Quantitative Techniques

for Decision Making

Fourth Edition

M.P. GUPTA
Former Head and Dean
Faculty of Management Studies
University of Delhi

R.B. KHANNA
Professor
Indian Institute of Planning and Management (IIPM)
Jaipur

New Delhi-110001
2011
QUANTITATIVE TECHNIQUES FOR DECISION MAKING, Fourth Edition
M.P. Gupta and R.B. Khanna

© 2011 by PHI Learning Private Limited, New Delhi. All rights reserved. No part of this book
may be reproduced in any form, by mimeograph or any other means, without permission in
writing from the publisher.

ISBN-978-81-203-4278-1

The export rights of this book are vested solely with the publisher.

Fifth Printing (Fourth Edition) ... ... ... February 2011

Published by Asoke K. Ghosh, PHI Learning Private Limited, M-97, Connaught Circus,
New Delhi-110001 and Printed by Mudrak, 30-A, Patparganj, Delhi-110091.
 CONTENTS

Preface xi
Preface to the First Edition xiii

Chapter 1 DECISION MAKING—A QUANTITATIVE APPROACH .............. 1–20

The Decision Dilemma 1
1.1 Introduction 2
1.2 Operations Research—The Quantitative Approach to Decision
Making 4
1.3 Definitions of Operations Research 5
1.4 Characteristics of Operations Research 6
1.5 Models and Modelling in OR 7
1.6 OR Methodology 8
1.7 OR Techniques 14
1.8 Typical Applications of Operations Research 16
1.9 OR and Computers 17
1.10 Summary 17
Concept Quiz 17
Questions 19

Chapter 2 LINEAR PROGRAMMING—GRAPHIC METHOD ....................... 21–61

Crisis at Bhilpur 21
2.1 Introduction 22
2.2 Basic Requirements of a Linear Programming Problem 23
2.3 Graphical Solution to a Maximisation Problem 24

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2.4 Summary of Graphical Maximisation Procedure 27

2.5 Technical Issues in Linear Programming 28
2.6 Minimisation Problem 30
2.7 Solution by Computer Package 32
2.8 Problem Formulation 34
2.9 Basic Assumptions of Linear Programming 49
2.10 Advantages and Limitations of Linear Programming 50
2.11 Summary 51
Concept Quiz 51
Questions 54

Chapter 3 LINEAR PROGRAMMING—SIMPLEX METHOD ...................... 62–134

Manthan 62
3.1 Introduction 63
3.2 Setting up the Initial Solution 64
3.3 Developing the Second Solution 67
3.4 Developing the Third Solution 71
3.5 Developing the Fourth Solution 72
3.6 Summary of Steps in the Simplex Maximisation Procedure 74
3.7 Simplex Solution to a Minimisation Problem 74
3.8 Developing the Second Solution 77
3.9 Developing the Third Solution 78
3.10 Dual 80
3.11 Sensitivity Analysis 85
3.12 Solution by Computer Package 89
3.13 Technical Issues in the Simplex Method 93
3.14 Two Phase Method of Solving Problems Involving Artificial
Variables 98
3.15 Solved Examples 100
3.16 Summary 119
Concept Quiz 120
Questions 122

Chapter 4 TRANSPORTATION MODEL ....................................................... 135–202

Ashiana 135
4.1 Introduction 136
4.2 Setting up the Transportation Tableau 136
4.3 Testing the Solution for Improvement 146
4.4 The Unbalanced Case (Demand and Supply are Unequal) 156
4.5 Multiple Solutions 158
4.6 Degeneracy 159
4.7 Maximisation Problems 161
4.8 Least Time Transportation Model 163
4.9 Transhipment Model 166
4.10 Restrictions on Routes 167
 Contents v

4.11 Solution by Computer Package 167

4.12 Solved Examples 170
4.13 Summary 186
Concept Quiz 186
Questions 189

Chapter 5 ASSIGNMENT MODEL .................................................................. 203–248

Mettalica Works Limited 203
5.1 Introduction 204
5.2 The Hungarian Method 205
5.3 Summary of the Assignment Method 209
5.4 Maximisation Case 209
5.5 Travelling Salesman Problem 212
5.6 Solution by Computer Package 215
5.7 Solved Examples 217
5.8 Summary 235
Concept Quiz 236
Questions 239

