School of Construction

MBA CPM/CEQS 2nd Semester

INTRODUCTION TO
OPERATIONS RESEARCH
QUANTITATIVE TECHNIQUES

Authored By:
• Sanjay Bhattacharya

Quatitative Techniques in Construction CM 661

 Early Applications 2

Operations Research is an Art and Science

It had its early roots in World War II and is

flourishing in business and industry with the aid
of computer

Primary applications areas of Operations
Research include forecasting, production
scheduling, inventory control, capital
budgeting, and transportation.
 What is Operations Research?
3
Operations
The activities carried out in an organization.

Research
The process of observation and testing
characterized by the scientific method.
Situation, problem statement, model
construction, validation, experimentation,
candidate solutions.

Operations Research is a quantitative approach to

decision making based on the scientific method of problem
solving.
 What is Operations Research? 4

Operations Research is the scientific approach to execute

decision making, which consists of:

The art of mathematical modeling of

complex situations

The science of the development of
solution techniques used to solve
these models

The ability to effectively
communicate the results to the
decision maker
What Do We do 5

1. OR professionals aim to provide rational bases for

decision making by seeking to understand and
structure complex situations and to use this
understanding to predict system behavior and
improve system performance.

2. Much of this work is done using analytical and

numerical techniques to develop and manipulate
mathematical and computer models of
organizational systems composed of people,
machines, and procedures.
 Terminology 6

The British/Europeans refer to “Operational Research",

the Americans to “Operations Research" - but both are
often shortened to just "OR".

Another term used for this field is “Management

Science" ("MS"). In U.S. OR and MS are combined
together to form "OR/MS" or "ORMS".

Yet other terms sometimes used are “Industrial

Engineering" ("IE") and “Decision Science" ("DS").
 7

Operations Research Models

Deterministic Models Stochastic Models

• Linear Programming • Discrete-Time Markov Chains
• Network Optimization • Continuous-Time Markov Chains
• Integer Programming • Queuing Theory (waiting lines)
• Nonlinear Programming • Decision Analysis
• Inventory Models Game Theory
Inventory models
Simulation
 Deterministic vs. Stochastic Models
8

Deterministic models
assume all data are known with certainty

Stochastic models
explicitly represent uncertain data via
random variables or stochastic processes.

Deterministic models involve optimization

Stochastic models
characterize / estimate system performance.
 History of OR 9

OR is a relatively new discipline.

70 years ago it would have been
possible to study mathematics,
physics or engineering at university
it would not have been possible to
study OR.

It was really only in the late 1930's
that operationas research began in
a systematic way.
1890 1900 1910 1920
Frederick Taylor •Henry Gannt •F. W. Harris •William Shewart
Scientific [Project Scheduling] [Inventory Theory] 10
[Control Charts]
Management •Andrey A. Markov •E. K. Erlang •H.Dodge – H.Roming
[Industrial [Markov Processes] [Queuing Theory] [Quality Theory]
Engineering] •Assignment
[Networks]

1960 1950 1940 1930

•John D.C. Litle •H.Kuhn - A.Tucker •World War 2 Jon Von Neuman –
[Queuing Theory] [Non-Linear Prog.] •George Dantzig Oscar Morgenstern
•Simscript - GPSS •Ralph Gomory [Linear [Game Theory]
[Simulation] [Integer Prog.] Programming]
•PERT/CPM •First Computer
•Richard Bellman
[Dynamic Prog.]
ORSA and TIMS

1970 1980 1990 2019

•Microcomputer •H. Karmarkar •Spreadsheet •You are here
[Linear Prog.] Packages
•Personal computer •INFORMS
•OR/MS Softwares
Problem Solving and Decision
11

Making

7 Steps of Problem Solving
(First 5 steps are the process of decision making)

Identify and define the problem.

Determine the set of alternative solutions.

Determine the criteria for evaluating the alternatives.

Evaluate the alternatives.

Choose an alternative.
---------------------------------------------------------------

Implement the chosen alternative.

Evaluate the results.
Quantitative Analysis and Decision 12

Making

Potential Reasons for a Quantitative Analysis
Approach to Decision Making

The problem is complex.

The problem is very important.

The problem is new.

