INTRODUCTION TO

MANAGEMENT
SCIENCE, 13e
Anderson Slides by
Sweeney JOHN
Williams LOUCKS
Martin St. Edward’s
University

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 Chapter 6, Part A
Distribution and Network Models

Transportation Problem
• Network Representation
• General LP Formulation
Assignment Problem
• Network Representation
• General LP Formulation
Transshipment Problem
• Network Representation
• General LP Formulation

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 Transportation, Assignment, and
Transshipment Problems
A network model is one which can be represented
by a set of nodes, a set of arcs, and functions (e.g.
costs, supplies, demands, etc.) associated with the
arcs and/or nodes.
Transportation, assignment, transshipment,
shortest-route, and maximal flow problems of this
chapter as well as the minimal spanning tree and
PERT/CPM problems (in other chapters) are all
examples of network problems.

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 Transportation, Assignment, and
Transshipment Problems
Each of the five models of this chapter can be
formulated as linear programs and solved by
general purpose linear programming codes.
For each of the five models, if the right-hand side
of the linear programming formulations are all
integers, the optimal solution will be in terms of
integer values for the decision variables.
However, there are many computer packages
(including The Management Scientist) that contain
separate computer codes for these models which
take advantage of their network structure.

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 Transportation Problem

The transportation problem seeks to minimize the

total shipping costs of transporting goods from m
origins (each with a supply si) to n destinations
(each with a demand dj), when the unit shipping
cost from an origin, i, to a destination, j, is cij.
The network representation for a transportation
problem with two sources and three destinations is
given on the next slide.

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 Transportation Problem

Network Representation

1 d1
c11
s1 1 c12
c13
2 d2
c21

s2 2 c22
c23
3 d3

Sources Destinations

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 Transportation Problem

Linear Programming Formulation

Using the notation:

xij = number of units shipped from
origin i to destination j
cij = cost per unit of shipping from
origin i to destination j
si = supply or capacity in units at origin i
dj = demand in units at destination j
continued

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 Transportation Problem

Linear Programming Formulation (continued)

m n
Min  c x
i =1 j =1
ij ij

x
j =1
ij  si i =1, 2, ,m Supply

σ𝑚
𝑖=1 𝑥𝑖𝑗 = 𝑑𝑗 j=1,2,…,n Demand

xij > 0 for all i and j

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 Transportation Problem: Example #1

Acme Block Company has orders for 80 tons of

concrete blocks at three suburban locations
as follows: Northwood -- 25 tons,
Westwood -- 45 tons, and
Eastwood -- 10 tons. Acme
has two plants, each of which
can produce 50 tons per week.
Delivery cost per ton from each plant
to each suburban location is shown on the next slide.
How should end of week shipments be made to fill
the above orders?

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 Transportation Problem: Example #1

Delivery Cost Per Ton

Northwood Westwood Eastwood

Plant 1 24 30 40
Plant 2 30 40 42

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 Transportation Problem: Example #1

Partial Spreadsheet Showing Problem Data

A B C D E F G H
1 LHSCoefficients
2 Constraint X11 X12 X13 X21 X22 X23 RHS
3 #1 1 1 1 50
4 #2 1 1 1 50
5 #3 1 1 25
6 #4 1 1 45
7 #5 1 1 10
8 Obj.Coefficients 24 30 40 30 40 42 30

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 Transportation Problem: Example #1

Partial Spreadsheet Showing Optimal Solution

BA C D E F G
10 X11 X12 X13 X21 X22 X23
11 Dec.Var.Values 5 45 0 20 0 10
12 Minimized Total Shipping Cost 2490
13
14 Constraints LHS RHS
15 Plant 1 Capacity 50 <= 50
16 Plant 2 Capacity 30 <= 50
17 Northwood Demand 25 = 25
18 Westwood Demand 45 = 45
19 Eastwood Demand 10 = 10

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 Transportation Problem: Example #1

Optimal Solution

From To Amount Cost

Plant 1 Northwood 5 120
Plant 1 Westwood 45 1,350
Plant 2 Northwood 20 600
Plant 2 Eastwood 10 420
Total Cost = $2,490

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 Transportation Problem: Example #2

The Navy has 9,000 pounds of material in Albany,

Georgia that it wishes to ship to three installations:
San Diego, Norfolk, and Pensacola. They
require 4,000, 2,500, and 2,500 pounds,
respectively. Government regulations
require equal distribution of shipping
among the three carriers.

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 Transportation Problem: Example #2

The shipping costs per pound for truck, railroad,

and airplane transit are shown on the next slide.
Formulate and solve a linear program to
determine the shipping arrangements
(mode, destination, and quantity) that
will minimize the total shipping cost.

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 Transportation Problem: Example #2

Destination
Mode San Diego Norfolk Pensacola
Truck $12 $6 $5
Railroad 20 11 9
Airplane 30 26 28

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 Transportation Problem: Example #2

Define the Decision Variables

We want to determine the pounds of material, xij ,

to be shipped by mode i to destination j. The
following table summarizes the decision variables:

San Diego Norfolk Pensacola

Truck x11 x12 x13
Railroad x21 x22 x23
Airplane x31 x32 x33

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 Transportation Problem: Example #2

Define the Objective Function

Minimize the total shipping cost.
Min: (shipping cost per pound for each mode per
destination pairing) x (number of pounds shipped
by mode per destination pairing).
Min: 12x11 + 6x12 + 5x13 + 20x21 + 11x22 + 9x23
+ 30x31 + 26x32 + 28x33

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 Transportation Problem: Example #2

Define the Constraints

Equal use of transportation modes:
(1) x11 + x12 + x13 = 3000
(2) x21 + x22 + x23 = 3000
(3) x31 + x32 + x33 = 3000
Destination material requirements:
(4) x11 + x21 + x31 = 4000
(5) x12 + x22 + x32 = 2500
(6) x13 + x23 + x33 = 2500
Non-negativity of variables:
xij > 0, i = 1,2,3 and j = 1,2,3

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 Transportation Problem: Example #2

The Management Scientist Output

OBJECTIVE FUNCTION VALUE = 142000.000

Variable Value Reduced Cost
x11 1000.000 0.000
x12 2000.000 0.000
x13 0.000 1.000
x21 0.000 3.000
x22 500.000 0.000
x23 2500.000 0.000
x31 3000.000 0.000
x32 0.000 2.000
x33 0.000 6.000

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 Transportation Problem: Example #2

Solution Summary
• San Diego will receive 1000 lbs. by truck
and 3000 lbs. by airplane.
• Norfolk will receive 2000 lbs. by truck
and 500 lbs. by railroad.
• Pensacola will receive 2500 lbs. by railroad.
• The total shipping cost will be $142,000.

