time interval equal to the
difference between the maximum lead-times and the normal (average) lead-time or

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say the maximum demand during lead-time minus the average demand during lead-
time. Depending on the characteristics of the above discussed terms, different types
of inventory models may be formulated. These models may be deterministic models
or probabilistic model depending on the demand pattern.

In any inventory model, we try to seek answers for the following questions:
(a) When should the inventory be purchased for replenishment? For example,
the inventory should be replenished after a period ‘t’ or when the level of the
inventory is qo.
(b) How much quantity must be purchased or ordered or produced at the time
of replenishment so as to minimize the inventory costs? For example, the
inventory must be purchased with the supplier who is supplying at a cost of Np/ per
unit. In addition to the above depending on the data available, we can also decide
from which source we have to purchase and what price we have to purchase? But in
general, time and quantity are the two variables we can control separately or in
combination.

2.9 Inventory Control Problem

The inventory control problem consists of the determination of three basic factors:
1. When to order (produce or purchase)?
2. How much to order?
3. How much safety stock to be kept?

When to order: This is related to lead-time (also called delivery lag) of an item.
Lead time may be the interval between the placement of an order for an item and its
receipt in stock. It may be replenishment order from outside or within the firm.

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There should be enough stock for each item so that customers’ orders can be
reasonably met from this stock until replenishment. This stock level known as
reorder level, has to be determined for each item. It is determined by balancing the
cost of maintaining these stocks and the disservice to the customer if his orders are
not met.
How much to order: Each order has an associated ordering cost or cost of
acquisition. To keep this cost low, the number of orders has to be as reduced as
possible. To achieve limited number of orders, the order size has to be increased.
But large order size would imply high inventory cost. Thus, the problem of how
much to order is solved by compromising between the acquisition cost and the
inventory carrying cost.
How much should the safety stock be. This is important to avoid overstocking
while ensuring that no stock-out takes place. The inventory control policy of an
organisation depends upon the demand characteristics. The demand for an item may
be dependent or independent. For instance, the demand for the different models of
television sets manufactured by a company does not depend upon the demand for
any other item, while the demand for its components will depend upon the demand
for the television sets.

2.9.1 The Classical EOQ Model (Demand Rate Uniform,

Replenishment Rate Infinite)
According to Gupta and Hira 2012, the EOQ model is one of the simplest inventory
models we have. A store keeper has an order to supply goods to customers at a
uniform rate R per unit. Hence, the demand is fixed and known. No shortages are
allowed, consequently, the cost of shortage C2 is infinity. The store keeper places
an order with a manufacturer every t time units, where t is fixed; and the ordering

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cost per order is C3. Replenishment time is negligible, that is, replenishment rate is
infinite so that the replacement is instantaneous (lead-time is zero). The holding
cost is assumed to be proportional to the amount of inventory as well as the time
inventory is held. Hence the time of holding inventory I for time T is C1IT, where
C1, C2 and C3 are assumed to be constants. The store keeper’s problem is therefore
to the following
i. How frequently should he place the order?
ii. How many units should he order in each order placed?
This model is represented schematically below.
If orders are placed at intervals t, a quantity q = Rt must be ordered in each order.
Since the stock in small time dt is Rtdt the stock in time period t will be

t t t
T

Fig. Inventory situation for EOQ model

 Cost of holding inventory during time t = 1 C1Rt2.

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 2
Order cost to place an order = C3.

 Total cost during time t = 1 C1Rt2 + C3

Average total cost per unit, C(t) = 1 C1Rt + C3……………. (1)
2 t
C will be minimum if dC(t) = 0and d2C(t) is positive.

dt dt2
Differentiating equation (1) w.r.t ‘t’

d2C(t)=1 C1R – C3 = 0, which gives t= 2C3 .

dt 2 t2 C1R
Differentiating w.r.t.‘t’

d2C(t)=2C3 which is positive for value of t given by the above equation.

dt2 t3 ,
Thus C(t) is minimum for optimal time interval,

to = 2C3
C1R …………………………. (2)
Optimum quantity q0to be ordered during each order,

q0=Rt0= 2C3R ……………………(3)

C1 lot size (or economic order quantity) formula by R. H.
This is known as the optimal
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Wilson. It is also called Wilson’s or square root formula or Harris lot size formula.
Any other order quantity will result in a higher cost.
The resulting minimum average cost per unit time,

C0(q) = 1C1R.2C3+C3 C1R

2 C1R 2C3

=1 C1C3R +1 C1C3R= 2C1C3R ……(4)

√2 √2
Also, the total minimum cost per unit time, including the cost of the item
= √2C1C3R + CR, …………………………………….. (5)

Where C is cost/unit of the item

Equation (1) can be written in an alternative form by replacing t by q/R as

The average inventory is and it is time dependent.

