Introduction to Management

Science
with Spreadsheets
Stevenson and Ozgur
First Edition

Part 1 Introduction to Management Science and Forecasting

Chapter 1
Introduction to Management Science,
Modeling, and
Excel Spreadsheets

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives

After completing this chapter, you should be able to:

1. Formulate linear programming models, including an

objective function and constraints
2. Graphically solve an LP problem with the iso-profit line
method
3. Graphically solve an LP problem with the corner-point
method

Copyright © 2007 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–2
 Learning Objectives (cont’d)

After completing this chapter, you should be able to:

4. Interpret sensitivity analysis and shadow prices

5. Construct and solve a minimization problem
6. Formulate production-mix, diet, and labor
scheduling problems

Copyright © 2007 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–3
 The Importance of Management Science
• Management science
–The discipline of applying advanced analytical methods to help make
better decisions.
–Devoted to solving managerial-type problems using quantitative models
• Applications of management science
–Forecasting, capital budgeting, portfolio analysis, capacity planning,
scheduling, marketing, inventory management, project management, and
production planning.

Copyright © 2007 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–4
 Table 1–2 Successful Applications of Management Science

Copyright © 2007 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–5
 Table 1–2 Successful Applications of Management Science (cont’d)

Copyright © 2007 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–6
 Problem Solving Approaches
• Managers tend to use a qualitative • Managers tend to use a
approach to problem solving when quantitative approach when
1. The problem is fairly simple. 1. The problem is complex.
2. The problem is familiar. 2. The problem is not familiar.
3. The costs involved are not 3. The costs involved are
great. substantial.
4. Enough time is available to
analyze the problem.

Copyright © 2007 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–7
 Advantages of the Quantitative Approach
• Directs attention to the essence of an analysis: to solve a specific
problem.
• Improves planning which helps prevent future problems
• Results in more objective decisions than purely qualitative
analysis.
• Incorporates advances in computational technologies to
managerial problem-solving.

Copyright © 2007 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–8
 Models
• A Model
–An abstraction of reality. It is a simplified, and often idealized,
representation of reality.
• Examples : an equation, an outline, a diagram, and a map
–By its very nature a model is incomplete.
–Provides an alternative to working with reality
• Symbolic models
–Use numbers and algebraic symbols
• Mathematical models
–Decision variables
–Uncontrollable variables

Copyright © 2007 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–9
 Deterministic versus Probabilistic Models
• Deterministic models
–Used for problems in which information is known with a high degree of
certainty.
–Used to determine an optimal solution to the problem.
• Probabilistic models
–Used when it cannot be determined precisely what values (requiring
probabilities) will occur (usually in the future).

Copyright © 2007 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–10
 Figure 1–1 The Management Science Approach

Copyright © 2007 The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin 1–11
Linear Programming

 A mathematical technique to help

plan and make decisions relative to
the trade-offs necessary to allocate
resources
 Will find the minimum or maximum
value of the objective
 Guarantees the optimal solution to
the model formulated
LP Applications

1. Scheduling school buses to minimize total

distance traveled
2. Allocating police patrol units to high crime
areas in order to minimize response time
to 911 calls
3. Scheduling tellers at banks so that needs
are met during each hour of the day while
minimizing the total cost of labor
LP Applications

4. Selecting the product mix in a factory to

make best use of machine- and labor-
hours available while maximizing the
firm’s profit
5. Picking blends of raw materials in feed
mills to produce finished feed
combinations at minimum costs
6. Determining the distribution system that
will minimize total shipping cost
LP Applications

7. Developing a production schedule that will

satisfy future demands for a firm’s product
and at the same time minimize total
production and inventory costs
8. Allocating space for a tenant mix in a new
shopping mall
so as to maximize
revenues to the
leasing company
Requirements of an
LP Problem

1. LP problems seek to maximize or

minimize some quantity (usually
profit or cost) expressed as an
objective function
2. The presence of restrictions, or
constraints, limits the degree to
which we can pursue our objective
Requirements of an
LP Problem

3. There must be alternative courses of

action to choose from
4. The objective and constraints in
linear programming problems must
be expressed in terms of linear
equations or inequalities
 Formulating LP Problems

The product-mix problem at Shader Electronics

 Two products
1. Shader X-pod, a portable music player
2. Shader BlueBerry, an internet-
connected color telephone
 Determine the mix of products that will
produce the maximum profit
Formulating LP Problems