Chapter 6 INTEGER PROGRAMMING ......................................................... 249–261

Gharana Home Appliances 249
6.1 Introduction 249
6.2 Gomory’s Fractional Cut Method 250
6.3 Branch and Bound Method 252
6.4 Solution by Computer Package 256
6.5 Summary 257
Concept Quiz 257
Questions 259

Chapter 7 GOAL PROGRAMMING ................................................................ 262–277

Sunder Textiles 262
7.1 Introduction 263
7.2 Special Features of Goal Programming 263
7.3 Formulation Procedure 263
7.4 Solution by Computer Package 269
7.5 Summary 272
Concept Quiz 272
Questions 274

Chapter 8 DYNAMIC PROGRAMMING ......................................................... 278–296

Sangeet Electronics 278
8.1 Introduction 279
8.2 Definitions 279
8.3 Stage Coach Problem 280
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8.4 Solution by Computer Package 289

8.5 Summary 291
Concept Quiz 292
Questions 293

Chapter 9 PROBABILITY ................................................................................. 297–329

Oil or Gas 297
9.1 Introduction 297
9.2 Basic Probability Concepts 298
9.3 Approaches to Probability 299
9.4 Addition Rules 301
9.5 Probabilities under Conditions of Statistical Independence 305
9.6 Probabilities under Conditions of Statistical Dependence 309
9.7 Revising Prior Estimates of Priorities: Baye’s Theorem 313
9.8 Solved Examples 315
9.9 Summary 322
Concept Quiz 323
Questions 326

Chapter 10 PROBABILITY DISTRIBUTIONS ................................................ 330–355

Vahan Ancillaries 330
10.1 Introduction 331
10.2 Types of Probability Distributions 332
10.3 Random Variable 332
10.4 Expected Value of a Random Variable 332
10.5 Mean of a Distribution 334
10.6 Standard Deviation of a Distribution 334
10.7 Binomial Distribution 335
10.8 Poisson Distribution 336
10.9 Normal Distribution 337
10.10 Application Areas of Probability and Probability
Distributions 344
10.11 Solved Examples 345
10.12 Summary 349
Concept Quiz 351
Questions 353

Chapter 11 INVENTORY MODELS ................................................................... 356–397

Kalpataru Bhandar 356
11.1 Introduction 357
11.2 Costs Associated with Inventory 358
11.3 EOQ Model 359
11.4 EOQ Model—Discounts and Price Breaks 361
11.5 EOQ Model and Production Processes 363
 Contents vii

11.6 EOQ Model—Eliminating the Instant Receipt Assumption 363

11.7 A Practical Approach—When Costs are not Known 364
11.8 Selective Inventory Control—ABC Analysis 367
11.9 When to Order 371
11.10 Determining Optimal Level of Safety Stock—When Out of
Stock Costs are Known 373
11.11 Determining Optimal Level of Safety Stock—When Out
of Stock Costs are Not Known 375
11.12 Fixed Order Quantity System 377
11.13 Fixed Interval System 378
11.14 Other Systems 379
11.15 Reordering with Planned Stockouts 380
11.16 Solution by Computer Package 381
11.17 Solved Examples 383
11.18 Summary 388
Concept Quiz 389
Questions 391

Chapter 12 REPLACEMENT MODELS ........................................................... 398–412

Atithi Hotel 398
12.1 Introduction 399
12.2 Replacement of Equipment Which Deteriorates with Time 399
12.3 Replacement of Items that Fail Completely 402
12.4 Staffing Problems 405
12.5 Solution with the Help of Computer 406
12.6 Summary 406
Concept Quiz 407
Questions 409

Chapter 13 NETWORK MODELS—CPM AND PERT .................................. 413–475

