Operations Research 2 Review 2013

Decision Analysis

1. You are given the following payoff table (in units of thousands of dollars) for a
decision analysis problem without probabilities:

State of Nature
Decision Alternative S1 S2
A1 1 7
A2 6 3
A3 4 4
(a) Which alternative should be chosen under the maximax criterion?

(b) Which alternative should be chosen under the maximin criterion?

(c) Which alternative should be chosen under the minimax regret criterion?

2. Higande Company has two adjacent lots that can be used for its Sales Showroom.
Higande can choose to buy one lot or two lots. When the showroom is constructed,
the probable sales (in millions of pesos per month) that can be generated out of such
a facility was estimated as follows:

Conservative Low Sales Moderate Sales Most Optimistic Sales

If Showroom is P=0.20 p=0.65 P=0.15
developed on
One Lot 10 18 20
Two Lot 12 25 30

Determine the optimal decision using expected value approach.

 Operations Research 2 Review 2013

Fashion House, Inc. stocks and sells high fashion clothing for women. For the coming summer
season, they plan to order designer swimwear at a cost of P500 per unit. These will be sold for
P850 per unit during the summer selling season. At the end of summer, the swimsuits must be sold
in a after-season sale for P300 per unit, because they will be out of fashion during the following
year. Demand during the summer is estimated as in the following table:

Demand (units) 100 200 300 400 500

Probability 20% 30% 30% 15% 5%

3. What is the expected profit/loss if Fashion house decides to stock 400 units?

4. Determine the stocking decision that will put Fashion House in the best financial
position.

5. If Fashion house wants to commission a marketing research team to make certain the
units that would be sold for summer, what is the maximum allowable budget for such
information? (What is the expected value of perfect information for this situation?)

Solution:

Payoff Table State of Nature : Demanded units are:

Alternative Decision 100 200 300 400 500
A1=Stock 100 35,000 15,000 -5,000 -25,000 -45,000
A2=Stock 200 35,000 70,000 50,000 30,000 10,000
A3=Stock 300 35,000 70,000 105,000 85,000 65,000
A4=Stock 400 35,000 70,000 105,000 140,000 120,000
A5=Stock 500 35,000 70,000 105,000 140,000 175,000
Probability 0.2 0.3 0.3 0.15 0.05
 Operations Research 2 Review 2013

EOQ with Production Lot sizes

The Acme Bumper Co. manufactures bumpers for automobiles for a major car manufacturer. About
60,000 pairs (front and rear units) of bumpers are ordered by the car manufacturer per year at a
price of P 6,000 per pair units. Pairs of bumpers are produced at a rate of 400 per working day, and
the company operates 240 days per year. The company manufactures other products, and it must
set up the manufacturing system for a production order for pairs of bumpers, which cost P10,000
per set up. It costs P100 to store one pair of bumpers for one month.

6. What is the optimum production run quantity?

7. What is the total annual expense of producing the optimum run quantity every time?
8. How many production runs will be required per year?
9. The old standard set by an IE was a production run of 3,000 pairs. What is the savings
per year by producing the optimum run quantity every time?

Lakost Brame buys specialty printing paper from National Paper company. Lakost buys 2,000 rolls
of this special paper every year at P4,440 per roll. It costs P250 each time Lakost orders, and he
estimates that his inventory holding cost is 25% of inventory value per roll per year. His company
works an average of 250 days each year.

Just learning that National Paper company is giving quantity discounts on his purchase items,
Lakost got the following discount ranges:

Quantity Discount Price per roll

1-50 rolls 0 4,440.00
51-100 3% 4,306.80
101 or more 6% 4,173.60

10. If Lakost Brame did not know about the quantity discounts and used the Economic
Order quantity model to order his paper, how many rolls should he order every time?
11. How long is the interval of time in-between orders using the basic EOQ?
12. If quantity discounts are to be considered, what would be the annual costs of
inventory (all of ordering, holding and purchase) be?
13. How much would Lakost save annually with the quantity discount compared to the
basic EOQ?
 Operations Research 2 Review 2013

Reorder points

14. Daily demand for a certain product follows a normal distribution with an average of 15
units per day and a standard deviation of 5 days. If the lead time for ordering this
product from the supplier is 3 days, what should be the reorder point to ensure only a
2% chance of stock outs? (Assume Z 0.02= -2.05)

15. Daily demand for the sales of the Toyota Vios at the Balintawak outlet is a constant 1
unit per day. Toyota Motor Philippines (the supplier) has a lead time of normally 12
days with a standard deviation of 4 days. What should be the reorder point to ensure
only a 2% chance of stock outs? (Assume Z 0.02= -2.05)

