ANALAYTICAL DECISION MOFELING FOR

BUSINESS DECISION MAKING

 Course Contents

 Unit-One: Introduction to Quantitative Analysis for Management

Decisions (Operations Research)

 Unit-Two: Linear Programming Problem (LPP)

 Unit-Three: Transportation Model

 Unit-Four: Assignment Model

 Unit-Five: Decision Theory

 Unit-Six: Network Model

 Unit-One:
Introduction to Quantitative Analysis for Management Decisions (Operations Research)

1.1OR – Quantitative Approach to Decision Making

1.2History of Operations Research
1.3Nature and Significance of Operations Research
1.4Operation Research: Some Definitions
1.5Features of Operations Research Approach
1.6Models and Model Building in Operations Research
1.7Methodology of Operations Research
1.8Features of OR solution
 1.1 OR – Quantitative Approach to Decision Making
• Decision-making in today’s social and business environment has become
a complex task.
• Uncertainty of the future
• Nature of competition and social interaction
• Knowledge and technology are changing rapidly
• Decision-makers cannot afford to make decisions by simply applying
their personal experiences, guesswork or intuition
• In order to solve a real-life problem, the decision-maker must examine in
both from quantitative as well as qualitative perspective.
• Operations Research as one of the quantitative aid to decision-making
 1.2 History of Operations Research
• The name operations research evolved in the year 1940.
• Operations Research came into existence as a discipline during World War II when
there was a critical need to manage scarce resources.
• During World War II, a team of scientist (mathematics, Economics, statistics and
probability theory, engineering, behavioural, and physical science called Blackett's
Circus) in UK applied scientific techniques to research military operations to win
the war and the techniques thus developed was named as operation research.
• However, a particular model and technique of OR can be traced back to much
earlier times.
• The objective was the most effective utilization of most limited military resources
by the use of quantitative techniques.
• After the war ended, scientists who had been active in the military OR groups
made efforts to apply the operations research approach to civilian problems,
related to business, industry, research and development
 History of Operations Research…Cont’d
There are three important factors behind the rapid development in the use of operations
research approach.
1) The industrialization (after World War II) resulted in complex managerial problems,
and therefore application of operations research to managerial decision making
become popular.
2) Many operation researchers continued their research after World war II.
Consequently, some important advancement were made in various operations
research techniques: linear programming, statistical quality control, dynamic
programming, queuing theory and inventory theory.
3) Analytic power was made available by high-speed computers. The use of computers
made it possible to apply many OR techniques for practical decision analysis.
1.3 Nature and Significance Operations Research
Operations research supports to find optimal solution (maximization or minimization)-to find the
best solution given the constraints imposed by the problem-constrained optimization.. It also help
to allocate the available limited resources for various competing activities
 1.4 Operation Research: Some Definitions
Because of the wide scope of application of operations research, giving a precise definition is
difficult. However, a few definitions of OR are given below.
• Operations research is the application of the methods of science to complex problems in the direction and
management of large systems of men, machines, materials and money in industry, business, government
and defence…………..Operations Research Society, UK
• Operations research is concerned with scientifically defining how to best design and operate man-machine
systems usually requiring the allocation of scarce resources……….Operations Research Society, America.
• Operational Research (OR) is the application of mathematical methods to tackle real-life problems
associated with decision-making in businesses and other enterprises.
• Operations research is a systematic application of quantitative methods, techniques and tools to the
analysis of problems involving the operation of systems (Chruchman, et al, na).
• Operations Research is the application of scientific methods, techniques and tools, to problems involving
operations of a system so as to provide those in control of the operations with optimum solutions to the
problems.
• Operations research (OR) is an analytical method of problem-solving and decision-making that is useful in
the management of organizations.
 1.5 Features of Operations Research Approach
1.5.1 Inter-disciplinary Approach:a team of individuals specializing in mathematics, statistics, computer
science, psychology, etc. can be organized so that each aspect of the problem could be analysed by a particular
specialists in that field. It involves the combination of many academic disciplines into operation research.
1.5.2 Methodological (Scientific) Approach: Operation research is the application of scientific methods,
techniques and tools to problems involving the operations of systems so as to provide those in control of
operations with optimum solutions to the problems.