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 Assignment Problem

An assignment problem seeks to minimize the total

cost assignment of m workers to m jobs, given that
the cost of worker i performing job j is cij.
An assignment problem is a special case of a
transportation problem in which all supplies and all
demands are equal to 1; hence assignment problems
may be solved as linear programs.
The network representation of an assignment
problem with three workers and three jobs is shown
on the next slide.

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 Assignment Problem

Network Representation

c11
1 1
c12
c13
Agents Tasks
c21
c22
2 2
c23
c31
c32
3 c33 3

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 Assignment Problem

Linear Programming Formulation

Using the notation:

xij = 1 if agent i is assigned to task j

0 otherwise

cij = cost of assigning agent i to task j

continued

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 Assignment Problem

Linear Programming Formulation (continued)

m n
Min  c x
i =1 j =1
ij ij

x
j =1
ij  1 i =1, 2, ,m Agents
m

x
i =1
ij = 1 j =1, 2, ,n Tasks

xij > 0 for all i and j

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 Assignment Problem: Example

An electrical contractor pays his subcontractors a

fixed fee plus mileage for work performed. On a given
day the contractor is faced with three electrical jobs
associated with various projects. Given below are the
distances between the subcontractors and the projects.
Projects
Subcontractor A B C
Westside 50 36 16
Federated 28 30 18
Goliath 35 32 20
Universal 25 25 14
How should the contractors be assigned to minimize
total mileage costs?

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 Assignment Problem: Example

Network Representation
50
West. A
36
Subcontractors 16 Projects
28
Fed.
30 B
18
35 32

Gol. C
20
25 25
Univ.
14
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 Assignment Problem: Example

Linear Programming Formulation

Min 50x11+36x12+16x13+28x21+30x22+18x23
+35x31+32x32+20x33+25x41+25x42+14x43
s.t. x11+x12+x13 < 1
x21+x22+x23 < 1
Agents
x31+x32+x33 < 1
x41+x42+x43 < 1
x11+x21+x31+x41 = 1
x12+x22+x32+x42 = 1 Tasks
x13+x23+x33+x43 = 1
xij = 0 or 1 for all i and j

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 Assignment Problem: Example

The optimal assignment is:

Subcontractor Project Distance

Westside C 16
Federated A 28
Goliath (unassigned)
Universal B 25
Total Distance = 69 miles

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 Transshipment Problem

Transshipment problems are transportation problems

in which a shipment may move through intermediate
nodes (transshipment nodes)before reaching a
particular destination node.
Transshipment problems can be converted to larger
transportation problems and solved by a special
transportation program.
Transshipment problems can also be solved by
general purpose linear programming codes.
The network representation for a transshipment
problem with two sources, three intermediate nodes,
and two destinations is shown on the next slide.

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 Transshipment Problem

Network Representation

c36
3
c13
s1 1
c37 6 d1
c14
c15 c46
Supply 4 c47 Demand
c23
c24 c56
s2 2 7 d2
c25
5 c57
Sources Destinations
Intermediate Nodes

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 Transshipment Problem

Linear Programming Formulation

Using the notation:

xij = number of units shipped from node i to node j
cij = cost per unit of shipping from node i to node j
si = supply at origin node i
dj = demand at destination node j
continued

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 Transshipment Problem

Linear Programming Formulation (continued)

Min cx
all arcs
ij ij

s.t. 
arcs out
xij − x
arcs in
ij  si Origin nodes i


arcs out
xij − x
arcs in
ij =0 Transhipment nodes

x
arcs in
ij − 
arcs out
xij = d j Destination nodes j

xij > 0 for all i and j

continued

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 Transshipment Problem

LP Formulation Special Cases

• Total supply not equal to total demand
• Maximization objective function
• Route capacities or route minimums
• Unacceptable routes
The LP model modifications required here are
identical to those required for the special cases in
the transportation problem.

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 Transshipment Problem: Example

The Northside and Southside facilities

of Zeron Industries supply three firms
(Zrox, Hewes, Rockrite) with customized
shelving for its offices. They both order
shelving from the same two manufacturers,
Arnold Manufacturers and Supershelf, Inc.
Currently weekly demands by the users
are 50 for Zrox, 60 for Hewes, and 40 for
Rockrite. Both Arnold and Supershelf can
supply at most 75 units to its customers.
Additional data is shown on the next
slide.

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 Transshipment Problem: Example

Because of long standing contracts based on

past orders, unit costs from the manufacturers to the
suppliers are:

Zeron N Zeron S
Arnold 5 8
Supershelf 7 4
The costs to install the shelving at the various
locations are:

Zrox Hewes Rockrite

Thomas 1 5 8
Washburn 3 4 4

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 Transshipment Problem: Example

Network Representation
ZROX

Zrox 50
5 1
Zeron
75 Arnold
ARNOLD
N 5
8 8
Hewes
HEWES 60

7 3

75
Super Zeron
WASH 4
Shelf S
4 BURN
4 Rock-
Rite 40

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 Transshipment Problem: Example

Linear Programming Formulation

• Decision Variables Defined
xij = amount shipped from manufacturer i to supplier j
xjk = amount shipped from supplier j to customer k
where i = 1 (Arnold), 2 (Supershelf)
j = 3 (Zeron N), 4 (Zeron S)
k = 5 (Zrox), 6 (Hewes), 7 (Rockrite)
• Objective Function Defined
Minimize Overall Shipping Costs:
Min 5x13 + 8x14 + 7x23 + 4x24 + 1x35 + 5x36 + 8x37
+ 3x45 + 4x46 + 4x47

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 Transshipment Problem: Example

Constraints Defined
Amount Out of Arnold: x13 + x14 < 75
Amount Out of Supershelf: x23 + x24 < 75
Amount Through Zeron N: x13 + x23 - x35 - x36 - x37 = 0
Amount Through Zeron S: x14 + x24 - x45 - x46 - x47 = 0
Amount Into Zrox: x35 + x45 = 50
Amount Into Hewes: x36 + x46 = 60
Amount Into Rockrite: x37 + x47 = 40

Non-negativity of Variables: xij > 0, for all i and j.