16. The usage of a letterhead paper has an approximately normal distribution with a mean
of 200 sheets per working day and a standard deviation of 13 sheets. Letterhead
paper is ordered from a printer whose deliveries are variable, with a mean of 25
working days and a standard deviation of 4 working days. A 99% service level was
established for letterhead paper. What should be the reorder point for letterhead
paper? Assume Z 0.99= 2.33

17. What is the safety stock for the letterhead paper?

 Operations Research 2 Review 2013

Non-Linear Programming

Solve the following NLP problem:

Max Z = 25 X1 -0.8X12 + 30 X2 -1.2X22

s.t. X1 + 2X2 = 40

18. Using the method of Lagrange Multiplier.

19. Using Substitution method.

20. A 20 meter wire is cut into two to form two square areas. What is the minimum sum of
these two areas?

Review of Probability for Queuing Theory:

Poisson Distribution

Random variable X = the number of occurrences given (occurrences/time) or (occurrences/area-space)

Applications:

Number of calls that randomly arrive at a calling center every minute when the average number
of calls per minute is known from historical data.

Number of customers that arrive at a fastfood for a given hour (ex. A Tuesday 3pm to 4 pm),
given some known the number of customers that arrive every hour every Tuesday afternoon)

Number of text sms messages sent to a cell site per day.

Number of typographical errors in an issue of the La Sallian.

Number of scratches found on a traded UpperDeck collectible card.

Number of dandruff flakes found on the shoulder of the next person you see. Try also pimple,
mole, bruisemarks, blemishes,etc found on a person’s body. When how many should be expected
for members of a population.
 Operations Research 2 Review 2013

Input parameter: µ = expected number of occurrences for a given interval of time or area-space
(density should be proportional to time or space)
= (density in occurrence/time) x (given time) or
(density in occurrence/area-space) x (given area-space)

µ x e −µ
Probability distribution function: p ( x; µ ) = for x=0,1,2…..α
x!

21. Lunchtime customers arrive at a fastfood counter following a Poisson distribution with an
expected 5 customers per minute. What is the probability that 2 customers will arrive in the
next 30 seconds?

Let X= number of customers that arrive in the next 30 seconds.

µ= expected number of customers per 30 minutes.

 customers  1 min 

= proportionally  5  x(30 sec ) =
 min  60 sec 

= 2.5 customers in 30 secs

2.5 x e −2.5
Poisson pdf : p ( x; 2.5) =
x!

2.5 2 e −2.5
P( x = 2) = p(2 ; 2.5) = = 0.2565
2!

Ans: There is a 25.65% probability that there would be exactly 2 customers in the next 30 seconds.
 Operations Research 2 Review 2013

22. Lunchtime customers arrive at a fastfood counter following a Poisson distribution with an
expected 5 customers per minute. What is the probability that more than 5 customers will
arrive in the next minute?

Exponential Distribution
The exponential distribution is most useful in considering the lifetimes X of electronic devices, as
well as the length of time X that people take to finish an task (ex, service times in a call center, or
fastfood outlet.)
Input parameter:

β= the expected value or mean

x 
−  
1 β 
Probability density function: f(x) = e for x>0
β

To ease probability computations, we use the following Cumulative Probability function:

 x 
−  
β 
F(x) = P(X< some value x) = 1− e

23. A call center agent has an exponentially distributed service time per caller of 10 minutes.

a. What is the probability that a randomly chosen call would last no more than 5 minutes?
b. What is the probability that a call would last between 7 to 10 minutes?
c. What proportion of calls would last more than 15 minutes?
 Operations Research 2 Review 2013

Different sides of the same Coin: The Poisson and the Exponential Distributions

The exponential distribution and the Poisson distribution are close cousins in this memory-less
property. The occurrence of events through time is Poisson distributed, while the time in-between
occurrences is exponentially distributed. Their parameters are related by the equation β=1/µ

Comparison Examples:
A. Calls arrive at a call center at a rate of 3 calls per minute following a Poisson distribution. What
is the probability that there will be no calls in the next minute?
B. The duration between calls that arrive at a call center is an exponentially distributed random
variable with at an average of 20 seconds in-between calls. What is the probability that the next
call will occur a full minute from the last one?

Answer (A) : Poisson f(x) = µxe-µ/x! Find P(X=0) = f(0)

= (3) e /0! = e-3
0 -3

= 0.0498

(B) : Exponential cdf = 1-e-t/B Find P(t>60 secs) = Probability that the length of time in
between calls is greater than 60 seconds, that is, no calls from [0,60] seconds
P(t>60) = 1-P(t≤60)
= 1- (1-e-60/20)
= 1-(1- e-3)
= e-3
= 0.0498 (same as (A)!)