It may be realised that some of the assumptions made are not satisfactory in actual
practice. For instance, in real life, customer demand is usually not known exactly
and replenishment time is usually not negligible.

Corollary 1. In the above model, if the order cost is C3 + bq instead of being

fixed, where b is the cost of order per unit of item, we can prove that there is no
change in the optimum order quantity due to changed order cost.
Proof. The average cost per unit of time, .
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From equation(5),

is positive

That is,

, which is necessarily positive for above value of q.

, which is the same as equation (3)

Hence, there is no change in the optimum order quantity as a result of the change in
the cost of order.

Corollary 2. In the model in figure …… discussed above, the lead time has been
assumed to be zero. However, most real life problems have positive lead time L
from when the order for the item was placed until it is actually delivered. The
ordering policy of the above model, therefore, must satisfy the reorder point. If L
is the lead time in days, and R is the inventory consumption rate in units per day,
the total inventory requirements during the lead time = LR. Thus we should place
an order q as soon as the stock level becomes LR. This is called reorder point p =
LR.
In practice, this is equivalent to continuously observing the level of inventory until
the reorder point is obtained. That is why economic lot size model is also called
continuous review model.
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If the buffer stock B is to be maintained, reorder level will be
P = B + LR ……………………………………….. (6)
Furthermore, if D days are required for reviewing the system,

……………….. (7)

2.9.2 Assumptions in the EOQ Formula

The following assumptions have been made while deriving the EOQ formula:
1. Demand is known and uniform (constant)
2. Shortages are not permitted; as soon as the stock level becomes zero, it is
instantaneously replenished.
3. Replenishment stock is instantaneous or replenishment rate is infinite.
4. Lead time is zero. The moment the order is placed, the quantity ordered is
automatically received.
5. Inventory carrying cost and ordering cost per order remain constant over
time. The former has a linear relationship with the quantity ordered and the
latter with the number of order.
6. Cost of the item remains constant over time. There are no price-breaks or
quantity discounts.
7. The item is purchased and replenished in lots or batches.
8. The inventory system relates to a single item.

2.9.3 Limitations of the EOQ Model

The EOQ formula has a number of limitations. It has been highly controversial
since a number of objections have been raised regarding its validity. Some of
these objections are:
1. In practice, the demand is neither known with certainty nor is it uniform. If
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 the fluctuations are mild, the formula can be applicable but for large
fluctuations, it loses its validity. Dynamic EOQ models, instead, may have to
be applied.
2. The ordering cost is difficult to measure. Also it may not be linearly related
to the number of orders as assumed in the derivation of the model. The
inventory carrying rate is still more difficult to measure and even to define
precisely.
3. It is difficult to predict the demand. Present demand may be quite different
from the past history. Hardly any prediction is possible for a new product to
be introduced in the market.
4. The EOQ model assumes instantaneous replenishment of the entire quantity
ordered. In practice, the total quantity may be supplied in parts. EOQ model
is not applicable in such a situation.
5. Lead time may not be zero unless the supplier is next-door and has sufficient
stock of the item, which is rarely so.
6. Price variations, quantity discounts and shortages may further invalidate the
use of the EOQ formula.
However, the flatness of the total cost curve around the minimum is an answer to
the many objections. Even if we deviate from EOQ within reasonable limits, there
is no substantial change in cost. For example, if because of inaccuracies and errors,
we have selected an order quantity 20% more (or less) than q0 the increase in total
cost will be less than 20%.

Example 15.1
A stock-keeper has to supply 12, 000 units of a product per year to his customer.
The demand is fixed and known and the shortage cost is assumed to be infinite.

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The inventory holding cost is N 0.20k per unit per month, and the ordering cost per
order is N350. Determine
i. The optimum lot size q0
ii. Optimum scheduling period t0
iii. Minimum total variable yearly cost.