The problem is repetitive.
 Problem Solving Process
13

Formulate the
Problem
Situation Problem
Implement a Solution Statement
Goal: solve a problem
• Model must be valid Data
• Model must be Construct
a Model
tractable
Implement
• Solution must be the Solution

useful Model

Solution
Find
a Solution
Establish
a Procedure

Test the Model

and the Solution Solution Tools
The Situation 14

• May involve current operations

or proposed expansions due to
expected market shifts
Situation
• May become apparent through
consumer complaints or through
employee suggestions
Data • May be a conscious effort to
improve efficiency or response to
an unexpected crisis.

Example: Internal nursing staff not happy with their schedules;

hospital using too many external nurses.
 Problem Formulation
15

Formulate the
Problem
Situation Problem
Statement

Data

• Describe system
Define variables

• Define boundaries
Define constraints
• State assumptions
Data requirements
• Select performance measures

Example: Maximize individual nurse preferences

subject to demand requirements.
 Data Preparation 16

Data preparation is not a trivial step, due to the time required

and the possibility of data collection errors.

A model with 50 decision variables and 25 constraints could
have over 1300 data elements!

Often, a fairly large data base is needed.

Information systems specialists might be needed.
 Constructing a Model
17

Situation Problem

Problem must be translated Formulate the
statement

from verbal, qualitative terms to Problem

logical, quantitative terms Data

Construct

A logical model is a series of a Model
rules, usually embodied in a
computer program
Model
• A mathematical model is a collection of
functional relationships by which allowable
actions are delimited and evaluated.

Example: Define relationships between individual nurse assignments

and preference violations; define tradeoffs between the use of
internal and external nursing resources.
 Model Development 18

Models are representations of real objects or situations.

Three forms of models are iconic, analog, and
mathematical.

Iconicmodels are physical replicas (scalar
representations) of real objects.

Analog models are physical in form, but do not
physically resemble the object being modeled.

Mathematical models represent real world problems
through a system of mathematical formulas and
expressions based on key assumptions, estimates, or
statistical analyses.
Advantages of Models 19

Generally, experimenting with

models (compared to
experimenting with the real
situation):

requires less time

is less expensive

involves less risk
 Mathematical Models 20

Cost/benefit considerations must be made

in selecting an appropriate mathematical
model.

Frequently a less complicated (and
perhaps less precise) model is more
appropriate than a more complex and
accurate one due to cost and ease of
solution considerations.
 Mathematical Models
21

Relate decision variables (controllable inputs) with fixed

or variable parameters (uncontrollable inputs).

Frequently seek to maximize or minimize some
objective function subject to constraints.

Are said to be stochastic if any of the uncontrollable
inputs (parameters) is subject to variation (random),
otherwise are said to be deterministic.

Generally, stochastic models are more difficult to
analyze.

The values of the decision variables that provide the
mathematically-best output are referred to as the
optimal solution for the model.
 Transforming Model Inputs into 22

Output

Uncontrollable Inputs
(Environmental Factors)

Controllable
Mathematical Output
Inputs
Model (Projected Results)
(Decision Variables)
 Example: Project 23

Scheduling
Consider a construction company building a 250-unit
apartment complex. The project consists of hundreds
of activities involving excavating, framing, wiring,
plastering, painting, landscaping, and more. Some of
the activities must be done sequentially and others can
be done simultaneously. Also, some of the activities
can be completed faster than normal by purchasing
additional resources (workers, equipment, etc.).
What is the best schedule for the activities and for
which activities should additional resources be
purchased?
 Example: Project Scheduling 24

Question:
Suggest assumptions that could be made to simplify the
model.

Answer:
Make the model deterministic by assuming normal and
expedited activity times are known with certainty and are
constant. The same assumption might be made about the other
stochastic, uncontrollable inputs.
Example: Project Scheduling
25

Question:
How could management science be used to solve this
problem?

Answer:
Management science can provide a structured,
quantitative approach for determining the minimum
project completion time based on the activities' normal
times and then based on the activities' expedited
(reduced) times.
Example: Project 26

Scheduling

Question:
What would be the uncontrollable inputs?

Answer:

Normal and expedited activity completion times

Activity expediting costs

Funds available for expediting

Precedence relationships of the activities
 Example: Project Scheduling 27

Question:
What would be the decision variables of the
mathematical model? The objective function? The
constraints?

Answer:

Decisionvariables: which activities to expedite and
by how much, and when to start each activity

Objective function: minimize project completion
time

Constraints: do not violate any activity precedence
relationships and do not expedite in excess of the
funds available.
 Example: Project 28

Scheduling

Question:
Is the model deterministic or stochastic?