Rasoi Appliances 413
13.1 Introduction 414
13.2 Critical Path Method (CPM) 415
13.3 Definitions 416
13.4 Rules and Conventions 416
13.5 Drawing a Network (Activity on Arrow (AOA)) 417
13.6 Calculating Earliest Start Time 419
13.7 Calculating Latest Finish Time (LFT) 420
13.8 Floats (Slacks), Critical Activities and Critical Path 421
13.9 Activity on Node (AON) Network 424
13.10 Crashing a Project 429
13.11 Resource Levelling 434
13.12 Control of Project Costs 436
13.13 Programme Evaluation and Review Technique (PERT) 438
13.14 Updating a Network 441
viii Contents

13.15 Difference between PERT and CPM 445

13.16 Solution by Computer Package 445
13.17 Solved Examples 450
13.18 Summary 461
Concept Quiz 462
Questions 464

Chapter 14 DECISION THEORY ...................................................................... 476–519

On Oily Waters 476
14.1 Introduction 477
14.2 Steps in Decision Making 479
14.3 Decision Making Environment 480
14.4 Decision Making under Uncertainty 480
14.5 Decision Making under Risk 483
14.6 Expected Value of Perfect Information (EVPI) 486
14.7 An Alternative Approach—Minimising Expected Losses 487
14.8 Marginal Analysis 488
14.9 Utility as a Decision Criterion 489
14.10 Decision Trees 492
14.11 Expected Value of Sample Information (EVSI) 495
14.12 Bayesian Revision of Probabilities 495
14.13 Solution by Computer Package 498
14.14 Solved Examples 501
14.15 Summary 508
Concept Quiz 510
Questions 512

Chapter 15 THEORY OF GAMES ..................................................................... 520–546

Blue Scooters Limited 520
15.1 Introduction 521
15.2 Assumptions, Definitions and Classification of Games 521
15.3 Two-Person Zero Sum Games 522
15.4 Pure Strategies and Saddle Points 523
15.5 Mixed Strategies 524
15.6 Shortcut Method for Finding Optimum Mixed Strategies 526
15.7 Solution of Games by Dominance 527
15.8 Graphical Solution of Games 530
15.9 Solution by Linear Programming 535
15.10 Solved Examples 537
15.11 Solution by Computer Package 540
15.12 Summary 541
Concept Quiz 541
Questions 543
 Contents ix

Chapter 16 SEQUENCING .................................................................................. 547–562

Vishwakarma Workshop 547
16.1 Introduction 548
16.2 n Jobs 2 Stations 548
16.3 n Jobs 2 Stations—Different Sequence 549
16.4 n Jobs m Stations 550
16.5 2 Jobs Through n Stations in Random Order 552
16.6 Solution by Computer Package 554
16.7 Summary 556
Concept Quiz 556
Questions 558

Chapter 17 QUEUING THEORY ....................................................................... 563–586

Operation Raksha 563
17.1 Introduction 564
17.2 Queuing and Cost Behaviour 564
17.3 Definitions for Queuing Systems 565
17.4 Single Channel, Single Server Queuing Model (M/M/1) 568
17.5 Economic Aspects of Queuing 571
17.6 Solution by Computer Package 572
17.7 Solved Examples 574
17.8 Summary 580
Concept Quiz 581
Questions 583

Chapter 18 SIMULATION ................................................................................... 587–620

Happy Landings 587
18.1 Introduction 588
18.2 Steps Involved in Monte Carlo Simulation 589
18.3 Solved Examples 594
18.4 Summary 612
Concept Quiz 612
Questions 613

Chapter 19 MARKOV ANALYSIS ..................................................................... 621–641

Adla Badli 621
19.1 Introduction 622
19.2 Markov Process 622
19.3 Transition Matrix 623
19.4 Prediction of Market Shares for Future Periods 624
19.5 Steady State Conditions 626
19.6 Absorbing Chains 628
19.7 Solved Examples 630
x Contents

19.8 Solution by Computer Package 633

19.9 Summary 634
Concept Quiz 634
Questions 636

Appendix A Mathematics for Managers ........................................................ 643–701

Appendix B Standard Normal Probability Distribution ........................... 702–703
Appendix C Values of e–l for Computing Poisson Probabilities ...................... 704
Appendix D Table of Random Numbers ........................................................ 705–706

Bibliography ....................................................................................................... 707–710

