Course Title :Operations

Research
• Course Code : MGT 613
• Lectures : 3
• Tutorials : 1
• Credits : 4
• Weightage : CA =40 , MTE = 20 , ETE
= 40
 About the Instructor
• Mandeep Singh Hayer
• mshayer@gmail.com
Education
B.Tech in Agricultural Engineering
College of Agri Engg PAU Ludhiana
,1998
MBA in Marketing Management ,
College of Basic Sciences and
Humanities PAU , 2000
 About the Instructor
Mandeep Singh Hayer
Experience

Industrial 4 ½ years . Started Career

with TATA STEEL as a Senior Sales
Officer

Academic / Teaching 3 Yrs . Faculty in

Deptt of Business Management at PCTE
Baddowal Ludhiana
 Operations Research Some
Definitions
• “The science of better”
✦✦✦
“The use of mathematical models, statistics and
algorithms to aid in decision-making with the goal
of
improving or optimizing performance”
✦✦✦
“Research designed to determine the most
efficient way to do something”
✦✦✦
“The application of scientific methods to
improve the effectiveness of operations,
decisions and management”
 OR Definitions continued
• OR is a scientific method of providing
executive departments with
quantitative basis for decisions
regarding operations under their
control .
• OR is the application of modern
methods of mathematical science to
complex problems involving
management of large system of men
,machines material and money in
industry business government and
 Origins of OR

• During WWII, OR developed to

allocate scarce
resources to military operations
• After the war, OR introduced into
industry
• Improvements in techniques
• Computer revolution
Necessity of OR in Industry
• Complexity : Factors such as
customer demand , raw material
requirement , equipment capacity ,
equipment failure , restrictions on
manufacturing etc
• Scattered responsibility and authority
• Uncertainity
• Knowledge explosion : OR collects
latest info for analysis purpose
 Scope /Applications of OR
• Accounting : Cash Flow Planning ,
Credit Policy Analysis
• Construction : Allocation of
resources to projects ,
determination of workforce, Project
scheduling monitoring and control
• Facilities Planning : Factory size and
location decision, International
logistics systems design ,
transportation loading & unloading,
Warehouse location decision
• Finance : Dividend policy making ,
 Scope /Applications of OR
cont..
• Manufacturing : Inventory control ,
Production Scheduling and
smoothing
• Marketing : Advertising Budget
Allocation , Product introduction
timing , Selection of Product mix
• OB : Scheduling of training
programmes , Skill balancing ,
recruitment of employees
• Purchasing : Optimal Buying &
Material Transfer
 Phases / Steps of OR
• Problem identified with decision variables
• How many units to buy/sell...
• How much time to spend on a task...
• Measure of performance is the objective function
• What is the goal?
• Usually: Max/min profit/cost/time/units
• A function of the decision variables
• Restrictions of values of decision variables set in
• constraints
• Min acceptable profit
• Max available resources
• Parameters are the constants of the objective
function and theconstraints
 Models of OR
• What is a model?
• A model is a representation of the
structure
• of a real-life system (existing, or
currently
• being built).
• In general, models can be classified
as follows:
• – iconic
• – analogue
 Models of OR Cont…
• Iconic model: Exact replica of the
properties of the real-life system, but in
smaller scale. Examples are: model
airplanes, maps, etc. Miniature Model of
a Building
• Analogue model: It uses a set of
properties to represent the properties
of a real-life system. For instance, a
hydraulic system can be used as an
analogue of electrical, traffic and
economic
systems.
• Symbolic model: It represent the
properties of the real-life system
through the means of symbols, such as
 OR models
• Operations Research models are in
general
symbolic models and they can be
classified
into two groups based on the nature
of environment
– deterministic models
– stochastic models.
 Deterministic models
Deterministic models are models
which do
not contain the element of probability.
These are primarily optimization
models,
such as:
– Linear programming
– Non-linear programming
– Dynamic programming
– Simulation techniques.
Deterministic models cont…
• Everything is defined , results are
certain
• For any given input there shall be
some ouput
• E.g EOQ model we can determine lot
size
• We can also apply sentivity analysis
wher change in the input variable
shall change the outcome
 Stochastic models
• Stochastic models are models which
contain the element of probability.
Examples are:
– Queuing theory
– Stochastic processes
– Reliability
– Simulation techniques.
 Stochastic models cont …
• Used in case of risk and uncertainty
• Input & Output variables take the
form of probability distribution
• These models reveal the probability
of occurrence of an event
• They reveal the complexity of the
real world
• E.g in game theory when saddle
points do not exist we apply
probabilistic model
Models Other classifications
• Static Model: Does not take time into
account . Assumes values of
variables do not change with time
• Dynamic Model : Considers time as
one of the variables e.g Dynamic
programming , replacement problem
• Descripitive Model: One which just
describes the situation e.g Poll or a
survey
Models Other classifications
cont …
• Predictive Model : Predicts something
based on data e.g election results
• Prescriptive Model: Prescribes or
suggests a course of action for a
problem E.g Any kind of programming
( Linear , Non Linear , Geometric ,
Dynamic )
• Analytic Model : Exact solution is
obtained by mathematical methods
• Simulation Model : This reacts in the
same manner as realty under a given
set of conditions
 OR/MS Successes
Best cases from the annual INFORMS
Edelman Competition
2002: Continental Airlines Survives 9/11
2001: Merrill Lynch Integrated Choice
2001: NBC’s Optimization of Ad Sales
2000: Ford Motor Prototype Vehicle Testing
1996: Procter & Gamble Supply Chain
1991: American Airlines Revolutionizes Pricing

