Introduction

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 An Introduction to Modeling

 Operations research (management science) is a

scientific approach to decision making that seeks to best
design and operate a system, usually under conditions
requiring the allocation of scarce resources.
– Term coined during WW II when leaders asked scientists and
engineers to analyze several military problems.
 A system is an organization of interdependent
components that work together to accomplish the goal of
the system.
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  The scientific approach to decision making requires the
use of one or more mathematical models.
 A mathematical model is a mathematical representation
of the actual situation that may be used to make better
decisions or clarify the situation.

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 Management Science Applications
 Linear Programming was used by Burger King to find how
to best blend cuts of meat to minimize costs.

 Integer Linear Programming model was used by American Air

Lines to determine an optimal flight schedule.

 The Shortest Route Algorithm was implemented by the Sony

Corporation to developed an onboard car navigation
 system.

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 Management Science Applications
 Project Scheduling Techniques were used by a contractor to
rebuild Interstate 10 damaged in the 1994 earthquake in the Los
Angeles area.

 Decision Analysis approach was the basis for the development of

a comprehensive framework for planning environmental policy in
Finland.

 Queuing models are incorporated into the overall design plans for
Disneyland and Disney World, which lead to the development of
‘waiting line entertainment’ in order to improve customer
satisfaction.
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 Mathematical Modeling

 Many managerial decision situations lend themselves to

quantitative analyses.
 A constrained mathematical model consists of
– An objective
– One or more constraints

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 Mathematical Modeling

Example
 NewOffice Furniture produces three products
 Desks (D)
 Chairs (C)
– Raw material required
 Molded steel (M)
 7 pounds of per desk
– Net profit is
 3 pounds of per chair
 $50 per desk
 1.5 pounds per one pound of
 $30 per chair molded steel produced.
 $6 per pound of molded steel – Raw material available
sold
2000 pounds

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 Mathematical Modeling

 Objective: Determine production mix that maximizes the

profit under the raw material constraint and other
production requirements (detailed next).
 Maximize 50D + 30C + 6 M
Subject to 7D + 3C + 1.5M 2000 (raw steel)
D 100 (contract )
C 500 (cushions available)
D, C, M 0 (Non-negativity)
D and C are integers
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 Classification of Mathematical Models

 Prescriptive models “prescribe” behavior for an

organization that will enable it to best meet its goals.
– Components of this model include:
 objective function(s)
 decision variables
 constraints
 An optimization model seeks to find values of the
decision variables that optimize (maximize or minimize)
an objective function among the set of all values for the
decision variables that satisfy the given constraints.
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 Classification of Mathematical Models

 Classification by the model purpose

– Optimization models
– Prediction models
 Classification by the degree of certainty of the data in the
model
– Deterministic models
– Probabilistic (stochastic) models

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  A static model is one in which the decision variables do not
involve sequences of decisions over multiple periods.
 A dynamic model is a model in which the decision variables
do involve sequences of decisions over multiple periods.
 A linear model is one in which decision variables appear in
the objective function and in the constraints of an optimization
model.
 A Nonlinear model. In general, nonlinear models are much
harder to solve.
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  If one or more of the decision variables must be integer, then we
say that an optimization model is an integer model.
 If all the decision variables are free to assume fractional values,
then an optimization model is a noninteger model. .
 Integer models are much harder to solve than noninteger models
 A deterministic model is a model in which for any value of the
decision variables the value of the objective function and whether
or not the constraints are satisfied is known with certainty. If this is
not the case, then we have a stochastic model.

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 The Seven-Step Model-Building Process

1. Formulate the Problem

– Define the problem.
– Specify objectives.
– Determine parts of the organization to be studied.
2. Observe the System
– Determine parameters affecting the problem.
– Collect data to estimate values of the parameters.
3. Formulate a Mathematical Model of the Problem

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 4. Verify the Model and Use the Model for Prediction
– Does the model yield results for values of decision variables
not used to develop the model?
– What eventualities might cause the model to become invalid?
5. Select a Suitable Alternative
– Given a model and a set of alternative solutions, determine
which solution best meets the organizations objectives.

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 6. Present the Results and Conclusion(s) of the Study to
the Organization
– Present the results to the decision maker(s)
 If necessary, prepare several alternative solutions and permit the
organization to choose the one that best meets their needs.
– Any non-approval of the study’s recommendations may have
stemmed from an incorrect problem definition or failure to
involve the decision maker(s) from the start of the project.
 In such a case, return to step 1, 2, or 3.

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 7. Implement and Evaluate Recommendations
 Assist in implementing the recommendations.
 Monitor and dynamically update the system as the environment
and parameters change to ensure that recommendations
enable the organization to meet its goals.