Hours Required
to Produce 1 Unit

X-pods BlueBerrys Available Hours

Department (X1) (X2) This Week
Electronic 4 3 240
Assembly 2 1 100
Profit per unit $7 $5
Table B.1
Decision Variables:
X1 = number of X-pods to be produced
X2 = number of BlueBerrys to be produced
Formulating LP Problems

Objective Function:
Maximize Profit = $7X1 + $5X2

There are three types of constraints

 Upper limits where the amount used is ≤ the
amount of a resource
 Lower limits where the amount used is ≥ the
amount of the resource
 Equalities where the amount used is = the
amount of the resource
Formulating LP Problems

First Constraint:
Electronic Electronic
time used is ≤ time available
4X1 + 3X2 ≤ 240 (hours of electronic time)

Second Constraint:
Assembly Assembly
time used is ≤ time available
2X1 + 1X2 ≤ 100 (hours of assembly time)
Graphical Solution

 Can be used when there are two

decision variables
1. Plot the constraint equations at their
limits by converting each equation to an
equality
2. Identify the feasible solution space
3. Create an iso-profit line based on the
objective function
4. Move this line outwards until the optimal
point is identified
 Graphical Solution

X2

100 –
–
80 –
Number of BlueBerrys
Assembly (constraint B)
–
60 –
–
40 –
– Electronics (constraint A)
20 – Feasible
region
–
|– | | | | | | | | | | X1
Figure B.3 0 20 40 60 80 100
Number of X-pods
 Graphical Solution

Iso-Profit
X
Line Solution Method
2

Choose a100
possible
– value for the objective function
–
80 –
Number of Watch TVs
Assembly (constraint B)
– $210 = 7X1 + 5X2
60 –
Solve for the axis
– intercepts of the function and plot the line
40 –
– Electronics (constraint A)
X = 42
20 – Feasible
2 X1 = 30
region
–
|– | | | | | | | | | | X1
Figure B.3 0 20 40 60 80 100
Number of X-pods
 Graphical Solution

X2

100 –
–
80 –
Number of BlueBerrys
–
60 – $210 = $7X1 + $5X2
–
(0, 42)
40 –
–
20 – (30, 0)
–
|– | | | | | | | | | | X1
Figure B.4 0 20 40 60 80 100
Number of X-pods
 Graphical Solution

X2

100 –
– $350 = $7X1 + $5X2

Number of BlueBeryys
80 –
$280 = $7X1 + $5X2
–
60 – $210 = $7X1 + $5X2
–
40 –
–
$420 = $7X1 + $5X2
20 –
–
|– | | | | | | | | | | X1
Figure B.5 0 20 40 60 80 100
Number of X-pods
 Graphical Solution

X2

100 –
– Maximum profit line
80 –
Number of BlueBerrys
–
60 – Optimal solution point
– (X1 = 30, X2 = 40)
40 –
–
$410 = $7X1 + $5X2
20 –
–
|– | | | | | | | | | | X1
Figure B.6 0 20 40 60 80 100
Number of X-pods
 Corner-Point Method

X2

100 –
2 –
80 –
Number of BlueBerrys
–
60 –
–
3
40 –
–
20 –
–
|– | | | | | | | | | | X1
Figure B.7
1
0 20 40 60 80 100
4
Number of X-pods
Corner-Point Method

 The optimal value will always be at a corner

point
 Find the objective function value at each
corner point and choose the one with the
highest profit

Point 1 : (X1 = 0, X2 = 0) Profit $7(0) + $5(0) = $0

Point 2 : (X1 = 0, X2 = 80) Profit $7(0) + $5(80) = $400
Point 4 : (X1 = 50, X2 = 0) Profit $7(50) + $5(0) = $350
Corner-Point Method

 The optimal value will always be at a corner

Solve for the intersection of two constraints
point
 Find the4X1 + 3X2 ≤ 240
objective (electronics
function value time)
at each
1X2 ≤choose
2X1 + and
corner point 100 (assembly
the onetime)
with the
highest profit
4X1 + 3X2 = 240 4X1 + 3(40) = 240
- 4X1 - 2X2 = -200 4X1 + 120 = 240
Point 1 : (X1 = 0, X2 = 0) Profit $7(0) + $5(0) = $0
+ 1X2 = 40 X1 = 30
Point 2 : (X1 = 0, X2 = 80) Profit $7(0) + $5(80) = $400
Point 4 : (X1 = 50, X2 = 0) Profit $7(50) + $5(0) = $350
Corner-Point Method