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 Transshipment Problem: Example

The Management Scientist Solution

Objective Function Value = 1150.000

Variable Value Reduced Costs
X13 75.000 0.000
X14 0.000 2.000
X23 0.000 4.000
X24 75.000 0.000
X35 50.000 0.000
X36 25.000 0.000
X37 0.000 3.000
X45 0.000 3.000
X46 35.000 0.000
X47 40.000 0.000

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 Transshipment Problem: Example

Solution
ZROX
Zrox 50

5 75 1
Zeron
75 Arnold
ARNOLD
N 5
8 8
Hewes
HEWES 60
7 3 4
Super Zeron
75 Shelf
WASH
S
4 BURN
4 Rock-
Rite 40

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 End of Chapter 6, Part A

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 INTRODUCTION TO
MANAGEMENT
SCIENCE, 13e
Anderson Slides by
Sweeney JOHN
Williams LOUCKS
Martin St. Edward’s
University

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publicly accessible website, in whole or in part. Slide 1
 Chapter 6, Part B
Distribution and Network Models

 Shortest-Route Problem
 Maximal Flow Problem

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 Shortest-Route Problem

 The shortest-route problem is concerned with

finding the shortest path in a network from one
node (or set of nodes) to another node (or set of
nodes).
 If all arcs in the network have nonnegative values
then a labeling algorithm can be used to find the
shortest paths from a particular node to all other
nodes in the network.
 The criterion to be minimized in the shortest-route
problem is not limited to distance even though the
term "shortest" is used in describing the procedure.
Other criteria include time and cost. (Neither time
nor cost are necessarily linearly related to distance.)

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 Shortest-Route Problem

 Linear Programming Formulation

Using the notation:

xij = 1 if the arc from node i to node j

is on the shortest route
0 otherwise

cij = distance, time, or cost associated

with the arc from node i to node j
continued

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 Shortest-Route Problem

 Linear Programming Formulation (continued)

Min 
all arcs
c ij xij

s.t. 
arcs out
xij  1 Origin node i


arcs out
xij  x
arcs in
ij 0 Transhipment nodes

x
arcs in
ij  1 Destination node j

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 Example: Shortest Route

Susan Winslow has an important business meeting

in Paducah this evening. She has a number of alternate
routes by which she can travel
from the company headquarters
in Lewisburg to Paducah. The
network of alternate routes and
their respective travel time,
ticket cost, and transport mode
appear on the next two slides.
If Susan earns a wage of $15 per hour, what route
should she take to minimize the total travel cost?

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 Example: Shortest Route

 Network Model

F
2 5
K L
A
B G
C J
3
6
1
D I
H Paducah
Lewisburg E M
4

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 Example: Shortest Route

Transport Time Ticket

Route Mode (hours) Cost
A Train 4 $ 20
B Plane 1 $115
C Bus 2 $ 10
D Taxi 6 $ 90
E Train 3 1/3 $ 30
F Bus 3 $ 15
G Bus 4 2/3 $ 20
H Taxi 1 $ 15
I Train 2 1/3 $ 15
J Bus 6 1/3 $ 25
K Taxi 3 1/3 $ 50
L Train 1 1/3 $ 10
M Bus 4 2/3 $ 20

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 Example: Shortest Route

Transport Time Time Ticket Total

Route Mode (hours) Cost Cost Cost
A Train 4 $60 $ 20 $ 80
B Plane 1 $15 $115 $130
C Bus 2 $30 $ 10 $ 40
D Taxi 6 $90 $ 90 $180
E Train 3 1/3 $50 $ 30 $ 80
F Bus 3 $45 $ 15 $ 60
G Bus 4 2/3 $70 $ 20 $ 90
H Taxi 1 $15 $ 15 $ 30
I Train 2 1/3 $35 $ 15 $ 50
J Bus 6 1/3 $95 $ 25 $120
K Taxi 3 1/3 $50 $ 50 $100
L Train 1 1/3 $20 $ 10 $ 30
M Bus 4 2/3 $70 $ 20 $ 90

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 Example: Shortest Route

 LP Formulation
• Objective Function
Min 80x12 + 40x13 + 80x14 + 130x15 + 180x16 + 60x25
+ 100x26 + 30x34 + 90x35 + 120x36 + 30x43 + 50x45
+ 90x46 + 60x52 + 90x53 + 50x54 + 30x56
• Node Flow-Conservation Constraints
x12 + x13 + x14 + x15 + x16 = 1 (origin)
– x12 + x25 + x26 – x52 = 0 (node 2)
– x13 + x34 + x35 + x36 – x43 – x53 = 0 (node 3)
– x14 – x34 + x43 + x45 + x46 – x54 = 0 (node 4)
– x15 – x25 – x35 – x45 + x52 + x53 + x54 + x56 = 0 (node 5)
x16 + x26 + x36 + x46 + x56 = 1 (destination)

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 Example: Shortest Route

 Solution Summary

Minimum total cost = $150

x12 = 0 x25 = 0 x34 = 1 x43 = 0 x52 = 0

x13 = 1 x26 = 0 x35 = 0 x45 = 1 x53 = 0
x14 = 0 x36 = 0 x46 = 0 x54 = 0
x15 = 0 x56 = 1
x16 = 0

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 Maximal Flow Problem

 The maximal flow problem is concerned with

determining the maximal volume of flow from one
node (called the source) to another node (called the
sink).
 In the maximal flow problem, each arc has a
maximum arc flow capacity which limits the flow
through the arc.

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 Example: Maximal Flow

 A capacitated transshipment model can be developed

for the maximal flow problem.
 We will add an arc from the sink node back to the
source node to represent the total flow through the
network.
 There is no capacity on the newly added sink-to-
source arc.
 We want to maximize the flow over the sink-to-source
arc.

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 Maximal Flow Problem

 LP Formulation
(as Capacitated Transshipment Problem)
• There is a variable for every arc.
• There is a constraint for every node; the flow out
must equal the flow in.
• There is a constraint for every arc (except the
added sink-to-source arc); arc capacity cannot be
exceeded.
• The objective is to maximize the flow over the
added, sink-to-source arc.

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 Maximal Flow Problem

 LP Formulation
(as Capacitated Transshipment Problem)

Max xk1 (k is sink node, 1 is source node)

s.t. xij - xji = 0 (conservation of flow)
i j

xij < cij (cij is capacity of ij arc)

xij > 0, for all i and j (non-negativity)

(xij represents the flow from node i to node j)

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 Example: Maximal Flow

National Express operates a fleet of cargo planes and

is in the package delivery business. NatEx is interested
in knowing what is the maximum it could transport in
one day indirectly from San Diego to Tampa
(via Denver, St. Louis, Dallas, Houston and/or
Atlanta) if its direct flight was out of
service. NatEx's indirect routes from
San Diego to Tampa, along with their
respective estimated excess shipping
capacities (measured in hundreds of
cubic feet per day), are shown on the next slide. Is
there sufficient excess capacity to indirectly ship 5000
cubic feet of packages in one day?