1.5.3 Holistic Approach or Systems Orientation: While arriving at a decision, an operation research team
examines the relative importance of all conflicting and multiple objectives and the validity of claims of various
departments of the organization from the perspective of the whole organization.
1.5.4 Objectivistic Approach: The OR approach seeks to obtain an optimal (best) solution to the problem
under analysis.
1.5.5 Decision Making: Operations Research increases the effectiveness of management decisions.
1.5.6. Use of Computers: OR often requires a computer (nowadays digital computer) to solve the complex
mathematical model or to perform a large number of computations that are involved.
1.5.7. Human factors: In deriving quantitative solution, we do not consider human factors which doubtlessly
play a great role in the problems. So study of the OR is incomplete without a study of human factors.
 1.6. Models and Model Building in Operations Research
• A model is an abstract representation of reality in terms of mathematical, physical,
narrative, etc.
1.6.1 Classification of OR Model
• There are many ways to classify models:
i) Classification based on structure
a) Physical (Iconic) Models: models provide a physical appearance of the real object. E.g.
Globe, photography, airplane, trains
b) Analogue Models: are abstract models mostly showing inter and intra relationships
between two or more parameters. E.g. histogram, frequency table, cause-effect
diagram, flow charts, Gantt charts, price-demand graph, world map, organizational
chart and others.
c) Symbolic models (Mathematical model): These models use symbols (letters,
numbers) and functions to represent variables and their relationships to describe the
properties of the system.
E.g. Max Z= 300x+ 2500y
 Models and Model Building…Cont’d
ii) Classification based on function or purpose
a) Descriptive models: Descriptive models simply describe some aspects of a
situation.
b) Predictive Models: These models indicate “If this occurs, then that
follow”. It relates dependent and independent variables.
c) Normative (Optimization) models: These models provide the “best” or
“Optimal” solution to problems subject to certain limitations on the use of
resources.
iii) Classification Based on Time Reference
d) Static Models: Static models represent a system at some specified time
and do not account for changes over time
e) Dynamic models: In dynamic models, time is considered as one of the
variables and allows the impact of changes due to change in time
 Models and Model Building…Cont’d
iv) Classification based on Degree of certainty
a) Deterministic Models: If all the parameters, constants and functional relationships are assumed to be
known with certainty when the decision is made
b) Probabilistic (Stochastic) Models: Models in which at least one parameter or decision variable is a
random variable are called probabilistic (or stochastic).

v) Classification Based on Method of Solution or Quantification

a) Heuristic Model: A heuristic is a well-defined intelligent procedure — based on intuition, problem
context and structure — designed to find an approximate solution to an optimization problem. In
contrast with exact methods that are designed to find optimal solutions, heuristic methods find
solutions that are not necessarily optimal. These models employ some sets of rules which, though
perhaps not optimal, do facilitate solutions of problems when applied in a consistent manner.
b) Analytical Models: These models have a specific mathematical structure and thus can be solved by
known analytical or mathematical techniques. Any optimization model (which requires maximization or
minimization of an objective function) is an analytical model.
c) Simulation Models: These models have a mathematical structure but are not solved by applying
mathematical techniques to get a solution. Instead, a simulation model is essentially a computer-
assisted experimentation on a mathematical structure of a real-life problem in order to describe and
evaluate its behavior under certain assumptions over a period of time.
 1.6.2 Advantage of Models

Models in general are used as an aid for analysing complex problems. However, a model
can also serve other purposes as:
i. A model provides economy in representation of the realities of the system. For example, it
easier to represent a factory lay out on paper than to construct it. It is cheaper to try out
modifications of such systems by rearrangement on paper.
ii. The problem can be viewed in its entirety, with all the components being considered
simultaneously.
iii.Models serve as aids to transmit ideas and visualization among people in the
organization. For example, process chart can help the management to communicate
about better work methods to workers.
iv.A model allows us to analyse and experiment in a complex situation to a degree that
would be impossible in the actual system and its environment. For example, the
experimental firing of satellite may be costly and require years of preparation.
v. Models simplify the investigation considerably and provide a powerful and flexible for
predicting the future state of the process or system.
 1.6.3 Methodology of Operations Research
For effective use of OR techniques, it is essential to follow some steps that
are helpful for decision-makers to make better solution as shown below.
Step1: Observation and Defining a Problem
Step2: Formulating a Model
• Identify Variables
• Determine objective function
• Identify constraints (limitations)
Step 3: solve the mathematical model
Step 4: Validating (Testing) the solution
Step 6:Modifying the Model
Step 7: Establishing control over the solution
END