Solution
Supply rate R= C1
= N 0.20K per unit per month, C3 = N350 per order.
i.
q0 =

ii.
iii.

Example 15.2
A particular item has a demand of 9,000 unit/year. The cost of a single
procurement is N100 and the holding cost per unit is N 2.40k per year. The
replacement is instantaneous and no shortages are allowed. Determine
i. The economic lot size,
ii. The number of orders per year,
iii. The time between orders
iv. The total cost per if the cost of one unit is N1

Solution
R = 9000 units/year
C3 = N100/procurement, C1 = N2.40/unit/year
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 i.

ii.

iii.

iv.

= 9000 + 2080 = N11080/year

Example 15.3
A stockist has to supply 400 units of a product every Monday to his
customer. He gets the product at N 50 per unit from the manufacturer. The
cost of ordering and transportation from the manufacturer is N75 per order.
The cost of carrying the inventory is 7.5% per year of the cost of the
product. Find:
i. The economic lot size
ii. The total optimal cost (including the capital cost)
iii. The total weekly profit if the item is sold for N 55 per unit

Solution
R = 400 units/week
C3 = N75per order
C1 = 7.5% per year of the cost of the product
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 iii.

i.
ii.

2.10 What is a Case Study?

A case study is a description of an actual administrative situation involving a
decision to be made or a problem to be solved. It can be a real situation that actually
happened just as described, or portions have been disguised for reasons of privacy.
Most case studies are written in such a way that the reader takes the place of the
manager whose responsibility it is to make decisions to help solve the problem. In
almost all case studies, a decision must be made, although that decision might be to
leave the situation as it is and do nothing.

2.10.1 The case method as a learning tool

The case method of analysis is a learning tool in which students and instructors
participate in direct discussion of case studies, as opposed to the lecture method,
where the instructor speaks and students listen and take notes. In the case method,
students teach themselves, with the instructor being an active guide, rather than just a
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talking head delivering content. The focus is on students learning through their joint,
co-operative effort.
Assigned cases are first prepared by students, and this preparation forms the basis
for class discussion under the direction of the instructor. Students learn, often
unconsciously, how to evaluate a problem, how to make decisions, and how to
orally argue a point of view. Using this method, they also learn how to think in
terms of the problems faced by an administrator. In courses that use the case
method extensively, a significant part of the student's evaluation may rest with
classroom participation in case discussions, with another substantial portion resting
on written case analyses. For these reasons, using the case method tends to be very
intensive for both students and instructor.

Case studies are used extensively throughout most business programs at the
university level, and The F.C. Manning School of Business Administration is no
exception. As you will be using case studies in many of the courses over the next
four years, it is important that you get off to a good start by learning the proper way
to approach and complete them.

2.10.2 How to do a case study

While there is no one definitive "Case Method" or approach, there are common
steps that most approaches recommended be followed in tackling a case study. It is
inevitable that different instructors will tell you to do things differently; this is part
of life and will also be part of working for others. This variety is beneficial since it
will show you different ways of approaching decision making. What follows is
intended to be a rather general approach, portions of which have been taken from an
excellent book entitled, Learning with Cases, by Erskine, Leenders, & Mauffette-

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Leenders, published by the Richard Ivey School of Business, The University of
Western Ontario, 1997.
Beforehand (usually a week before), you will get:
1. the case study,
2. (often) some guiding questions that will need to be answered, and
3. (sometimes) some reading assignments that have some relevance to the case
subject.
Your work in completing the case can be divided up into three components:
1. what you do to prepare before the class discussion,
2. what takes place in the class discussion of the case, and
3. anything required after the class discussion has taken place.

For maximum effectiveness, it is essential that you do all three components. Here
are the subcomponents. We will discuss them in more detail shortly.
Before the class discussion:
1. Read the reading assignments (if any)
2. Use the Short Cycle Process to familiarize yourself with the case.
3. Use the Long Cycle Process to analyze the case
4. Usually there will be group meetings to discuss your ideas.
5. Write up the case (if required)

In the class discussion:

1. Someone will start the discussion, usually at the prompting of the instructor.

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2. Listen carefully and take notes. Pay close attention to assumptions. Insist
that they are clearly stated.
3. Take part in the discussion. Your contribution is important, and is likely a
part of your evaluation for the course.