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 Example: Maximal Flow

 Network Model
3
Denver 2 5 St. Louis
3
4 2 3 2
3 4
San 4 3
Diego 1 4 7 Tampa
3 1
3 5 1 5 Dallas
Houston 3 6 Atlanta
6

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 Example: Maximal Flow

 Modified Network Model

3
2 5
3
4 2 3 2
Source 3 4 Sink
4 3
1 4 7
3 1
Added
3 5 1 5 arc
3 6
6

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 Example: Maximal Flow

 LP Formulation
• 18 variables (for 17 original arcs and 1 added arc)
• 24 constraints
• 7 node flow-conservation constraints
• 17 arc capacity constraints (for original arcs)

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 Example: Maximal Flow

 LP Formulation
• Objective Function
Max x71
• Node Flow-Conservation Constraints
x12 + x13 + x14 – x71 = 0 (node 1)
– x12 + x24 + x25 – x42 – x52 = 0 (node 2)
– x13 + x34 + x36 – x43 = 0 (and so on)
– x14 – x24 – x34 + x42 + x43 + x45 + x46 + x47 – x54 – x64 = 0
– x25 – x45 + x52 + x54 + x57 = 0
– x36 – x46 + x64 + x67 = 0
– x47 – x57 – x67 + x71 = 0

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 Example: Maximal Flow

 LP Formulation (continued)
• Arc Capacity Constraints
x12 < 4 x13 < 3 x14 < 4
x24 < 2 x25 < 3
x34 < 3 x36 < 6
x42 < 3 x43 < 5 x45 < 3 x46 < 1 x47 < 3
x52 < 3 x54 < 4 x57 < 2
x64 < 1 x67 < 5

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 Example: Maximal Flow

 Alternative Optimal Solution #1

Objective Function Value = 10.000
Variable Value Variable Value
x12 3.000 x45 0.000
x13 3.000 x46 0.000
x14 4.000 x47 3.000
x24 1.000 x52 0.000
x25 2.000 x54 0.000
x34 0.000 x57 2.000
x36 5.000 x64 0.000
x42 0.000 x67 5.000
x43 2.000 x71 10.000

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 Example: Maximal Flow

 Alternative Optimal Solution #1

2
2 5
3 1 2
Source Sink
4 3
1 4 7

3 2 5
10 3 6
5

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 Example: Maximal Flow

 Alternative Optimal Solution #2

Objective Function Value = 10.000
Variable Value Variable Value
x12 3.000 x45 0.000
x13 3.000 x46 1.000
x14 4.000 x47 3.000
x24 1.000 x52 0.000
x25 2.000 x54 0.000
x34 0.000 x57 2.000
x36 4.000 x64 0.000
x42 0.000 x67 5.000
x43 1.000 x71 10.000

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 Example: Maximal Flow

 Alternative Optimal Solution #2

2
2 5
3 1 2
Source Sink
4 3
1 4 7
1
3 1 5
10 3 6
4

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 End of Chapter 6, Part B

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 INTRODUCTION TO
MANAGEMENT
SCIENCE, 13e
Anderson Slides by
Sweeney JOHN
Williams LOUCKS
Martin St. Edward’s
University

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publicly accessible website, in whole or in part. Slide 1
 Chapter 11 - Waiting Line Models

Structure of a Waiting Line System

Queuing Systems
Queuing System Input Characteristics
Queuing System Operating Characteristics
Analytical Formulas
Single-Channel Waiting Line Model with Poisson
Arrivals and Exponential Service Times
Multiple-Channel Waiting Line Model with
Poisson Arrivals and Exponential Service Times

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 Structure of a Waiting Line System

Queuing theory is the study of waiting lines.

Four characteristics of a queuing system are:
• the manner in which customers arrive
• the time required for service
• the priority determining the order of service
• the number and configuration of servers in the
system.

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 Structure of a Waiting Line System

Distribution of Arrivals
• Generally, the arrival of customers into the system
is a random event.
• Frequently the arrival pattern is modeled as a
Poisson process.
Distribution of Service Times
• Service time is also usually a random variable.
• A distribution commonly used to describe service
time is the exponential distribution.

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 Structure of a Waiting Line System

Queue Discipline
• Most common queue discipline is first come, first
served (FCFS).
• Other disciplines assign priorities to the waiting
units and then serve the unit with the highest
priority first.

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 Structure of a Waiting Line System

Single Service Channel System

Customer Waiting line Customer
arrives S1 leaves

Multiple Service Channels System

S1

Customer Waiting line Customer

arrives S2 leaves

S3

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 Queuing Systems

A three part code of the form A/B/k is used to

describe various queuing systems.
A identifies the arrival distribution, B the service
(departure) distribution and k the number of
channels for the system.

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 Queuing Systems

Symbols used for the arrival and service processes

are: M - Markov distributions
(Poisson/exponential), D - Deterministic (constant)
and G - General distribution (with a known mean
and variance).
For example, M/M/k refers to a system in which
arrivals occur according to a Poisson distribution,
service times follow an exponential distribution
and there are k servers working at identical service
rates.

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 Queuing System Input Characteristics

 = the average arrival rate

1/ = the average time between arrivals
µ = the average service rate for each server
1/µ = the average service time

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 Queuing System Operating Characteristics

P0 = probability the service facility is idle

Pn = probability of n units in the system
Pw = probability an arriving unit must wait for
service
Lq = average number of units in the queue
awaiting service
L = average number of units in the system
Wq = average time a unit spends in the queue
awaiting service
W = average time a unit spends in the system

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 Analytical Formulas

For nearly all queuing systems, there is a relationship

between the average time a unit spends in the system
or queue and the average number of units in the
system or queue.
These relationships, known as Little's flow equations
are:
L = W and Lq = Wq

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 Analytical Formulas

When the queue discipline is first-come, first-

served(FCFS), analytical formulas have been derived
for several different queuing models including the
following:
• M/M/1
• M/M/k
• M/G/1
• M/G/k with blocked customers cleared
• M/M/1 with a finite calling population
Analytical formulas are not available for all possible
queuing systems. In this event, insights may be gained
through a simulation of the system.

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 M/M/1 Queuing System

Single channel
Poisson arrival-rate distribution
Exponential service-time distribution
Unlimited maximum queue length
Infinite calling population
Examples:
• Single-window theatre ticket sales booth
• Single-scanner airport security station

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 Example: SJJT, Inc. (A)

M/M/1 Queuing System

Joe Ferris is a stock trader on
the floor of the New York Stock
Exchange for the firm of Smith,
Jones, Johnson, and Thomas, Inc.
Stock transactions arrive at a mean
rate of 20 per hour. Each order received by Joe
requires an average of two minutes to process.

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 Example: SJJT, Inc. (A)

M/M/1 Queuing System

Orders arrive at a mean rate
of 20 per hour or one order every
3 minutes. Therefore, in a 15
minute interval the average
number of orders arriving will be
 = 15/3 = 5.

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 Example: SJJT, Inc. (A)

Arrival Rate Distribution

Question
What is the probability that no orders are
received within a 15-minute period?

