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PROBABILITY
P(A or B) = P(A) + P(B) P(A and B)
Probability of any event: 0 P (event) 1
For Mutually exclusive events:
P(A or B) = P(A) + P(B)
P(AB) = P(A | B) P(B)
Independent Events:
P ( AB )
P(A and B) = P(A)P(B)
Conditional Probability P ( A | B )
P(A | B) = P(A)
P (B )
Dependent Events:
P(A and B) = P(A) * P(B given A)
P(A and B and C) = P(A) * P(B given A) * P(C
given A and B)
Bayes Theorem
Expected Value
P( A | B )
P (B | A) P( A)
P(B | A) P ( A) P(B | A ) P ( A )
A, B
A
E X X i P X i
i 1
X1P ( X1 ) X 2 P (X 2 ) ... X n P (X n )
Xi = random variables possible values
P(Xi) = probability of each of the random
variables possible values
n
i 1
Xi
=
random variables possible values
E(X) =
expected value of the random variable
[Xi E(X)]
=
difference between each value of
the random variable and the expected value
P(Xi) =
probability of each possible value of the
random variable
Binomial Distribution
n!
Probability of r success in n trials
p r q nr
r! (n r )!
(1 p ) x 1 p
f (X)
Variance 2
2 Variance
2
12
Poisson Distribution
x e
P( X )
X!
( x ) 2
2 2
e
2
Completely specified by the mean,
Standard Deviation
X=
random variable (service times)
=
average number of units the service
facility can handle in a specific period of time
deviation,
X
Z
e=
Expected value =
1
Variance = 2
= r/p
= variance = r(1-p)/p2
2 Variance
2
12
DECISION ANALYSIS
Criterion of Realism
Expected Monetary Value
EMV(alternative) = X i P ( X i )
Weighted average = (best in row) + (1 )(worst in
row)
Xi = payoff for the alternative in state of
nature i
For Minimization:
P(Xi) = probability of achieving payoff Xi (i.e.,
Weighted average = (best in row) + (1 )(worst in
probability of state of nature i)
row)
= summation symbol
EMV (alternative i) = (payoff of first state of nature) x
Expected Value with Perfect Information
(probability of first state of nature) + (payoff of second
EVwPI = (best payoff in state of nature i)
state of nature) x (probability of second state of nature) +
(probability of state of nature i)
+ (payoff of last state of nature) x (probability of last
EVwPI = (best payoff for first state of nature) x
state of nature)
(probability of first state of nature) + (best
payoff for second state of nature) x (probability
of second state of nature) + + (best payoff for
last state of nature) x (probability of last state of
nature)
Expected Value of Perfect Information
EVPI = EVwPI Best EMV
Expected Value of Sample Information
EVSI = (EV with SI + cost) (EV without SI)
Utility of other outcome = (p)(utility of best outcome,
which is 1) + (1 p)(utility of the worst outcome, which
is 0)
EVSI
100%
EVPI
Y 0 1 X
REGRESSION MODELS
Y b0 b1 X
Y predicted value of Y
b0 estimate of 0 , based on sample results
b1 estimate of 1 , based on sample results
e Y Y
Y
b1
X
n
Y
(X X )
b0 Y b1 X
Sum of Squares Total SST (Y Y )
Correlation Coefficient = r r 2
Standard Error of Estimate s
MSE
SSR
MSR
k
k number of independent variables in the model
HypothesisTest H 0 : 1 0
H 1 : 1 0
SSR
SSE
1
SST
SST
SSE
Mean Squared Error s 2 MSE
n k 1
Generic Linear Model Y 0 1 X
MSR
F Statistic : F
MSE
Coefficient of Determination r 2
df 2 n k 1
Adjusted r 2 1
SSE /( n k 1)
SST /( n 1)
FORECASTING
forecast error
n
(error)
Mean Squared Error (MSE)
error
actual
n
100%
Y Yt 1 ... Yt n 1
sum of demands in previous n periods
Ft 1 t
n
n
New forecast Last period s forecast (Last period s actual demand Last period s forecast)
b b X
Y
0
1
predicted value
where Y
b0 intercept
b1 slope of the line
X time period (i.e., X 1, 2, 3, , n)
Y a b1 X1 b2 X 2 b3 X 3 b4 X 4
FITt 1 Ft 1 Tt 1
Tracking signal
RSFE
MAD
(forecast error)
MAD
Co Co
Number of units in each order
Q
D
Q
Order quantity
(Carrying cost per unit per year) Q Co 2 Ch
2
Q
2DCo
Ch
EOQ Q *
2
Ch
pt dt p
Q
Q
d
d
Q 1
p
p
p
Total produced Q pt
Q
d
1
2
p
D
Annual setup cost Cs
Q
Average inventory
Q*
2DCs
d
Ch 1
p
Q
d
1 Ch
2
p
D
Annual ordering cost Co
Q
Annual holding cost
D
Q
Co + C h
Q
2
Safety Stock
ROP = Average demand during lead time + Safety
Stock
Service level = 1 Probability of a stockout
Probability of a stockout = 1 Service level
d daily demand
2
L
Q
Ch (SS)Ch
2
ML
ML + MP
PROJECT MANAGEMENT
Expected Activity Time t =
a + 4m + b
6
Project variance
b a
Variance =
2
( )
( )
n = m 1
n =0
n
1
1
n! m!