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 Case 1: Continental Airlines
Survives 9/11

• Business Problem: Long before

September 11, 2001, Continental
asked what crises plan it could use
to plan recovery from potential
disasters such as limited and
massive weather delays.

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 Continental Airlines (con’t)

• Strategic Objectives and

Requirements are to accommodate:
– 1,400 daily flights
– 5,000 pilots
– 9,000 flight attendants
– FAA regulations
– Union contracts

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 Continental Airlines (con’t)

• Model Structure: Working with

CALEB Technologies, Continental
used an optimization model to
generate optimal assignments of
pilots & crews. The solution offers
a system-wide view of the
disrupted flight schedule and all
available crew information.
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 Continental Airlines (con’t)

• Project Value: Millions of dollars

and thousands of hours saved for
the airline and its passengers.
After 9/11, Continental was the
first airline to resume normal
operations.

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 Case 2: Merrill Lynch
Integrated Choice

• Business Problem: How should

Merrill Lynch deal with online
investment firms without
alienating financial advisors,
undervaluing its services, or
incurring substantial revenue risk?

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 Merrill Lynch (con’t)

• Objectives and Requirements:

Evaluate new products and pricing
options, and options of online vs.
traditional advisor-based services.

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 Merrill Lynch (con’t)

• Model Structure: Merrill Lynch’s

Management Science Group
simulated client-choice behavior,
allowing it to:
– Evaluate the total revenue at risk
– Assess the impact of various pricing
schedules
– Analyze the bottom-line impact of
introducing different online and
Operations
offline investment
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choices
Science
 Merrill Lynch (con’t)

• Project Value:
– Introduced two new products which
garnered $83 billion ($22 billion in
new assets) and produced $80 million
in incremental revenue
– Helped management identify and
mitigate revenue risk of as much as
$1 billion
– Reassured financial advisors
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 Case 3: NBC’s Optimization of
Ad Sales
• Business Problem: NBC sales staff
had to manually develop sales
plans for advertisers, a long and
laborious process to balance the
needs of NBC and its clients. The
company also sought to improve
the pricing of its ad slots as a way
of boosting revenue.
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 NBC Ad Sales (con’t)

• Strategic Objectives and

Requirements: Complete intricate
sales plans while reducing labor
cost and maximizing income.