Answer
P (x = 0) = (50e -5)/0! = e -5 = .0067

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 Example: SJJT, Inc. (A)

Arrival Rate Distribution

Question
What is the probability that exactly 3 orders
are received within a 15-minute period?

Answer
P (x = 3) = (53e -5)/3! = 125(.0067)/6 = .1396

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 Example: SJJT, Inc. (A)

Arrival Rate Distribution

Question
What is the probability that more than 6 orders
arrive within a 15-minute period?

Answer
P (x > 6) = 1 - P (x = 0) - P (x = 1) - P (x = 2)
- P (x = 3) - P (x = 4) - P (x = 5)
- P (x = 6)
= 1 - .762 = .238

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 Example: SJJT, Inc. (A)

Service Rate Distribution

Question
What is the mean service rate per hour?

Answer
Since Joe Ferris can process an order in an
average time of 2 minutes (= 2/60 hr.), then the mean
service rate, µ, is µ = 1/(mean service time), or 60/2.

m = 30/hr.

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 Example: SJJT, Inc. (A)

Service Time Distribution

Question
What percentage of the orders will take less than
one minute to process?

Answer
Since the units are expressed in hours,
P (T < 1 minute) = P (T < 1/60 hour).
Using the exponential distribution, P (T < t ) = 1 - e-µt.
Hence, P (T < 1/60) = 1 - e-30(1/60)
= 1 - .6065 = .3935 = 39.35%

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 Example: SJJT, Inc. (A)

Service Time Distribution

Question
What percentage of the orders will be processed
in exactly 3 minutes?

Answer
Since the exponential distribution is a continuous
distribution, the probability a service time exactly
equals any specific value is 0.

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 Example: SJJT, Inc. (A)

Service Time Distribution

Question
What percentage of the orders will require more
than 3 minutes to process?

Answer
The percentage of orders requiring more than 3
minutes to process is:
P (T > 3/60) = e-30(3/60) = e -1.5 = .2231 = 22.31%

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 Example: SJJT, Inc. (A)

Average Time in the System

Question
What is the average time an order must wait
from the time Joe receives the order until it is
finished being processed (i.e. its turnaround time)?
Answer
This is an M/M/1 queue with  = 20 per hour
and m = 30 per hour. The average time an order waits
in the system is: W = 1/(µ -  )
= 1/(30 - 20)
= 1/10 hour or 6 minutes

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 Example: SJJT, Inc. (A)

Average Length of Queue

Question
What is the average number of orders Joe has
waiting to be processed?
Answer
Average number of orders waiting in the queue
is:
Lq = 2/[µ(µ - )]
= (20)2/[(30)(30-20)]
= 400/300
= 4/3

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 Example: SJJT, Inc. (A)

Utilization Factor
Question
What percentage of the time is Joe processing
orders?

Answer
The percentage of time Joe is processing orders is
equivalent to the utilization factor, /m. Thus, the
percentage of time he is processing orders is:
/m = 20/30
= 2/3 or 66.67%

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 M/M/k Queuing System

Multiple channels (with one central waiting line)

Poisson arrival-rate distribution
Exponential service-time distribution
Unlimited maximum queue length
Infinite calling population
Examples:
• Four-teller transaction counter in bank
• Two-clerk returns counter in retail store

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 Example: SJJT, Inc. (B)
(optional not included in the exam)
M/M/2 Queuing System
Smith, Jones, Johnson, and Thomas, Inc. has
begun a major advertising campaign which it
believes will increase its business 50%. To handle the
increased volume, the company has hired an
additional floor trader, Fred Hanson, who works at
the same speed as Joe Ferris.
Note that the new arrival rate of orders,  , is
50% higher than that of problem (A). Thus,  =
1.5(20) = 30 per hour.

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 Example: SJJT, Inc. (B)
(optional not included in the exam)
Sufficient Service Rate
Question
Why will Joe Ferris alone not be able to handle
the increase in orders?

Answer
Since Joe Ferris processes orders at a mean rate of
µ = 30 per hour, then  = µ = 30 and the utilization
factor is 1.
This implies the queue of orders will grow
infinitely large. Hence, Joe alone cannot handle this
increase in demand.

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 Example: SJJT, Inc. (B)
(optional not included in the exam)
Probability of n Units in System
Question
What is the probability that neither Joe nor Fred
will be working on an order at any point in time?

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 Example: SJJT, Inc. (B)
(optional not included in the exam)
Probability of n Units in System (continued)
Answer
Given that  = 30, µ = 30, k = 2 and ( /µ) = 1, the
probability that neither Joe nor Fred will be working is:
1
P0 =
k − 1 (  / m )n ( / m )k km
 + ( )
n= 0 n! k! km − 
= 1/[(1 + (1/1!)(30/30)1] + [(1/2!)(1)2][2(30)/(2(30)-30)]

= 1/(1 + 1 + 1) = 1/3 = .333

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 Example: SJJT, Inc. (B)

Average Time in System

Question
What is the average time in the system for an
order with both Joe and Fred working?

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 Example: SJJT, Inc. (B)

Average Time in System (continued)

Answer
The average turnaround time is the average
waiting time in the system, W.

m ( m )k (30)(30)(30 30)2 1
Lq = ( P0 ) = (1/3) =
( k − 1)!( km −  ) 2
(1!)(2(30) − 30) 2
3
L = Lq + ( /µ) = 1/3 + (30/30) = 4/3
W = L/ = (4/3)/30 = 4/90 hr. = 2.67 min.

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 Example: SJJT, Inc. (B)

Average Length of Queue

Question
What is the average number of orders waiting to
be filled with both Joe and Fred working?

Answer
The average number of orders waiting to be
filled is Lq. This was calculated earlier as 1/3.

