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MANAGERIAL DECISION MODELING WITH SPREADSHEETS

SECOND EDITION

Nagraj (Raju) Balakrishnan

Professor of Management Clemson University

Barry Render
Charles Harwood Professor of Management Science Graduate School of Business, Rollins College

Ralph M. Stair, Jr.

Professor Emeritus of Management Information Systems Florida State University

PEARSON

Prentice Hall

PRENTICE HALL
Upper Saddle River, New Jersey 07458

CHAPTER 1
1.1 1.2

Introduction to Managerial Decision Making 1 What is Decision Modeling? 2 Types of Decision Models 2
Deterministic Models 2 Probabilistic Models 3 Quantitative versus Qualitative Data 4 Using Spreadsheets in Decision Modeling 4 Steps Involved in Decision Modeling 6 Step 1: Formulation 6 Step 2: Solution 8 Step 3: Interpretation and Sensitivity Analysis 8 Decision Modeling in the Real World 9 Spreadsheet Example of a Decision Model: Tax Computation 9 Spreadsheet Example of Another Decision Model: Break-Even Analysis 13 Using Goal Seek to Find the Break-Even Point 15 Possible Problems in Developing Decision Models 17 Defining the Problem 17 Developing a Model 17 Acquiring Input Data 18 Developing a Solution 18 Testing the Solution 19 Analyzing the Results 19

2.3

1.3

2.4

1.4 1.5

1.6

2.5

1.7

ImplementationNot Just the Final

Step 19 Summary 20 Glossary 20 Discussion Questions and Problems 20 Bibliography 22

2.6

CHAPTER 2

2.1 2.2

Linear Programming Models: Graphical and Computer Methods 23 Introduction 24 Development of a Linear Programming Model 25
Formulation 25 Solution 25 Interpretation and Sensitivity Analysis 25

2.7

Properties of a Linear Programming Model 25 Basic Assumptions of a Linear Programming Model 26 Formulating a Lhiear Programming Problem 27 Linear Programming Example: Flair Furniture Company 28 Decision Variables 28 The Objective Function 29 Constraints 29 Nonnegativity Constraints and Integer Values 30 Guidelines to Developing a Correct LP Model 30 Graphical Solution of a Linear Programming Problem with Two Variables 32 Graphical Representation of Constraints 32 Feasible Region 35 Identifying an Optimal Solution by Using Level Lines 36 Identifying an Optimal Solution by Using All Corner Points 39 Comments on Flair Furniture's Optimal Solution 39 Extension to Flair Furniture's LP Model 40 A Minimization Linear Programming Problem 41 Holiday Meal Turkey Ranch 42 Graphical Solution of the Holiday Meal Turkey Ranch Problem 43 Special Situations in Solving Linear Programming Problems 44 Redundant Constraints 45 Infeasibility 46 Alternate Optimal Solutions 46 Unbounded Solution 47 Setting Up and Solving Linear Programming Problems Using Excel's Solver 49 Using Solver to Solve the Flair Furniture Problem 49

Vlll

Contents Changing Cells 50 Target Cell 51 Constraints 52 Entering Information in Solver 53 Using Solver to Solve Flair Furniture Company's Modified Problem 58 Using Solver to Solve the Holiday Meal Turkey Ranch Problem 59 2.8 Premium Solver for Education 61 2.9 Algorithmic Solution Procedures for Linear Programming Problems 63 Simplex Method 63 Karmarkar's Algorithm 63 Summary 64 Glossary 64 Solved Problems 65 Discussion Questions and Problems 68 Case Study: Mexicana Wire Winding, Inc. 74 Case Study: Golding Landscaping and Plants, Inc. 75 Bibliography 76 Summary 121 Solved Problem 122 Problems 124 Case Study: Chase Manhattan Bank 137 Bibliography 137 CHAPTER 4 4.1 Linear Programming Sensitivity Analysis 139 Introduction 140 Why Do We Need to Study Sensitivity Analysis? 140 Sensitivity Analysis Using Graphs 141 Types of Sensitivity Analysis 142 Impact of Changes in an Objective Function Coefficient 143 Impact of Changes in a Constraint's Right-Hand-Side Value 145 Sensitivity Analysis Using Solver Reports 149 Solver Reports 150 Sensitivity Report 151 Impact of Changes in a Constraint's Right-Hand-Side Value 152 Impact of Changes in an Objective Function Coefficient 153 Sensitivity Analysis for a Larger Maximization Example 156 Anderson Electronics Example 156 Some Questions We Want Answered 156 Alternate Optimal Solutions 160 Analyzing Simultaneous Changes by Using the 100% Rule 161 Simultaneous Changes in Constraint RHS Values 161 Simultaneous Changes in OFC Values 162 Pricing Out New Variables 162 Anderson's Proposed New Product 162 Sensitivity Analysis for a Minimization Example 165 Burn-Off Diet Drink Example 165 Burn-Off's Excel Solution 165 Answering Sensitivity Analysis Questions for Burn-Off 167 Summary 168 Glossary 168 Solved Problem 169 Discussion Questions and Problems 172 Case Study: Coastal States Chemicals and Fertilizers 182 Bibliography 183 Transportation, Assignment, and Network Models 185 Introduction 186 Transportation Model 186 Transshipment Model 186