m
m
L
P0
2
(m 1)!(m )
1 Lq
P0 1
1
N
N!
(N n )!
n 0
Lq
Wq
k 1
(N L)
Average time in the system
W Wq
N!
N n !
P0 for n 0,1,..., N
2
2 ( )
Wq
2 ( )
MARKOV ANALYSIS
7
(i)
i
vector of state probabilities for period Pij = conditional probability of being in state j in the
future given the current state of i
P11 P12 P1n
=
(1, 2, 3, , n)
P
where
P22 P2 n
21
P
n
=
number of states
1, 2, , n =
probability of being in state 1,
Pm1 Pm 2 Pmn
state 2, , state n
For any period n we can compute the state
Equilibrium condition
probabilities for period n + 1
= P
(n + 1) = (n)P
Fundamental Matrix
M represent the amount of money that is in each of the
F = (I B)1
nonabsorbing states
Inverse of Matrix
M = (M1, M2, M3, , Mn)
n
= number of nonabsorbing states
a b
P
M
= amount in the first state or category
1
c d
M2
= amount in the second state or category
d
M
= amount in the nth state or category
n
1
r
a b
-1
r
P
c
a
c d
r
r
r = ad bc
Partition of Matrix for absorbing states
Computing lambda and the consistency index
n
I O
=
P
A
I = identity matrix
O = a matrix with all 0s
CI
n 1
Consistency Ratio
CR
CI
RI
UCL x x A2 R
LCL x x A2 R
p-charts
UCL R D4 R
UCL p p z p
LCL R D3 R
LCL p p z p
p = mean proportion or fraction defective in the sample
p (1 p )
n
(3 is
UCL c c 3 c
LCL c c 3 c
OTHERS
Computing lambda and the consistency index
The input to one stage is also the output from
n
another stage
CI
sn1 = Output from stage n
n 1
The transformation function
Consistency Ratio
CI
tn = Transformation function at stage n
CR
General formula to move from one stage to
RI
another using the transformation function
sn1 = tn (sn, dn)
The total return at any stage
fn = Total return at stage n
Transformation Functions
sn 1 an sn bn d n cn
Return Equations
rn an sn bn d n cn
Fixed cost
Probability of breaking even
Break - even point (units)
break - even point
Price/unit Variable cost/unit
Z
f
sv
(Mean demand)
unit
unit
Fixed costs
EMV
K(break - even point X)for X BEPUsing the unit normal loss integral, EOL can be
computed using
$0for X BEP
Opportunity Loss
where
K = loss per unit when sales are below the break-even
point
X = sales in units
EOL = KN(D)
EOL = expected opportunity loss
K = loss per unit when sales are below the breakeven point
= standard deviation of the distribution
N(D) = value for the unit normal loss integral for a
given value of D
D
a
ad ae
AB b d e bd be C
c
cd ce
d
a b c e ad be cf
f
a b e f ae bg af bh
c d g h ce dg cf dh
b
e
h
c
f
i
10
a
c
Original matrix
a b
c d
d
ad cb
c
ad cb
ad cb
a
ad cb
Y2 a( X X ) 2 b( X X ) c
X
X
X (b 2aX cX )
b 2aX cX
X
Total cost (Total ordering cost) + (Total holding cost)
+ (Total purchase cost)
Q = order quantity
D = annual demand
Co = ordering cost per order
Ch = holding cost per unit per year
C = purchase (material) cost per unit
a
b
Y1 aX 2 bX c
D
Q
C o + C h DC
Q
2
2
Change in X X X 2 X1
TC
2
Change in X X X 2 X1
Y 0
Y C
Y X
Y cX n
1
Y
Xn
Y g ( x) h( x )
Y g ( x) h( x )
Y nX n 1
Y cnX n 1
n
X n 1
Y g ( x ) h( x )
Y g ( x ) h( x )
Y
dQ
Q2
2
2DCo
Q
Ch
d 2TC DCo
dQ 2
Q3
11