Upon closer inspection, we can see that the exponential expected value β is the inverse of the
Poisson expected value µ. β is shown to be 20 seconds/arrival. The Poisson expected value µ is 3
calls per minute. If this density is transformed in terms of calls per second, we could get 3 calls/60 secs
which is the same as 1 call every 20 seconds.
Logically speaking, the two events in questions (A) and (B) refer to the same thing: in (A) the
event is finding no occurrence of calls in a minute’s interval, in (B) the event is that the duration of time
in between occurrence of calls is 60 seconds. Both probabilities use identical data as expected density
of calls per period of time, they only differ in that the Poisson uses “calls per time” while the
Exponential distribution uses “time per call” as input parameters.
 Operations Research 2 Review 2013

QUEUING THEORY
The most commonly studied configurations can be represented by the following 2 cases:

Case 1: Single queues with single server with Poisson arrival rates and Exponentially
distributed service times based on first-come, first-served policy.
(M/M/1):(FCFS/inf/inf)

Case 2: Single queues with Multiple servers with Poisson arrival rates and Exponentially
distributed service times based on first-come, first-served policy.
(M/M/s):(FCFS/inf/inf)

To study queuing systems, we use analytical models that require three basic input parameters:

λ = effective mean arrival rate (arriving customers/time)

µ = effective mean service rate (serviced customers/time)

c = number of servers

Out of these three input parameters, we can derive important performance measures of the queue:

L = expected number of people in the system (being serviced + in queue)

Lq = expected number of people in queue

W = expected waiting time of a customer in the system

Wq = expected waiting time of a customer in queue

= traffic intensity =

Po = probability of zero customers in the system

Pn = probability of having n customers in the system

 Operations Research 2 Review 2013

General formulas that are valid for all queuing models: (J.Little’s
formulas)

L = λ ⋅W
Lq = λ ⋅Wq
1
W = Wq +
µ
λ
L = Lq +
µ
Dimensional analysis should show that the formulas are virtually consistent.

Ex: L=λW

L = number of people in the system = (dimension units=”persons”);

λ = arrivals per time = (dimensions units = “persons per time”)

W = expected waiting time per customer in the system = (“time”)

Lambda λ is just a conversion factor (person/time) to transform W waiting time into persons in
the system L.

The last equation L=Lq+λ/µ shows that the number of people in the system is the total of the
number of people in the queue Lq plus the expected number of people being serviced (λ/µ).

We use J.Little’s formulas to algebraically solve the output parameters when not all data are
complete. The process of computing is is much like linear algebra and the solutions to linear equations.
 Operations Research 2 Review 2013

Single Server Queues with Poisson Arrivals and Exponential service times.
Case 1: Single queue, single server (M/M/1):(FCFS/α/α)

Assumptions:

Arrivals follow a poisson distribution from an infinite population, with expected customers
arriveing at λ persons per unit time

Service times follows an exponential distribution, such that expected service time per
customer β=1/µ, owhich is the same as saying that there should be µ persons served per unit
time.

There is only one server.

First-come-first-served policy is strictly followed.

Queue length can be infinite.

The following equations are applicable for Case I:

λ
ρ=
µ Pn = ρ n (1 − ρ )
λ λ2
L= Lq =
µ −λ µ (µ − λ )
1 λ
W = Wq =
µ −λ µ (µ − λ )

24. The number of calls that a social climber gets on her cellphone follows a Poisson distribution
with an expected 10 calls per hour. She can answer each call with a call time that follows an
exponential distribution with an expected =12 calls per hour.

Find L, Lq, W, Wq, and the Probability of the following states of the system: P0, P1, and P2.

Given: λ=10 arrivals per hour,

µ=12 services per hour

Answers: Po=0.17

L = 5 customers W = 0.5 hour P1=0.14

Lq = 4.17 Wq= 10/24 hour or 25 minutes P2=0.12

 Operations Research 2 Review 2013

25. Joe's Service Station operates a single gas pump. Cars arrive according to
a Poisson distribution at an average rate of 15 cars per hour. Joe can
service cars at the rate of 20 cars per hour with service time following an
exponential distribution.
a. What fraction of the time is Joe busy servicing cars?
b. How many cars can Joe expect to find at his station?
c. What is the probability that there are at least 2 cars in the station?
d. How long can a driver expect to wait before his car enters the service facility?
e. If you need to put in gas at Joe's service station, how long will it take you, on
the average?

Multiple Servers with single Queues and Poisson Arrivals and Exponential times.
Case 2: Single queue, multiple but identical servers (M/M/c):(FCFS/α/α)

Assumptions:

There are c identical servers

Arrivals follow a poisson distribution from an infinite population, with expected customers
arriveing at λ persons per unit time

Service times follows an exponential distribution, such that expected service time per
customer β=1/µ, which is the same as saying that there should be µ persons served per unit
time.

First-come-first-served policy is strictly followed.

Queue length can be infinite.