Answers to Concept Quiz ................................................................................. 711–717
Answers to Selected Questions ....................................................................... 719–754
Index ..................................................................................................................... 755–758
 PREFACE

The overwhelming response to the Third Edition of the book has encouraged us to
present the Fourth Edition of the book. The changes in this edition are based on the
feedback and suggestions from our readers and colleagues which we gratefully
acknowledge.
We have added a separate supplement ‘Mathematics for Managers’ in the form
of an appendix, which covers Matrix Algebra and Differential Calculus. While these
do not strictly come under the purview of operations research, a large number of
academic institutions and universities include these in their syllabi for management
programmes at the undergraduate and postgraduate levels. The inclusion of this
supplement will offer a complete coverage of the syllabi in one book.
Since most computer software in use today for network analysis and project
management draw networks in an Activity on Node format, we have included a
section on drawing of networks in the Activity on Node format so that readers can
interpret computer solutions with ease.
We have also included a number of solved and unsolved problems. We have
retained the format of our earlier editions and have stuck to the simplicity that was
our goal from the very outset—to present material in an easily understandable
manner sans the rigour of classical mathematics, and amply illustrated with life-like
problems and examples.
A revised CD is available as resource material for instructors. It contains
PowerPoint presentations for all chapters and can be effectively used along with the
normal ‘chalk and talk’ style.

xi
xii Preface

We look forward to continuing support from our colleagues and our readers and
shall welcome any suggestions for further improvement so that we can fully satisfy
the needs and requirements of our readers. These can be sent by e-mail to
[email protected].

MP Gupta
RB Khanna
 PREFACE TO THE FIRST EDITION

Decision making is a manager’s primary task. The quality of the decisions can be the
difference between success and failure of a business enterprise. While a qualitative
analysis is invariably carried out, a quantitative analysis is often avoided. The two,
used conjunctively can reinforce, negate or call for a review of decisions which may
have otherwise been taken. Business is associated with finance and commerce and,
hence, the arts. However, the bottom line for any business or enterprise is profits and
these can only be measured in monetary terms. Some quantification is always
involved in planning inventories, production schedules and calculating revenues and
expenses. Yet, managers are generally shy of mathematics. It is not just the
computational difficulty that turns them away but also the fact that quantification
implies commitment and a certain degree of precision. One can say that Option A is
better than Option B but quantitative techniques require that the decision maker or
analyst states by how much Option A is better than B.
Operations Research provides the basis for decision making in a scientific and
rational manner. It is often shrouded in mathematical complexity which ‘scares’ away
managers and management students. The advent of high-speed computers and the
availability of adequate software packages has eased the tedium of manual
computations. Stress must shift from the actual computational methods used, to
understanding of problem situations and identifying solution approaches.
This book is aimed at providing the management students and managers a
working knowledge of Operations Research and its applications. Engineering
students may not find the mathematical rigour they are used to, but the book aims at
providing them with a better understanding of the practical utility of mathematical
modelling and techniques. The book attempts to put across techniques in a language
and manner which does not require more than basic arithmetic that every person
learns in school. Effort has been made to avoid mathematical symbols beyond the
xiii
xiv Preface to the First Edition

elementary ones of addition, subtraction, multiplication and division. Rigorous

mathematical proofs, generalised symbolic models and general equations have been
avoided as far as practical. While simplicity has been the aim of this book it is
limited by the Einsteinian injunction:
Everything should be made simple, but not simpler than simple.
The book approaches the subject from a practical point of view and all problems
are related to life-like situations similar to those faced so often by managers in their
day to day functioning. Quite a few problems have been taken from old question
papers of various universities and professional examinations. Each chapter begins
with a case study. We have also included a section in each chapter dealing with
solutions of the problems with the help of computer software. Answers have been
provided for all the unsolved exercises so that the readers can gain confidence in
their ability to solve problems. Problem formulations have also been included where
considered necessary.
Suggestions for improvement to the text are most welcome and will be
gratefully acknowledged.

M.P. GUPTA
R.B. KHANNA
 Quantitative Techniques For Decision
Making

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Author : M. P. Gupta, R. B.
Publisher : PHI Learning ISBN : 9788120342781
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