 The optimal value will always be at a corner

point
 Find the objective function value at each
corner point and choose the one with the
highest profit

Point 1 : (X1 = 0, X2 = 0) Profit $7(0) + $5(0) = $0

Point 2 : (X1 = 0, X2 = 80) Profit $7(0) + $5(80) = $400
Point 4 : (X1 = 50, X2 = 0) Profit $7(50) + $5(0) = $350
Point 3 : (X1 = 30, X2 = 40) Profit $7(30) + $5(40) = $410
Sensitivity Analysis

 How sensitive the results are to

parameter changes
 Change in the value of coefficients
 Change in a right-hand-side value of a
constraint
 Trial-and-error approach
 Analytic postoptimality method
 Sensitivity Report

Program B.1
Changes in Resources

 The right-hand-side values of

constraint equations may change as
resource availability changes
 The shadow price of a constraint is
the change in the value of the
objective function resulting from a
one-unit change in the right-hand-side
value of the constraint
Changes in Resources

 Shadow prices are often explained as

answering the question “How much
would you pay for one additional unit
of a resource?”
 Shadow prices are only valid over a
particular range of changes in right-
hand-side values
 Sensitivity reports provide the upper
and lower limits of this range
Sensitivity Analysis

X2
–
Changed assembly constraint from 2X1
100 –
+ 1X2 = 100
–
to 2X1 + 1X2 = 110
80 – 2
–
Corner point 3 is still optimal, but
60 –
values at this point are now X1 = 45, X2
–
= 20, with a profit = $415
40 –
–
20 – Electronics constraint is
3 unchanged
–
1 |– | | | | | | | | | |
0 20 40 X1 Figure B.8 (a)
4 60 80 100
Sensitivity Analysis

X2
–
100 – Changed assembly constraint from 2X1
– + 1X2 = 100
80 –
to 2X1 + 1X2 = 90
2 –
Corner point 3 is still optimal, but
60 –
values at this point are now X1 = 15, X2
– 3
= 60, with a profit = $405
40 –
–
20 – Electronics constraint is
unchanged
–
1 |– | | | | | | | | | |
0 20 40 4 60 80 100 X1 Figure B.8 (b)
Changes in the
Objective Function

 A change in the coefficients in the

objective function may cause a
different corner point to become the
optimal solution
 The sensitivity report shows how much
objective function coefficients may
change without changing the optimal
solution point
Solving Minimization Problems

 Formulated and solved in much the

same way as maximization problems
 In the graphical approach an iso-cost
line is used
 The objective is to move the iso-cost
line inwards until it reaches the lowest
cost corner point
Minimization Example

X1 = number of tons of black-and-white picture

chemical produced
X2 = number of tons of color picture chemical
produced

Minimize total cost = 2,500X1 + 3,000X2

Subject to:
X1 ≥ 30 tons of black-and-white chemical
X2 ≥ 20 tons of color chemical
X1 + X2 ≥ 60 tons total
X1, X2 ≥ $0 nonnegativity requirements
Minimization Example

Table B.9 X2
60 – X1 + X2 = 60

50 –
Feasible
40 – region

30 –
b

20 –
a
10 – X1 = 30
X2 = 20

|– | | | | | |
X1
0 10 20 30 40 50 60
Seatwork
Product Mix Problem
The N. Dustrious Company produces two products: I and II. The raw
material requirements, space needed for storage, production rates, and
selling prices for these products are given in Table 1.

The total amount of raw material available per day for both products is
15751b. The total storage space for all products is 1500 ft2, and a
maximum of 7 hours per day can be used for production.
Cont’d

• This must be less than or equal to the total amount of raw material available,
which is 1575 Ib. Therefore,
5x1 + 3x2  1575
• Prouct I can be produced at the rate of 60 units per hour. Therefore, it must
take I minute or 1/60 of an hour to produce I unit. Similarly, it requires 1/30 of
an hour to produce 1 unit of product II. Hence a total of x1/60 + x2/30 hours is
required for the daily production. This quantity must be less than or equal to the
total production time available each day. Therefore,
x1 / 60 + x2 / 30  7
or x1 + 2x2  420
• Finally, the company cannot produce a negative quantity of any product,
therefore x1 and x2 must each be greater than or equal to zero.
Cont’d

• The linear programming model for this example can be summarized as:

…..Eq (4)
Graphical Solution to LP Problems