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 NBC Ad Sales (con’t)

• Model Structure: NBC used

optimization models to reduce
labor time and revenue
management to improve pricing of
its ad spots, which were viewed as
a perishable commodity.

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 NBC Ad Sales (con’t)

• Project Value: In its first four years,

the systems increased revenues by
over $200 million, improved sales-
force productivity, and improved
customer satisfaction.

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 Case 4: Ford Motor Prototype
Vehicle Testing

• Business Problem: Developing

prototypes for new cars and
modified products is enormously
expensive. Ford sought to reduce
costs on these unique, first-of-a-
kind creations.

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 Ford Motor (con’t)

• Strategic Objectives and

Requirements: Ford needs to verify
the designs of its vehicles and
perform all necessary tests.
Historically, prototypes sit idle
much of the time waiting for
various tests, so increasing their
usage would have a clear benefit.
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 Ford Motor (con’t)

• Model Structure: Ford and a team

from Wayne State University
developed a Prototype
Optimization Model (POM) to
reduce the number of prototype
vehicles. The model determines an
optimal set of vehicles that can be
shared and used to satisfy all
testing needs.
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 Ford Motor (con’t)

• Project Value: Ford reduced annual

prototype costs by $250 million.

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 Case 5: Procter & Gamble
Supply Chain

• Business Problem: To ensure smart

growth, P&G needed to improve its
supply chain, streamline work
processes, drive out non-value-
added costs, and eliminate
duplication.

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 P&G Supply Chain (con’t)

• Strategic Objectives and

Requirements: P&G recognized
that there were potentially millions
of feasible options for its 30
product-strategy teams to
consider. Executives needed sound
analytical support to realize P&G’s
goal within the tight, one-year
objective.
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 P&G Supply Chain (con’t)

• Model Structure: The P&G operations

research department and the
University of Cincinnati created
decision-making models and
software. They followed a modeling
strategy of solving two easier-to-
handle subproblems:
– Distribution/location
– Product sourcing
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 P&G Supply Chain (con’t)

• Project Value: The overall

Strengthening Global Effectiveness
(SGE) effort saved $200 million a
year before tax and allowed P&G
to write off $1 billion of assets and
transition costs.

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 Case 6: American Airlines
Revolutionizes Pricing

• Business Problem: To compete

effectively in a fierce market, the
company needed to “sell the right
seats to the right customers at the
right prices.”

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 American Airlines (con’t)
• Strategic Objectives and
Requirements: Airline seats are a
perishable commodity. Their value
varies – at times of scarcity they’re
worth a premium, after the flight
departs, they’re worthless. The new
system had to develop an approach
to pricing while creating software
that could accommodate millions of
bookings, cancellations, and
corrections.
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 American Airlines (con’t)

• Model Structure: The team developed yield

management, also known as revenue
management and dynamic pricing. The
model broke down the problem into three
subproblems:
– Overbooking
– Discount allocation
– Traffic management
The model was adapted to American
Airlines computers.
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 American Airlines (con’t)

• Project Value: In 1991, American

Airlines estimated a benefit of $1.4
billion over the previous three
years. Since then, yield
management was adopted by
other airlines, and spread to
hotels, car rentals, and cruises,
resulting in added profits going
into billions of dollars.
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 Some Important Points

• Differences Between OR/MS and IT

• Keys to Success
• Conclusion

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 Differences Between
OR and IT
• IT • OR
– Focuses on data – Uses data as input
as a corporate – Provides improved
resource solutions
– Stores, retrieves, – Gives global focus
formats, displays • Multiple objectives
data • Multiple criteria
– Understands – Evaluates
business process tradeoffs
and transactions
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 Conclusion
• Operations Research/Management Science
provides analytical tools that help
leverage information technology to solve
complex business problems involving
millions of variables.
• OR/MS departments collaborate easily with
other departments to achieve goals.
• OR/MS can realize savings and benefits in
dollars, time, customer satisfaction, and
retention.
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