4.2

4.3

CHAPTER 3
3.1 3.2

3.3

3.4

3.5

3.6

3.7

3.8

Linear Programming Modeling Applications with Computer Analyses in Excel 79 Introduction 80 Manufacturing Applications 81 Product Mix Problem 81 Make-Buy Decision Problem 84 Marketing Applications 88 Media Selection Problem 88 Marketing Research Problem 90 Finance Applications 93 Portfolio Selection Problem 93 Alternate Formulations of the Portfolio Selection Problem 96 Employee Staffing Applications 98 Labor Planning Problem 98 Extensions to the Labor Planning , Problem 100 Assignment Problem 101 Transportation Applications 101 Vehicle Loading Problem 101 Expanded Vehicle Loading ProblemAllocation Problem 103 Transportation Problem 105 Blending Applications 106 Diet Problem 106 Blending Problem 108 Multiperiod Applications 112 Production Scheduling Problem 112 Sinking Fund Problem 118

4.4

A Z

4.6 4.7

CHAPTER 5
5.1

Contents Assignment Model 186 Maximal-Flow Model 186 Shortest-Path Model 187 Minimal-Spanning Tree Model 187 Characteristics of Network Models 187 Types of Arcs 187 Types of Nodes 188 Transportation Model 190 LP Formulation for Executive Furniture's Transportation Model 191 Solving the Transportation Model Using Excel 193 Alternate Excel Layout for the Transportation Model 193 Unbalanced Transportation Models 194 Alternate Optimal Solutions 197 An Application of the Transportation Model: Facility Location 197 Transportation Models with Max~Min andMin -Max Objectives 197 Transshipment Model 200 Executive Furniture Company ExampleRevisited 200 LP Formulation for Executive Furniture's Transshipment Model 201 Assignment Model 203 Fix-It Shop Example 203 Solving Assignment Models 204 LP Formulation for Fix-It Shop's Assignment Model 205 Maximal-Flow Model 207 Road System in Waukesha, Wisconsin 207 LP Formulation for Waukesha Road System's Maximal-Flow Model 208

IX

6.2

5.2

5.3

6.3

6.4

5.4 5.5

6.5

5.6

6.6

5.7

5.8

Shortest-Path Model 211

Ray Design Inc. Example 212 LP Formulation for Ray Design Inc.'s ' Shortest-Path Model 212 Minimal-Spanning Tree Model 214 Lauderdale Construction Company Example 214 Summary 217 Glossary 217 Solved Problems 218 Discussion Questions and Problems 224 Case Study: Old Oregon Wood Store 232 Case Study: Custom Vans Inc. 233 Case Study: Binder's Beverage 235 Bibliography 236

5.9

Integer Programming Models 238 Goal Programming Models 238 Nonlinear Programming Models 238 Models with General Integer Variables 239 Harrison Electric Company 239 Using Solver to Solve Models with General Integer Variables 242 How Are IP Models Solved? 244 Solver Options 245 Should We Include Integer Requirements in a Model? 247 Models with Binary Variables 248 Portfolio Selection at Simkin and Steinberg 248 Set Covering Problem at Sussex County 252 Mixed Integer Models: Fixed-Charge Problems 254 Locating a New Factory for Hardgrave Machine Company 255 Goal Programming Models 259 Goal Programming Example: Wilson Doors Company 259 Solving Goal Programming Models with Weighted Goals 262 Solving Goal Programming Models with Ranked Goals 265 Comparing the Two Approaches for Solving GP Models 271 Nonlinear Programming Models 271 Why Are NLP Models Difficult to Solve? 271 Solving Nonlinear Programming Models Using Solver 273 Computational Procedures for Nonlinear Programming Problems 278 Summary 278 Glossary 279 Solved Problems 279 Discussion Questions and Problems 285 Case Study: Schank Marketing Research 292 Case Study: Oakton River Bridge 292 Case Study: PuyallupMall 293 Bibliography 294

CHAPTER 7 7.1

Project Management 295 Introduction 296

Phases in Project Management 296 Use of Software Packages in Project Management 299 Project Networks 300 Identifying Activities 300 Identifying Activity Times and Other Resources 301