After the class discussion:

1. Review ASAP after the class. Note what the key concept was and how the
case fits into the course.

2.10.3 Preparing a case study

It helps to have a system when sitting down to prepare a case study as the amount of
information and issues to be resolved can initially seem quite overwhelming. The
following is a good way to start.

Step 1: The Short Cycle Process

Quickly read the case. If it is a long case, at this stage you may want to read
only the first few and last paragraphs. You should then be able to Answer the
following questions:
1. Who is the decision maker in this case, and what is their position and
responsibilities?
2. What appears to be the issue (of concern, problem, challenge, or
opportunity) and its significance for the organisation?
3. Why has the issue arisen and why is the decision maker involved now?
4. When does the decision maker have to decide, resolve, act or dispose of the
issue? What is the urgency to the situation?
5. Take a look at the Exhibits to see what numbers have been provided.

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6. Review the case subtitles to see what areas are covered in more depth.
7. Review the case questions if they have been provided. This may give you
some clues about what the main issues are to be resolved.

You should now be familiar with what the case study is about, and be ready to begin
the process of analysing it. You are not done yet! Many students mistakenly believe
that this is all the preparation needed for a class discussion of a case study. If this
was the extent of your preparation, your ability to contribute to the discussion
would likely be limited to the first one quarter of the class time allotted. You need to
go further to prepare the case, using the next step. One of the primary reasons for
doing the short cycle process is to give you an indication of how much work will
need to be done to prepare the case study properly.

Step 2: The Long Cycle Process

At this point, the task consists of two parts:
1. A detailed reading of the case, and then
2. Analysing the case.

When you are doing the detailed reading of the case study, look for the following
sections:
1. Opening paragraph: introduces the situation.
2. Background information: industry, organisation, products, history,
competition, financial information, and anything else of significance.
3. Specific (functional) area of interest: marketing, finance, operations, human
resources, or integrated.
4. The specific problem or decision(s) to be made.

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5. Alternatives open to the decision maker, which may or may not be stated in
the case.
6. Conclusion: set up the task, any constraints or limitations, and the urgency
of the situation.

Most, but not all, case studies will follow this format. The purpose here is to
thoroughly understand the situation and the decisions that will need to be made.
Take your time, make notes, and keep focused on your objectives.
Analysing the case should take the following steps:
1. Defining the issue(s)
2. Analysing the case data
3. Generating alternatives
4. Selecting decision criteria
5. Analysing and evaluating alternatives
6. Selecting the preferred alternative
7. Developing an action/implementation plan

2.10.4 Defining the issue(s)/Problem Statement

The problem statement should be a clear, concise statement of exactly what needs
to be addressed. This is not easy to write! The work that you did in the short cycle
process answered the basic questions. Now it is time to decide what the main issues
to be addressed are going to be in much more detail. Asking yourself the following
questions may help:
1. What appears to be the problem(s) here?
2. How do I know that this is a problem? Note that by asking this question, you
will be helping to differentiate the symptoms of the problem from the problem

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 itself. Example: while declining sales or unhappy employees are a problem to most
companies, they are in fact, symptoms of underlying problems which need to
addressed.
3. What are the immediate issues that need to be addressed? This helps to
differentiate between issues that can be resolved within the context of the case, and
those that are bigger issues that needed to addressed at a another time (preferably
by someone else!).
4. Differentiate between importance and urgency for the issues identified.
Some issues may appear to be urgent, but upon closer examination are relatively
unimportant, while others may be far more important (relative to solving our
problem) than urgent. You want to deal with important issues in order of urgency
to keep focused on your objective. Important issues are those that have a
significant effect on:
1. Profitability,
2. strategic direction of the company,
3. source of competitive advantage,
4. morale of the company's employees and/or
5. customer satisfaction.
The problem statement may be framed as a question, e.g. what should Joe do? Or
how can Mr. Smith improve market share? Usually the problem statement has to be
re-written several times during the analysis of a case, as you peel back the layers of
symptoms or causation.