Answer:
Stochastic. Activity completion times, both normal
and expedited, are uncertain and subject to
variation. Activity expediting costs are uncertain. The
number of activities and their precedence
relationships might change before the project is
completed due to a project design change.
 Solving the Mathematical 29

Model

Many tools are

Model available as discussed
before
Find a
Some lead to
solution “optimal” solutions
(deterministic Models)

Others only evaluate
candidates
trial and
Solution Tools error to find “best”
course of action
 Model Solution 30

Involves identifying the values of the decision

variables that provide the “best” output for
the model.

One approach is trial-and-error.

might not provide the best solution

inefficient (numerous calculations required)

Special solution procedures have been

developed for specific mathematical
models.

some small models/problems can be solved by hand calculations

most practical applications require using a computer
Computer Software 31

A variety of software packages are available for solving

mathematical models, some are:

Spreadsheet packages such as Microsoft Excel

The Management Scientist (MS)

Quantitative system for business (QSB)

LINDO, LINGO

Quantitative models (QM)

Decision Science (DS)
 Model Testing and Validation 32

Often, the goodness/accuracy of a model cannot be

assessed until solutions are generated.

Small test problems having known, or at least
expected, solutions can be used for model testing and
validation.

If the model generates expected solutions:

use the model on the full-scale problem.

If inaccuracies or potential shortcomings inherent in

the model are identified, take corrective action such
as:

collection of more-accurate input data

modification of the model
 Implementation 33

A solution to a problem
Situation
usually implies changes for
some individuals in the
organization

Often there is resistance to
change, making the
Implement
the Procedure
implementation difficult

User-friendly system needed

Those affected should go
Procedure
through training
Implementation and Follow- 34

Up

Successful implementation of model results is of
critical importance.

Secure as much user involvement as possible
throughout the modeling process.

Continue to monitor the contribution of the model.

It might be necessary to refine or expand the model.
 Report Generation 35

A managerial report, based on the results of the

model, should be prepared.

The report should be easily understood by the
decision maker.

The report should include:

the recommended decision

other pertinent information about the results (for
example, how sensitive the model solution is to
the assumptions and data used in the model)
 Components of OR-Based 36

Decision Support System

Data base (nurse profiles,
external resources, rules)

Graphical User Interface
(GUI); web enabled using
java or VBA

Algorithms, pre- and post-
processor

What-if analysis

Report generators
 Examples of OR Applications
37

Rescheduling aircraft in response to groundings and

delays

Planning production for printed circuit board
assembly

Scheduling equipment operators in mail processing
& distribution centers

Developing routes for propane delivery

Adjusting nurse schedules in light of daily fluctuations
in demand
Example: Austin Auto 38

Auction

An auctioneer has developed a simple

mathematical model for deciding the starting bid
he will require when auctioning a used
automobile. Essentially, he sets the starting bid at
seventy percent of what he predicts the final
winning bid will (or should) be. He predicts the
winning bid by starting with the car's original
selling price and making two deductions, one
based on the car's age and the other based on
the car's mileage.
The age deduction is $800 per year and the
mileage deduction is $.025 per mile.
 Example: Austin Auto 39

Auction

Question:
Develop the mathematical model that will give the
starting bid (B) for a car in terms of the car's original price
(P), current age (A) and mileage (M).

Answer:
The expected winning bid can be expressed as:
P - 800(A) - .025(M)
The entire model is:
B = .7(expected winning bid) or
B = .7(P - 800(A) - .025(M)) or
B = .7(P)- 560(A) - .0175(M)
 Example: Austin Auto 40

Auction

Question:
Suppose a four-year old car with 60,000 miles on the odometer
is up for auction. If its original price was $12,500, what starting
bid should the auctioneer require?

Answer:
B = .7(12,500) - 560(4) - .0175(60,000) = $5460.
Example: Austin Auto
Auction 41

Question:
The model is based on what assumptions?