7.2

CHAPTER 6 6.1

Integer, Goal, and Nonlinear Programming Models 237 Introduction 238

Contents Project Management Techniques: PERT and CPM 301 Project Management Example: General Foundry, Inc. 302 Drawing the Project Network 303 Determining the Project Schedule 305 Forward Pass 306 Backward Pass 308 Calculating Slack Time and Identifying the Critical Path(s) 310 Total Slack Time versus Free Slack Time 311 Variability in Activity Times 313 PERT Analysis 313 Probability of Project Completion 316 Determining Project Completion Time for a Given Probability 317 Variability in Completion Time of Noncritical Paths 318 Managing Project Costs and Other Resources 319 Planning and Scheduling Project Costs: Budgeting Process 319 Monitoring and Controlling Project Costs 321 Managing Other Resources 323 Project Crashing 324 Crashing General Foundry's Project (Hand Calculations) 326 Crashing General Foundry's Project Using Linear Programming 329 Using Linear Programming to Determine Earliest and Latest Starting Times 331 Using Microsoft Project to Manage Projects 332 Creating a Project Schedule Using Microsoft Project 333 Tracking Progress and Managing Costs Using Microsoft Project 336 < Summary 340 Glossary 340 Solved Problems 341 Discussion Questions and Problems 342 Case Study: Haygood Brothers Construction Company 350 Case Study: Family Planning Research Center of Nigeria 351 Bibliography 352 Maximax Criterion 361 Maximin Criterion 361 Criterion of Realism (Hurwicz) 361 Equally Likely (Laplace) Criterion 362 Minimax Regret Criterion 362 Using Excel to Solve Decision-Making Problems under Uncertainty 363 Decision Making Under Risk 365 Expected Monetary Value 365 Expected Opportunity Loss 366 Expected Value of Perfect Information 367 Using Excel to Solve Decision-Making Problems under Risk 368 Decision Trees 368 Folding Back a Decision Tree 370 Using TreePlan to Solve Decision Tree Problems with Excel 372 Loading TreePlan 372 Creating a Decision Tree Using TreePlan 372 Decision Trees for Multistage Decision-Making Problems 377 A Multistage Decision-Making Problem for Thompson Lumber 378 Expanded Decision Tree for Thompson Lumber 378 Folding Back the Expanded Decision Tree for Thompson Lumber 380 Expected Value of Sample Information 382 Estimating Probability Values Using Bayesian Analysis 383 Calculating Revised Probabilities 384 Potential Problems in Using Survey Results 386 Utility Theory 386 Measuring Utility and Constructing a Utility Curve 387 Utility as a Decision-Making Criterion 390 Summary 392 Glossary 392 Solved Problems 393 Discussion Questions and Problems 397 Case Study: Ski Right 404 Case Study: Blake Electronics 405 Bibliography 407

7.3

8.5

7.4

8.7

7.5

8.8

7.6

8.9

7.7

8.10

CHAPTER 8 8.1 8.2 8.3 8.4

Decision Analysis 355 Introduction 356 The Five Steps in Decision Analysis 356
Thompson Lumber Company Example 356

CHAPTER 9
9.1 9.2 9.3

Queuing Models 409 Introduction 410 Approaches for Analyzing Queues 410

Types of Decision-Making Environments 358 Decision Making Under Uncertainty 360

Queuing System Costs 411 Characteristics of a Queuing System 412

Arrival Characteristics 412 Queue Characteristics 415

Contents Service Facility Characteristics 416 Measuring the Queue's Performance 418 Kendall's Notation for Queuing Systems 419 Variety of Queuing Models Studied Here 419 Single-Server Queuing System with Poisson Arrivals and Exponential Service Times (M/M/l Model) 420 Assumptions of the M/M/l Queuing Model 421 Operating Characteristic Equations for an M/M/l Queuing System 421 Arnold's Muffler Shop Example 422 Using ExcelModules for Queuing Model Computations 422 Cost Analysis of the Queuing System 426 Increasing the Service Rate 426 Multiple-Server Queuing System with Poisson Arrivals and Exponential Service Times (M/M/s Model) 427 Operating Characteristic Equations for an M/M/s Queuing System 428 Arnold's Muffler Shop Revisited 429 Cost Analysis of the Queuing System 430 Single-Server Queuing System with Poisson Arrivals and Constant Service Times (MIDI 1 Model) 431 Operating Characteristic Equations for an M/D/l Queuing System 431 Garcia-Golding Recycling, Inc. 432 Cost Analysis of the Queuing System 433 Single-Server Queuing System with Poisson Arrivals and General Service Times (MIG/1 Model) 433 Operating Characteristic Equations for an M/G/l Queuing System 434 Meetings with Professor Crino 435 Using Excel's Goal Seek to Identify Required Model Parameters 436 Multiple-Server Queuing System with Poisson Arrivals, Exponential Service Times, and Finite Population Size (M/M/s/oo/N Model) 438 Operating Characteristic Equations for the Finite Population Queuing System 438 Department of Commerce Example 439 Cost Analysis of the Queuing System 440 More Complex Queuing Systems 441 Summary 442 Glossary 442 Solved Problems 443 Discussion Questions and Problems 446 Case Study: New England Foundry 450 Case Study: Winter Park Hotel 452 Bibliography 452