2.10.5 Analysing Case Data

In analysing the case data, you are trying to answer the following:
1. Why or how did these issues arise? You are trying to determine cause and

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effect for the problems identified. You cannot solve a problem that you cannot
determine the cause of! It may be helpful to think of the organisation in question as
consisting of the following components:
1. resources, such as materials, equipment, or supplies, and
2. people who transform these resources using
3. processes, which creates something of greater value.

Now, where are the problems being caused within this framework, and why?
2. Who is affected most by this issues? You are trying to identify who are the
relevant stakeholders to the situation, and who will be affected by the decisions to
be made.
3. What are the constraints and opportunities implicit to this situation? It is
very rare that resources are not a constraint, and allocations must be made on the
assumption that not enough will be available to please everyone.
4. What do the numbers tell you? You need to take a look at the numbers given
in the case study and make a judgement as to their relevance to the problem
identified. Not all numbers will be immediately useful or relevant, but you need to
be careful not to overlook anything. When deciding to analyse numbers, keep in
mind why you are doing it, and what you intend to do with the result. Use common
sense and comparisons to industry standards when making judgements as to the
meaning of your answers to avoid jumping to conclusions.

2.10.6 Generating Alternatives

This section deals with different ways in which the problem can be resolved.
Typically, there are many (the joke is at least three), and being creative at this stage
helps. Things to remember at this stage are:

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1. Be realistic! While you might be able to find a dozen alternatives, keep in
mind that they should be realistic and fit within the constraints of the situation. The
alternatives should be mutually exclusive, that is, they cannot happen at the same
time.
2. Not making a decision pending further investigation is not an acceptable
decision for any case study that you will analyse. A manager can always delay
making a decision to gather more information, which is not managing at all! The
whole point to this exercise is to learn how to make good decisions, and having
imperfect information is normal for most business decisions, not the exception.
3. Doing nothing as in not changing your strategy can be a viable alternative,
provided it is being recommended for the correct reasons, as will be discussed
below.
4. Avoid the meat-sandwich method of providing only two other clearly
undesirable alternatives to make one reasonable alternative look better by
comparison. This will be painfully obvious to the reader, and just shows laziness
on your part in not being able to come up with more than one decent alternative.
5. Keep in mind that any alternative chosen will need to be implemented at
some point, and if serious obstacles exist to successfully doing this, then you are
the one who will look bad for suggesting it.
Once the alternatives have been identified, a method of evaluating them and
selecting the most appropriate one needs to be used to arrive at a decision.

2.10.7 Key Decision Criteria

A very important concept to understand, they answer the question of how you are
going to decide which alternative is the best one to choose. Other than choosing
randomly, we will always employ some criteria in making any decision. Think

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about the last time that you make a purchase decision for an article of clothing.
Why did you choose the article that you did? The criteria that you may have used
could have been:
1. fitness
2. price
3. fashion
4. colour
5. approval of friend/family
6. availability
Note that any one of these criteria could appropriately finish the sentence, the
brand/style that I choose to purchase must.... These criteria are also how you will
define or determine that a successful purchase decision has been made. For a
business situation, the key decision criteria are those things that are important to
the organisation making the decision, and they will be used to evaluate the
suitability of each alternative recommended.

Key decision criteria should be:

1. Brief, preferably in point form, such as
a. improve (or at least maintain) profitability,
b. increase sales, market share, or return on investment,
c. maintain customer satisfaction, corporate image,
d. be consistent with the corporate mission or strategy,
e. within present (or future) resources and capabilities,
f. within acceptable risk parameters,
g. ease or speed of implementation,
h. employee morale, safety, or turnover,

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 i. retain flexibility, and/or
j. minimize environmental impact.
2. Measurable, at least to the point of comparison, such as, alternative A will
improve profitability more than alternative B.
3. Be related to your problem statement, and alternatives. If you find that you
are talking about something else, that is a sign of a missing alternative or key
decision criteria, or a poorly formed problem statement.

Students tend to find the concept of key decision criteria very confusing, so you
will probably find that you re-write them several times as you analyse the case.
They are similar to constraints or limitations, but are used to evaluate alternatives.