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 Example: SJJT, Inc. (B)

Formula Spreadsheet
A B C D E F G H
1 Number of Channels k 2
2 Mean Arrival Rate (Poisson)  30
3 Mean Service Rate (Exponential ) m 30
4 Operating Characteristics
5 Probability of no orders in system Po =Po(H1,H2,H3)
6 Average number of orders waiting Lg ##
7 Average number of orders in system L =H6+H2/H3
8 Average time (hrs) an order waits Wq =H6/H2
9 Average time (hrs) an order is in system W =H8+1/H3
10 Probability an order must wait Pw =H2/H3

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 Example: SJJT, Inc. (B)

Spreadsheet Solution
A B C D E F G H
1 Number of Channels k 2
2 Mean Arrival Rate (Poisson)  30
3 Mean Service Rate (Exponential ) m 30
4 Operating Characteristics
5 Probability of no orders in system Po 0.333
6 Average number of orders waiting Lg 0.333
7 Average number of orders in system L 1.333
8 Average time (hrs) an order waits Wq 0.011
9 Average time (hrs) an order is in system W 0.044
10 Probability an order must wait Pw 1.000

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 Example: SJJT, Inc. (B)

Creating Special Excel Function to Compute P0

Select the Tools pull-down menu
Select the Macro option
Choose the Visual Basic Editor
When the Visual Basic Editor appears
Select the Insert pull-down menu
Choose the Module option
When the Module sheet appears
Enter Function Po (k,lamda,mu)
Enter Visual Basic program (on next slide)
Select the File pull-down menu
Choose the Close and Return to MS Excel option

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 Example: SJJT, Inc. (B)

Visual Basic Module for P0 Function

Function Po(k, lamda, mu)

Sum = 0
For n = 0 to k - 1
Sum = Sum + (lamda/mu) ^ n / Application.Fact(n)
Next
Po = 1/(Sum+(lamda/mu)^k/Application.Fact(k))*
(k*mu/(k*mu-lamda)))
End Function

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 Example: SJJT, Inc. (C)

Economic Analysis of Queuing Systems

The advertising campaign of Smith, Jones,
Johnson and Thomas, Inc. (see problems (A) and (B))
was so successful that business actually doubled.
The mean rate of stock orders arriving at the
exchange is now 40 per hour and the company must
decide how many floor traders to employ. Each floor
trader hired can process an order in an average time
of 2 minutes.

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 End of Chapter 11

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 INTRODUCTION TO
MANAGEMENT
SCIENCE, 13e
Anderson Slides by
Sweeney JOHN
Williams LOUCKS
Martin St. Edward’s
University

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 Chapter 13
Decision Analysis

Problem Formulation
Decision Making without Probabilities
Decision Making with Probabilities
Decision Analysis with Sample Information

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 Problem Formulation

A decision problem is characterized by decision

alternatives, states of nature, and resulting payoffs.
The decision alternatives are the different possible
strategies the decision maker can employ.
The states of nature refer to future events, not
under the control of the decision maker, which
may occur. States of nature should be defined so
that they are mutually exclusive and collectively
exhaustive.

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 Payoff Tables

The consequence resulting from a specific

combination of a decision alternative and a state of
nature is a payoff.
A table showing payoffs for all combinations of
decision alternatives and states of nature is a payoff
table.
Payoffs can be expressed in terms of profit, cost, time,
distance or any other appropriate measure.

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 Decision Trees

A decision tree is a chronological representation of

the decision problem.
Each decision tree has two types of nodes; round
nodes correspond to the states of nature while square
nodes correspond to the decision alternatives.
The branches leaving each round node represent the
different states of nature while the branches leaving
each square node represent the different decision
alternatives.
At the end of each limb of a tree are the payoffs
attained from the series of branches making up that
limb.

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 Decision Making without Probabilities

Three commonly used criteria for decision making

when probability information regarding the
likelihood of the states of nature is unavailable are:
• the optimistic approach
• the conservative approach
• the minimax regret approach.

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 Optimistic Approach

The optimistic approach would be used by an

optimistic decision maker.
The decision with the largest possible payoff is
chosen.
If the payoff table was in terms of costs, the decision
with the lowest cost would be chosen.

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 Conservative Approach

The conservative approach would be used by a

conservative decision maker.
For each decision the minimum payoff is listed and
then the decision corresponding to the maximum
of these minimum payoffs is selected. (Hence, the
minimum possible payoff is maximized.)
If the payoff was in terms of costs, the maximum
costs would be determined for each decision and
then the decision corresponding to the minimum
of these maximum costs is selected. (Hence, the
maximum possible cost is minimized.)

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 Minimax Regret Approach

The minimax regret approach requires the

construction of a regret table or an opportunity
loss table.
This is done by calculating for each state of nature
the difference between each payoff and the largest
payoff for that state of nature.
Then, using this regret table, the maximum regret
for each possible decision is listed.
The decision chosen is the one corresponding to
the minimum of the maximum regrets.

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 Example

Consider the following problem with three

decision alternatives and three states of nature with
the following payoff table representing profits:

States of Nature
s1 s2 s3

d1 4 4 -2
Decisions d2 0 3 -1
d3 1 5 -3

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 Example: Optimistic Approach

An optimistic decision maker would use the

optimistic (maximax) approach. We choose the
decision that has the largest single value in the
payoff table.

Maximum
Decision Payoff
Maximax d1 4 Maximax
decision d2 3 payoff
d3 5

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 Example: Optimistic Approach

Formula Spreadsheet
A B C D E F
1 PAYOFF TABLE
2
3 Decision State of Nature Maximum Recommended
4 Alternative s1 s2 s3 Payoff Decision
5 d1 4 4 -2 =MAX(B5:D5) =IF(E5=$E$9,A5,"")
6 d2 0 3 -1 =MAX(B6:D6) =IF(E6=$E$9,A6,"")
7 d3 1 5 -3 =MAX(B7:D7) =IF(E7=$E$9,A7,"")
8
9 Best Payoff =MAX(E5:E7)

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 Example: Optimistic Approach

Solution Spreadsheet
A B C D E F
1 PAYOFF TABLE
2
3 Decision State of Nature Maximum Recommended
4 Alternative s1 s2 s3 Payoff Decision
5 d1 4 4 -2 4
6 d2 0 3 -1 3
7 d3 1 5 -3 5 d3
8
9 Best Payoff 5

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 Example: Conservative Approach

A conservative decision maker would use the

conservative (maximin) approach. List the minimum
payoff for each decision. Choose the decision with
the maximum of these minimum payoffs.

Minimum
Decision Payoff
Maximin d1 -2 Maximin
decision d2 -1 payoff
d3 -3

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 Example: Conservative Approach

Formula Spreadsheet
A B C D E F
1 PAYOFF TABLE
2
3 Decision State of Nature Minimum Recommended
4 Alternative s1 s2 s3 Payoff Decision
5 d1 4 4 -2 =MIN(B5:D5) =IF(E5=$E$9,A5,"")
6 d2 0 3 -1 =MIN(B6:D6) =IF(E6=$E$9,A6,"")
7 d3 1 5 -3 =MIN(B7:D7) =IF(E7=$E$9,A7,"")
8
9 Best Payoff =MAX(E5:E7)

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 Example: Conservative Approach

Solution Spreadsheet
A B C D E F
1 PAYOFF TABLE
2
3 Decision State of Nature Minimum Recommended
4 Alternative s1 s2 s3 Payoff Decision
5 d1 4 4 -2 -2
6 d2 0 3 -1 -1 d2
7 d3 1 5 -3 -3
8
9 Best Payoff -1

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 Example: Minimax Regret Approach

For the minimax regret approach, first compute a

regret table by subtracting each payoff in a column
from the largest payoff in that column. In this
example, in the first column subtract 4, 0, and 1 from
4; etc. The resulting regret table is:

s1 s2 s3

d1 0 1 1
d2 4 2 0
d3 3 0 2

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 Example: Minimax Regret Approach

For each decision list the maximum regret.