XI

CHAPTER 10 10.1

Simulation Modeling 453 Introduction 454

9.4

9.5

What Is Simulation? 454 Advantages and Disadvantages of Simulation 455 10.2 Monte Carlo Simulation 457 Step 1: Establish a Probability Distribution for Each Variable 457 Step 2: Simulate Values from the Probability Distributions 458 Step 3: Repeat the Process for a Series of Replications 460 10.3 Role of Computers in Simulation 461 Types of Simulation Software Packages 462 Random Generation from Some Common Probability Distributions Using Excel 462 10.4 Simulation Model to Compute Expected Profit 467 Setting Up the Model 468 Replication by Copying the Model 470 Replication Using a Data Table 470 Analyzing the Results 472

9.6

70.5 Simulation Model of an Inventory Problem 473

Simkin's Hardware Store 474 Setting Up the Model 475 Computation of Costs 478 Replication Using Data Table 478 Analyzing the Results 480 Using Scenario Manager to Include Decisions in a Simulation Model 480 Analyzing the Results 482 10.6 Simulation Model of a Queuing Problem 483 Denton Savings Bank 483 Setting Up the Model 483 Replication Using Data Table 485 Analyzing the Results 486 10.7 Simulation Model of a Revenue Management Problem 486 Judith's Airport Limousine Service 486 Setting Up the Model 487 Replicating the Model Using Data Table and Scenario Manager 489 Analyzing the Results 490 10.8 Simulation Model of an Inventory Problem Using Crystal Ball 491 Reason for Using Add-in Programs 491 Simulation of Simkin's Hardware Store Using Crystal Ball 491

9.7

9.8

9.9

Xll

Contents Replicating the Model 493 Using Decision Table in Crystal Ball 495 Simulation Model of a Revenue Management Problem Using Crystal Ball 501 Setting Up the Model 501 Using Decision Table to Identify the Best Reservation Limit 502 Other Types of Simulation Models 504 Operational Gaming 504 Systems Simulation 505 Summary 505 Glossary 506 Solved Problems 506 Discussion Questions and Problems 515 Case Study: Alabama Airlines 524 Case Study: Abjar Transport Company 525 Bibliography 526

11.7 Decomposition of a Time Series 556

Multiplicative Decomposition Example: Sawyer Piano House 556 Using ExcelModules for Multiplicative Decomposition 557 Causal Forecasting Models: Simple and Multiple Regression 561 Causal Simple Regression Model 562 Causal Simple Regression Using ExcelModules 563 Casual Simple Regression Using Excel's Analysis ToolPak (Data Analysis) 568 Causal Multiple Regression Model 572 Causal Multiple Regression Using ExcelModules 573 Causal Multiple Regression Using Excel's Analysis ToolPak (Data Analysis) 576 Summary 581 Glossary 581 Solved Problems 582 Discussion Questions and Problems 586 Case Study: North-South Airline 593 Case Study: Forecasting Football Game Attendance at Southwestern University 594 Bibliography 595

10.9

11.8

10.10

CHAPTER 11 Forecasting Models 527 11.1 Introduction 528 11.2 Types of Forecasts 528 Qualitative Models 529 Time-Series Models 529 Causal Models 529 11.3 Qualitative Forecasting Models 530 11.4 Measuring Forecast Error 531 11.5 Basic Time-Series Forecasting Models 532 Components of a Time Series 532 Stationary and Nonstationary Time-Series Data 533 Moving Averages 534 Using ExcelModules for Forecasting Model Computations 534 Weighted Moving Averages 539 Exponential Smoothing 543 / 1.6 Trend and Seasonality In Time-Series Data 547 ' Linear Trend Analysis 547 Scatter Diagram 547 Least-Squares Procedure for Developing a Linear Trend Line 550 Seasonality Analysis 554

CHAPTER 12

Inventory Control Modelsappears in its entirety on Student CD-ROM Probability Concepts and Applications 598 Useful Excel Commands and Procedures for Installing ExcelModules 625 Areas Under the Standard Normal Curve 637 Brief Solutions to All Odd-Numbered End-Of-Chapter Problems 638 643

APPENDIX A APPENDIX B

APPENDIX C APPENDIX D

INDEX