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 1.6 Using Spreadsheets in Management
Science Models

 Spreadsheets have become a powerful tool in

management science modeling.
 Several reasons for the popularity of spreadsheets:
– Data are submitted to the modeler in spreadsheets
– Data can be analyzed easily using statistical and mathematical
tools readily available in the spreadsheet.
– Data and information can easily be displayed using graphical
tools.

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 Basic Excel functions and operators

 Arithmetic Operations
– Addition of cells A1and B1: = A1 + B1
– Subtracting cell B1 from A1: = A1 - B1
– Multiplication of cell A1 by B1: = A1 * B1
– Division of cell A1 by B1: = A1 / B1
– Cell A1xraised to the power in cell B1: = A1^ B1

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 Basic Excel functions and operators

 Relative and absolute addresses

– All row and column references are considered relative unless
preceded by a “$” sign
– When copied, ‘relative addresses’ change relative to the
original cell position.

Example: Cell E5 =A1+B$3+$C4+$D$6

Cell G9 = C5+D$3+$C8+$D$6

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 Basic Excel functions and operators

 The F4 key
– Pressing F4 will automatically put a $ sign in highlighted
portions of formulas.
– Specific operations:
 Press the F4 key once: The sign “$” appears in front of all rows and
columns of the highlighted area of the formula.
 Press the F4 key twice: The “$” sign appears in front of only the row
references of the highlighted area of the formula.
 Press the F4 key third time: The “$” sign appears in front of only the
column references of the highlighted area of the formula.
 Press the F4 key forth time: All the “$” signs are eliminated.

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 Basic Excel functions and operators

 Arithmetic functions
– Sum =SUM(A1:A3)
 Returns the sum A1+A2+A3
– Average =Average(A1:A3)
 Returns the arithmetic average of cells A1, A2, A3
– SUMPRODUCT =SUMPRODUCT(A1:A3,B1:B3)
 Returns the sum of products A1B1+A2B2+A3B3
– ABS =ABS(A3)
 Returns the absolute value of the entry in cell A3.

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 Basic Excel functions and operators

 Arithmetic functions – continued

– SQRT =SQRT(A3)
 Returns A3
– MAX =MAX(A1:A9)
 Returns the Maximum of the entries in cells A1 through A9.
– MIN =MIN(A1:A9)
 Returns the Minimum of the entries in cells A1 through A9.

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 Basic Excel functions and operators

 Statistical functions
– RAND() =RAND()
 Generate a random number between 0 and 1 from a uniform distribution.
– Probabilities and variable values under the normal distribution
 NORMDIST NORMINV
=NORMDIST(25,20,3,TRUE) =NORMINV(.55,20,3)
Returns P(X<25) when m = 20 Returns x0,, such that P(X<x0)=.55
and s = 3 when m = 20 and s = 3
 NORMSDIST NORMSMINV
=NORMSDIST(1.78) =NORMSINV(.55)
Returns P(Z<1.78) Returns z0, such that P(Z<z0)=.55

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 Basic Excel functions and operators

 Statistical functions
– Probabilities and variable values under the t- distribution
 TDIST TINV
=TDIST(1.5,12,1) =TINV(.05,15)
Returns P(t>1.5) when n=12 Returns t0,, such that
P(t<-t0)=.025 and P(t>t0)=.025
when n=15.
Note:
=TDIST(1.5,12,2)
returns P(t<-1.5) + P(t>1.5)
when n=12.

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 Basic Excel functions and operators

 Statistical functions – Other probability distributions

– Poisson =POISSON(7,5,TRUE)
 Returns P(X<7) for Poisson with l = 5.
Note: false returns the probability density P(X = 7)
– EXPONDIST =EXPONDIST(40,1/20,TRUE)
 Returns P(X<40) for the exponential distribution with 1/m=20
Note: false returns the probability density f(40)=20exp(-20(40))

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 Basic Excel functions and operators

 Conditional functions:
– IF =IF(A4>4,B1+B2, B1 – B2)
 Returns B1+B2 if A4>4, and B1 – B2 if A4

– SUMIF =SUMIF(F1:F12, “>60”,G1:G12)

 Returns G1+G2+…+G12 only if F1+F2+…+F12>60

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 Basic Excel functions and operators

– VLOOKUP =VLOOKUP(6.6,A1:E6,4)
 If the values in column A of a given table [A1:E6] are sorted (in an
ascending order), VLOOKUP finds the largest value in column A that is
less than or equal to 6.6, identifies the row it belongs to, and returns the
value in the fourth column that correspond to this row.

Note: If the values in column A are not sorted,

=VLOOKUP(6.6,A1:E6,4,FALSE) finds the value 6.6 in column A,
identifies the row it belongs to, and returns the value in the fourth
column that corresponds to this row.

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 Basic Excel functions and operators

 Statistical/Optimization
– Data Analysis [Selected from the Tools menu]. Useful entries:
 Descriptive Statistics
 Regression
 Exponential Smoothing
 Anova

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