Choose the decision with the minimum of these
values.

Maximum
Decision Regret
d1 1
Minimax d2 4 Minimax
decision d3 3 regret

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 Example: Minimax Regret Approach

Formula Spreadsheet
A B C D E F
1 PAYOFF TABLE
2 Decision State of Nature
3 Altern. s1 s2 s3
4 d1 4 4 -2
5 d2 0 3 -1
6 d3 1 5 -3
7
8 OPPORTUNITY LOSS TABLE
9 Decision State of Nature Maximum Recommended
10 Altern. s1 s2 s3 Regret Decision
11 d1 =MAX($B$4:$B$6)-B4 =MAX($C$4:$C$6)-C4 =MAX($D$4:$D$6)-D4 =MAX(B11:D11) =IF(E11=$E$14,A11,"")
12 d2 =MAX($B$4:$B$6)-B5 =MAX($C$4:$C$6)-C5 =MAX($D$4:$D$6)-D5 =MAX(B12:D12) =IF(E12=$E$14,A12,"")
13 d3 =MAX($B$4:$B$6)-B6 =MAX($C$4:$C$6)-C6 =MAX($D$4:$D$6)-D6 =MAX(B13:D13) =IF(E13=$E$14,A13,"")
14 Minimax Regret Value =MIN(E11:E13)

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 Example: Minimax Regret Approach

Solution Spreadsheet
A B C D E F
1 PAYOFF TABLE
2 Decision State
of Nature
3 Alternative s1 s2 s3
4 d1 4 4 -2
5 d2 0 3 -1
6 d3 1 5 -3
7
8 OPPORTUNITY LOSS TABLE
9 Decision State of Nature Maximum Recommended
10 Alternative s1 s2 s3 Regret Decision
11 d1 0 1 1 1 d1
12 d2 4 2 0 4
13 d3 3 0 2 3
14 Minimax Regret Value 1

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 Decision Making with Probabilities

Expected Value Approach

• If probabilistic information regarding the states
of nature is available, one may use the expected
value (EV) approach.
• Here the expected return for each decision is
calculated by summing the products of the
payoff under each state of nature and the
probability of the respective state of nature
occurring.
• The decision yielding the best expected return is
chosen.

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 Expected Value of a Decision Alternative

The expected value of a decision alternative is the

sum of weighted payoffs for the decision alternative.
The expected value (EV) of decision alternative di is
defined as:
N
EV( d i ) =  P( s j )Vij
j =1

where: N = the number of states of nature

P(sj ) = the probability of state of nature sj
Vij = the payoff corresponding to decision
alternative di and state of nature sj

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 Example: Burger Prince

Burger Prince Restaurant is considering opening

a new restaurant on Main Street. It has three
different models, each with a different
seating capacity. Burger Prince
estimates that the average number of
customers per hour will be 80, 100, or
120. The payoff table for the three
models is on the next slide.

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 Payoff Table

Average Number of Customers Per Hour

s1 = 80 s2 = 100 s3 = 120

Model A $10,000 $15,000 $14,000

Model B $ 8,000 $18,000 $12,000
Model C $ 6,000 $16,000 $21,000

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 Expected Value Approach

Calculate the expected value for each decision.

The decision tree on the next slide can assist in this
calculation. Here d1, d2, d3 represent the decision
alternatives of models A, B, C, and s1, s2, s3 represent
the states of nature of 80, 100, and 120.

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 Decision Tree

Payoffs
s1 .4
10,000
s2 .2
2 s3 15,000
.4
d1 14,000
s1 .4
d2 8,000
1 s2 .2
3 18,000
d3 s3 .4
12,000
s1 .4
6,000
s2 .2
4 16,000
s3
.4
21,000

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 Expected Value for Each Decision

EMV = .4(10,000) + .2(15,000) + .4(14,000)

d1 = $12,600
2
Model A
EMV = .4(8,000) + .2(18,000) + .4(12,000)
Model B d2 = $11,600
1 3

d3 EMV = .4(6,000) + .2(16,000) + .4(21,000)

Model C
= $14,000
4

Choose the model with largest EV, Model C.

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 Expected Value Approach

Formula Spreadsheet
A B C D E F
1 PAYOFF TABLE
2
3 Decision State of Nature Expected Recommended
4 Alternative s1 = 80 s2 = 100s3 = 120 Value Decision
5 d1 = Model A 10,000 15,000 14,000 =$B$8*B5+$C$8*C5+$D$8*D5 =IF(E5=$E$9,A5,"")
6 d2 = Model B 8,000 18,000 12,000 =$B$8*B6+$C$8*C6+$D$8*D6 =IF(E6=$E$9,A6,"")
7 d3 = Model C 6,000 16,000 21,000 =$B$8*B7+$C$8*C7+$D$8*D7 =IF(E7=$E$9,A7,"")
8 Probability 0.4 0.2 0.4
9 Maximum Expected Value =MAX(E5:E7)

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 Expected Value Approach

Solution Spreadsheet
A B C D E F
1 PAYOFF TABLE
2
3 Decision State of Nature Expected Recommended
4 Alternative s1 = 80 s2 = 100s3 = 120 Value Decision
5 d1 = Model A 10,000 15,000 14,000 12600
6 d2 = Model B 8,000 18,000 12,000 11600
7 d3 = Model C 6,000 16,000 21,000 14000 d3 = Model C
8 Probability 0.4 0.2 0.4
9 Maximum Expected Value 14000

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 Expected Value of Perfect Information

Frequently information is available which can

improve the probability estimates for the states of
nature.
The expected value of perfect information (EVPI) is
the increase in the expected profit that would
result if one knew with certainty which state of
nature would occur.

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 Expected Value of Perfect Information

EVPI Calculation
• Step 1:
Determine the optimal return corresponding to
each state of nature.
• Step 2:
Compute the expected value of these optimal
returns.
• Step 3:
Subtract the EV of the optimal decision from
the amount determined in step (2).

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 Expected Value of Perfect Information

Calculate the expected value for the optimum

payoff for each state of nature and subtract the EV of
the optimal decision.