2.10.8 Evaluation of Alternatives

If you have done the above properly, this should be straightforward. You measure
the alternatives against each key decision criteria. Often you can set up a simple
table with key decision criteria as columns and alternatives as rows, and write this
section based on the table. Each alternative must be compared to each criteria and
its suitability ranked in some way, such as met/not met, or in relation to the other
alternatives, such as better than, or highest. This will be important to selecting an
alternative. Another method that can be used is to list the advantages and
disadvantages (pros/cons) of each alternative, and then discussing the short and
long term implications of choosing each. Note that this implies that you have
already predicted the most likely outcome of each of the alternatives. Some
students find it helpful to consider three different levels of outcome, such as best,
worst, and most likely, as another way of evaluating alternatives.

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Recommendation
You must have one! Business people are decision-makers; this is your opportunity
to practice making decisions. Give a justification for your decision (use the
KDC's). Check to make sure that it is one (and only one) of your Alternatives and
that it does resolve what you defined as the Problem.

3.0 Tutor Marked Assignment

1. Identify and discuss the different classifications of inventories.
2. Give six limitations of the EOQ model.
3. What do you understand by case analysis?
4. Discuss the key decision criteria used in analysing a case.
5. Outline the assumptions of the EOQ formula

4.0 Summary
It has been an interesting journey through the subject of inventory control
systems. This session has provided us with vital information about the inventory
control model. An inventory control model has been defined an inventory as
consisting of usable but idle resources such as men, machines, materials, or
money. When the resources involved are material, the inventory is called stock.
Though inventory of materials is an idle resource (since materials lie idle and are
not to be used immediately), almost every organisation. It helps in the smooth and
efficient of running of an enterprise. It helps in providing service to the customer
at short notice. In the absence of inventory, the enterprise may have to pay high
prices due to piecemeal purchasing.

It reduces product cost since there is an added advantage of batching and long,
uninterrupted production runs. It acts as10a buffer stock when raw materials are
received late and shop rejection is too many.

Overbuying without regard to the forecast or proper estimate of demand to take

advantages of favourable market may result to poor inventory control system.
Inventories can be classified into direct and indirect. Direct inventories include
raw material inventories or production inventories, work-in -process inventories
or in process inventories, finished goods inventories, MRO inventory or spare
parts inventories. While indirect inventory types include, fluctuation inventories,
anticipation inventory, lot size inventory or cycle inventories, transportation
inventories, and decoupling inventories. The purpose of maintaining the inventory
or controlling the cost of inventory is to use the available capital optimally
(efficiently) so that inventory cost per item of material will be as small as possible.
The inventory control problem arises from when to order, how much to order and
how much the safety stock should be.

Finally, we discussed the EOQ model which is one of the simplest inventory
models we have. A store-keeper has an order to supply goods to customers at a
uniform rate R per unit. Hence, the demand is fixed and known. The study
session has exposed us to the subject of case analysis in OR. We opened this
session with a description of what case analysis is all about. We defined a case as
a description of an actual administrative or operational situation involving a
decision to be made or a problem to be solved. It can be a real situation that
actually happened just as described, or portions have been disguised for reasons
of privacy. Most case studies are written in such a way that the reader takes the
place of the manager whose responsibility is to make decisions to help solve the
problem.
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The stages involved in case analysis include the following:- the short cycle
process, and the long cycle process. Next, we considered the key decision criteria
when doing a case analysis. These have to be brief, measurable, and be related to
your problem statement. Finally we considered how to analyse alternatives.

5.0 Self–Assignment Questions

1. What do you understand by the term inventory control?
2. List and explain three inventory control problems.
3. Clearly write out the EOQ formula and explain all its components.
4. Identify and briefly discuss the stages involved in case analysis.
5. Present a brief analogy on how to do a case study.

6.0 Additional Activities

a. Visit U-tube addhttps://www.youtube.com/watch?v=9tJv5COGkD0
https://www.youtube.com/watch?v=A6XbBaNqAxw
https://www.youtube.com/watch?v=XDrpfL1TkP0. Watch the video & summarise
in 1 paragraph

7.0 References/ Further Readings

Denardo, Eric V. (2002), The Science of Decision making: A Problem-Based
Approach Using Excel. New York: John Wiley.
Gupta, P.K and Hira, D.S., (2012), Operations Research, New-Delhi: S. Chand &
Company.
Eiselt, H.A. and Sandblom, C.L. (2012). Operations Research: A Model Based

Approach, 2nd ed., New York: Springer Heidelberg

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