Answer:
The model assumes that the only factors
influencing the value of a used car are the
original price, age, and mileage (not condition,
rarity, or other factors).
Also, it is assumed that age and mileage
devalue a car in a linear manner and without
limit. (Note, the starting bid for a very old car
might be negative!)
Example: Iron Works, Inc.
42

Iron Works, Inc. (IWI) manufactures two products made

from steel and just received this month's allocation of b
pounds of steel. It takes a1 pounds of steel to make a unit
of product 1 and it takes a2 pounds of steel to make a unit
of product 2.
Let x1 and x2 denote this month's production level of
product 1 and product 2, respectively. Denote by p1 and
p2 the unit profits for products 1 and 2, respectively.
The manufacturer has a contract calling for at least m
units of product 1 this month. The firm's facilities are such
that at most u units of product 2 may be produced
monthly.
 Example: Iron Works, Inc. 43

Mathematical Model

The total monthly profit =
(profit per unit of product 1)
x (monthly production of product 1)
+ (profit per unit of product 2)
x (monthly production of product 2)
= p1x1 + p2x2
We want to maximize total monthly profit:
Max p1x1 + p2x2
Example: Iron Works, Inc. 44

Mathematical Model (continued)

The total amount of steel used during monthly production =
(steel required per unit of product 1)
x (monthly production of product 1)
+ (steel required per unit of product 2)
x (monthly production of product 2)
= a1x1 + a2x2

This quantity must be less than or equal to

the allocated b pounds of steel:
a1x1 + a2x2 < b
Example: Iron Works, Inc.
45

Mathematical Model (continued)

The monthly production level of product 1 must be greater
than or equal to m:
x1 > m

The monthly production level of product 2 must be less than
or equal to u:
x2 < u

However, the production level for product 2 cannot be
negative:
x2 > 0
Example: Iron Works, Inc. 46

Mathematical Model Summary

Max p1x1 + p2x2

s.t. a1x1 + a2x2 < b
x1 > m
x2 < u
x2 > 0
 Example: Iron Works, Inc. 47

Question:
Suppose b = 2000, a1 = 2, a2 = 3, m = 60, u = 720, p1 =
100, p2 = 200. Rewrite the model with these specific
values for the uncontrollable inputs.

Answer:
Substituting, the model is:
Max 100x1 + 200x2
s.t. 2x1 + 3x2 < 2000
x1 > 60
x2 < 720
x2 > 0
 Example: Iron Works, Inc. 48

Question:
The optimal solution to the current model is x1 =
60 and x2 = 626 2/3. If the product were engines,
explain why this is not a true optimal solution for
the "real-life" problem.

Answer:
One cannot produce and sell 2/3 of an engine.
Thus the problem is further restricted by the fact
that both x1 and x2 must be integers. They could
remain fractions if it is assumed these fractions are
work in progress to be completed the next month.
 Example: Iron Works, Inc.
49

Uncontrollable Inputs
$100 profit per unit Prod. 1
$200 profit per unit Prod. 2
2 lbs. steel per unit Prod. 1
3 lbs. Steel per unit Prod. 2
2000 lbs. steel allocated
60 units minimum Prod. 1
720 units maximum Prod. 2
0 units minimum Prod. 2

60 units Prod. 1 Max 100(60) + 200(626.67) Profit = $131,333.33

626.67 units Prod. 2 s.t. 2(60) + 3(626.67) < 2000 Steel Used = 2000
60 > 60
Controllable Inputs 626.67 < 720 Output
626.67 > 0
Mathematical Model
Example: Ponderosa
50

Development Corp.
Ponderosa Development Corporation (PDC) is a small real
estate developer operating in the Rivertree Valley. It has
seven permanent employees whose monthly salaries are
given in the table on the next slide.
PDC leases a building for $2,000 per month. The cost of
supplies, utilities, and leased equipment runs another
$3,000 per month.
PDC builds only one style house in the valley. Land for
each house costs $55,000 and lumber, supplies, etc. run
another $28,000 per house. Total labor costs are figured at
$20,000 per house. The one sales representative of PDC is
paid a commission of $2,000 on the sale of each house.
The selling price of the house is $115,000.
Example: Ponderosa
51

Development Corp.
Employee Monthly Salary
President $10,000
VP, Development 6,000
VP, Marketing 4,500
Project Manager 5,500
Controller 4,000
Office Manager 3,000
Receptionist 2,000
Example: Ponderosa 52

Development Corp.

Question:
Identify all costs and denote the marginal cost and marginal
revenue for each house.

Answer:
The monthly salaries total $35,000 and monthly office lease and
supply costs total another $5,000. This $40,000 is a monthly fixed
cost.
The total cost of land, material, labor, and sales commission per
house, $105,000, is the marginal cost for a house.
The selling price of $115,000 is the marginal revenue per house.
Example: Ponderosa
53

Development Corp.

Question:
Write the monthly cost function c(x), revenue function
r(x), and profit function p(x).