EVPI= .4(10,000) + .2(18,000) + .4(21,000) - 14,000 = $2,000

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 Expected Value of Perfect Information

Spreadsheet
A B C D E F
1 PAYOFF TABLE
2
3 Decision State of Nature Expected Recommended
4 Alternative s1 = 80 s2 = 100s3 = 120 Value Decision
5 d1 = Model A 10,000 15,000 14,000 12600
6 d2 = Model B 8,000 18,000 12,000 11600
7 d3 = Model C 6,000 16,000 21,000 14000 d3 = Model C
8 Probability 0.4 0.2 0.4
9 Maximum Expected Value 14000
10
11 Maximum Payoff EVwPI EVPI
12 10,000 18,000 21,000 16000 2000

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 Bayes’ Theorem and Posterior Probabilities

Knowledge of sample (survey) information can be

used to revise the probability estimates for the states of
nature.
Prior to obtaining this information, the probability
estimates for the states of nature are called prior
probabilities.
With knowledge of conditional probabilities for the
outcomes or indicators of the sample or survey
information, these prior probabilities can be revised by
employing Bayes' Theorem.
The outcomes of this analysis are called posterior
probabilities or branch probabilities for decision trees.

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 Computing Branch Probabilities

Branch (Posterior) Probabilities Calculation

• Step 1:
For each state of nature, multiply the prior
probability by its conditional probability for the
indicator -- this gives the joint probabilities for the
states and indicator.

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 Computing Branch Probabilities

Branch (Posterior) Probabilities Calculation

• Step 2:
Sum these joint probabilities over all states --
this gives the marginal probability for the indicator.
• Step 3:
For each state, divide its joint probability by the
marginal probability for the indicator -- this gives
the posterior probability distribution.

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 Expected Value of Sample Information

The expected value of sample information (EVSI) is

the additional expected profit possible through
knowledge of the sample or survey information.

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 Expected Value of Sample Information

EVSI Calculation
• Step 1:
Determine the optimal decision and its expected
return for the possible outcomes of the sample using
the posterior probabilities for the states of nature.
• Step 2:
Compute the expected value of these optimal
returns.
• Step 3:
Subtract the EV of the optimal decision obtained
without using the sample information from the
amount determined in step (2).

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 Efficiency of Sample Information

Efficiency of sample information is the ratio of EVSI

to EVPI.
As the EVPI provides an upper bound for the EVSI,
efficiency is always a number between 0 and 1.

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 Sample Information

Burger Prince must decide whether or not to

purchase a marketing survey from Stanton Marketing
for $1,000. The results of the survey are "favorable" or
"unfavorable". The conditional probabilities are:

P(favorable | 80 customers per hour) = .2

P(favorable | 100 customers per hour) = .5
P(favorable | 120 customers per hour) = .9

Should Burger Prince have the survey performed

by Stanton Marketing?

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 Posterior Probabilities

Favorable
State Prior Conditional Joint Posterior
80 .4 .2 .08 .148
100 .2 .5 .10 .185
120 .4 .9 .36 .667
Total .54 1.000

P(favorable) = .54

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 Posterior Probabilities

Unfavorable
State Prior Conditional Joint Posterior
80 .4 .8 .32 .696
100 .2 .5 .10 .217
120 .4 .1 .04 .087
Total .46 1.000

P(unfavorable) = .46

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 Posterior Probabilities

Formula Spreadsheet
A B C D E
1 Market Research Favorable
2 Prior Conditional Joint Posterior
3 State of Nature Probabilities Probabilities Probabilities Probabilities
4 s1 = 80 0.4 0.2 =B4*C4 =D4/$D$7
5 s2 = 100 0.2 0.5 =B5*C5 =D5/$D$7
6 s3 = 120 0.4 0.9 =B6*C6 =D6/$D$7
7 P(Favorable) = =SUM(D4:D6)
8
9 Market Research Unfavorable
10 Prior Conditional Joint Posterior
11 State of Nature Probabilities Probabilities Probabilities Probabilities
12 s1 = 80 0.4 0.8 =B12*C12 =D12/$D$15
13 s2 = 100 0.2 0.5 =B13*C13 =D13/$D$15
14 s3 = 120 0.4 0.1 =B14*C14 =D14/$D$15
15 P(Unfavorable) = =SUM(D12:D14)

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 Posterior Probabilities

Solution Spreadsheet
A B C D E
1 Market Research Favorable
2 Prior Conditional Joint Posterior
3 State of Nature Probabilities Probabilities Probabilities Probabilities
4 s1 = 80 0.4 0.2 0.08 0.148
5 s2 = 100 0.2 0.5 0.10 0.185
6 s3 = 120 0.4 0.9 0.36 0.667
7 P(Favorable) = 0.54
8
9 Market Research Unfavorable
10 Prior Conditional Joint Posterior
11 State of Nature Probabilities Probabilities Probabilities Probabilities
12 s1 = 80 0.4 0.8 0.32 0.696
13 s2 = 100 0.2 0.5 0.10 0.217
14 s3 = 120 0.4 0.1 0.04 0.087
15 P(Favorable) = 0.46

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 Decision Tree

Top Half

s1 (.148)
$10,000
s2 (.185)
d1 4
s3 (.667)
$15,000
$14,000
s1 (.148)
d2 $8,000
s2 (.185)
2 5 $18,000
s3 (.667)
I1 d3 $12,000
s1 (.148)
(.54) $6,000
s2 (.185)
6 $16,000
s3 (.667)
1 $21,000

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 Decision Tree

Bottom Half

1 s1 (.696) $10,000
I2 s2 (.217)
(.46) d1 7
s3 (.087)
$15,000
$14,000
s1 (.696)
d2 $8,000
s2 (.217)
3 8 $18,000
s3 (.087)
d3 $12,000
s1 (.696) $6,000
s2 (.217)
9
s3 (.087) $16,000
$21,000

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 Decision Tree

d1 EMV = .148(10,000) + .185(15,000)

4
+ .667(14,000) = $13,593
$17,855 d2
2 5 EMV = .148 (8,000) + .185(18,000)
I1 d3 + .667(12,000) = $12,518
(.54)
6 EMV = .148(6,000) + .185(16,000)
+.667(21,000) = $17,855
1
7 EMV = .696(10,000) + .217(15,000)
d1 +.087(14,000)= $11,433
I2
(.46) d2
3 8 EMV = .696(8,000) + .217(18,000)
d3 + .087(12,000) = $10,554
$11,433
9 EMV = .696(6,000) + .217(16,000)
+.087(21,000) = $9,475
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 Expected Value of Sample Information

If the outcome of the survey is "favorable”,

choose Model C. If it is “unfavorable”, choose Model A.

EVSI = .54($17,855) + .46($11,433) - $14,000 = $900.88

Since this is less than the cost of the survey, the

survey should not be purchased.

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 Efficiency of Sample Information

The efficiency of the survey:

EVSI/EVPI = ($900.88)/($2000) = .4504

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 End of Chapter 13

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© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part. Slide 50