The formulas useful for this case are:

 Operations Research 2 Review 2013

λ
Let ρ =
µ
1
P0 =
 c 
c −1
ρn ρ 1 
∑ + ⋅
n!  c! 1 − ρ

n=0 
 c 
 ρn
 P0
ρ
Pn =  n!n iff <1
 ρ P0 c
 c!c n −c
ρ c +1 1
Lq = ⋅ ⋅ P0
c!c  ρ  2
1 − 
 c

Then use J.Little’s formulas for W, Wq, and L

26. A computing system has a single printer attached to print out the output of the users.
The operating system software sends an average of 20 requests per hour to the printer.
The printer is capable of printing out 35 jobs per hour on the average. Assume that
the job arrival rate and the printing rate are Poisson distributed.

a. On the average, how many jobs are in the output queue waiting to be printed out?

b. How many jobs are in the “printer output system” on the average?

c. How long can a user expect to wait to have his or her job printed out once it has been sent
to the printer?

d. Once a job enters the output queue, how long does it take before printing begins on the
job?

e. What percentage of time will the printer be busy doing print jobs?

27. Assume that a second printer is added to the system. Answer questions (a) to (€ e),
assuming that the two printers are identical.
 Operations Research 2 Review 2013

DYNAMIC PROGRAMMING

28. In a certain coin game, players take turn removing 1, 2 or 3 coins from a stack of coins.
The object of the game is not to be the last person to take the last coin/s. What should
be the decision policy for a player about to make a move when there are 5 coins on the
stack?

29. Knapsack problem: The following table shows the various objects with their
corresponding weight and utility value.
Item Size Utility value
A 5 kgs 10 pts
B 2 3.5
C 1 1.6
D 2.5 2
E 1.5 2
A maximum 8 kilograms capacity is to be optimized for total utility.

a. If a dynamic programming approach would be used to maximize total utility value,

Define the “stage” and “state” variables.
b. What items would maximize total utility for the 8 kilo capacity?

Integer Programming

30. Min Z=3X1+6X2

St 7X1+3X2>=40 labor hours X1 X2 are non-negative integers.

Which of the following combinations would be the optimal answer?

a. X1=5, X2=2
b. X1=6, X2=0
c. X1=5.714, X2=0
d. X1=0, X2=13.33
e. X1=5, X2=1
 Operations Research 2 Review 2013

31. Three investment projects are under consideration. The following table shows the
costs and end-of-year returns.
Project 1 2 3
Cost (P) 5,000 6,000 4,000
Returns (P/year) 1,000 700 800

How should P10,000 total possible investment money be placed to maximize total
annual returns?

32. Max Z= 20X1+30X2+10X3+4X4

St 2X1 + 4X2+ 3X3+ 7X4 ≤ 10
10X1+7X2+20X3+15X4 ≤ 40
X1+ 10X2+X3 ≤10
X1,X2,X3, X4 are binary 1-0
Markov Analysis

Every year, the talent stars from two rival networks may stay with their station or
move to the other station following the following transition matrix:

From \ To Station A Station G

Station A 0.6 0.4
Station G 0.5 0.5

33. If the current population in 2013 for each station is A=20% of all talents
and B=80% of all talents, what would be the proportions of the star
populations of each station in 2014?
34. In the long term, what would be the populations for the two stations?
 Operations Research 2 Review 2013

Consumers of hair conditioners shift from one brand to another according to the
following transition matrix that may be assumed true every month.

From \ To CreamSilk Pantene Palmolive

Creamsilk 0.5 0.4 0.1
Pantene 0.5 0.5 0
Palmolive 0.3 0.3 0.40

35. In the beginning of January, Creamsilk captured 40% of the market, while
Pantene has 35%, with Palmolive the rest. What would be the expected
market share of these three brands at the end of February?
36. In the long term, what would be the respective market shares for each of
the three conditioner brands?
Simulation

A work sampling style experiment on the number of customers that were observed at a McDonald’s counter
queue has the following frequency distribution:

Number of observed customers

Frequency (N=120)
0 45
1 36
2 24
3 15
More than 3 0

Use the following 5 random numbers generated from a range of [0.. 0.999] to simulate five observations
(responses 37-41) and determine the mean and range of these observations( responses 42-43)

Random number Generated observation

0.638 37.
0.807 38.
0.417 39.
0.283 40.
0.459 41.
Average 42.
Range 43.
 Operations Research 2 Review 2013

The counter clerk attending customers at a McDonald’s counter has the following time to finish:

Time interval midpoint

Percentage
0 - 0.50 min 0.25 30
0.51 - 1.0 min 0.75 35
1.01-1.50 min 1.25 25
1.51-2.00 min 1.50 10
More than 2 0

Use the following 5 random numbers generated from a range of [0.. 0.999] to simulate five observations
(responses 44-48) and determine the mean and standard deviation of these observations( responses 49-
50)

Random number Generated observation

0.426 44.
0.816 45.
0.440 46.
0.429 47.
0.154 48.
Average 49.
Standard dev 50.