Answer:
c(x) = variable cost + fixed cost = 105,000x + 40,000
r(x) = 115,000x
p(x) = r(x) - c(x) = 10,000x - 40,000
Example: Ponderosa 54

Development Corp.

Question:
What is the breakeven point for monthly sales of the houses?

Answer:
r(x) = c(x) or 115,000x = 105,000x + 40,000
Solving, x = 4.

Question:
What is the monthly profit if 12 houses per month are built and sold?

Answer:
p(12) = 10,000(12) - 40,000 = $80,000 monthly profit
Example: Ponderosa Development
Corp. 55

Graph of Break-Even Analysis

1200
Thousands of Dollars

1000
Total Revenue = 115,000x Total Cost =
800
40,000 + 105,000x
600
Break-Even Point = 4 Houses
400
200
0
0 1 2 3 4 5 6 7 8 9 10
Number of Houses Sold (x)
 1
Problem formulation

Steps in OR Study 56
2
Model building

3
Data collection

4
Data analysis

5
Coding

Model No
6 Fine-tune
verification and model
validation

Yes

7
Experimental design

8
Analysis of results
Application Areas 57

Strategic planning

Supply chain management

Pricing and revenue management

Logistics and site location

Optimization

Marketing research
Applications Areas (cont.) 58

Scheduling

Portfolio management

Inventory analysis

Forecasting

Sales analysis

Auctioning

Risk analysis
 Examples
59

British Telecom used OR to schedule workforce for more

than 40,000filed engineers. The system was saving $150
million a year from 1997~ 2000. The workforce is projected
to save $250 million.

Sears Uses OR to create a Vehicle Routing and

Scheduling System which to run its delivery and home
service fleet more efficiently -- $42 million in annual
savings

UPS use O.R. to redesign its overnight delivery network, $87

million in savings obtained from 2000 ~ 2002; Another $189
million anticipated over the following decade.

USPS uses OR to schedule the equipment and workforce

in its mail processing and distribution centers. Estimated
saving in $500 millions can be achieve.
 60

Success Stories of OR
 A Short List of Successful Stories (1)
61

Air New Zealand

Air New Zealand Masters the Art of Crew Scheduling

AT&T Network

Delivering Rapid Restoration Capacity for the AT&T Network

Bank Hapoalim

Bank Hapoalim Offers Investment Decision Support for Individual
Customers

British Telecommunications

Dynamic Workforce Scheduling for British Telecommunications

Canadian Pacific Railway

Perfecting the Scheduled Railroad at Canadian Pacific Railway

Continental Airlines

Faster Crew Recovery at Continental Airlines

FAA

Collaborative Decision Making Improves the FAA Ground-Delay
Program
A Short List of Successful Stories (2)
62

Ford Motor Company

Optimizing Prototype Vehicle Testing at Ford Motor Company

General Motors

Creating a New Business Model for OnStar at General Motors

IBM Microelectronics

Matching Assets to Supply Chain Demand at IBM
Microelectronics

IBM Personal Systems Group

Extending Enterprise Supply Chain Management at IBM Personal
Systems Group

Jan de Wit Company

Optimizing Production Planning and Trade at Jan de Wit
Company

Jeppesen Sanderson

Improving Performance and Flexibility at Jeppesen Sanderson
A Short List of Successful Stories (3)
63

Mars

Online Procurement Auctions Benefit Mars and Its Suppliers

Menlo Worldwide Forwarding

Turning Network Routing into Advantage for Menlo Forwarding

Merrill Lynch

Seizing Marketplace Initiative with Merrill Lynch Integrated Choice

NBC

Increasing Advertising Revenues and Productivity at NBC

PSA Peugeot Citroen

Speeding Car Body Production at PSA Peugeot Citroen

Rhenania

Rhenania Optimizes Its Mail-Order Business with Dynamic
Multilevel Modeling

Samsung

Samsung Cuts Manufacturing Cycle Time and Inventory to
Compete
A Short List of Successful Stories (4)
64

Spicer

Spicer Improves Its Lead-Time and Scheduling Performance

Syngenta

Managing the Seed-Corn Supply Chain at Syngenta

Towers Perrin

Towers Perrin Improves Investment Decision Making

U.S. Army

Reinventing U.S. Army Recruiting

U.S. Department of Energy

Handling Nuclear Weapons for the U.S. Department of Energy

UPS

More Efficient Planning and Delivery at UPS

Visteon

Decision Support Wins Visteon More Production for Less
 65

www.scienceofbetter.org
For further details of successful stories