An Introduction to

Management Science
Quantitative Approaches to Decision Making
Fifteenth Edition

David R. Anderson Dennis J. Sweeney Thomas A. Williams

University of Cincinnati University of Cincinnati Rochester Institute
of Technology
Jeffrey D. Camm James J. Cochran
Wake Forest University University of Alabama

Michael J. Fry Jeffrey W. Ohlmann

University of Cincinnati University of Iowa

Australia Brazil Mexico Singapore United Kingdom United States

● ● ● ● ●

Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
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 Brief Contents

Preface xxi
About the Authors xxv
Chapter 1 Introduction 1
Chapter 2 An Introduction to Linear Programming 27
Chapter 3 Linear Programming: Sensitivity Analysis
and Interpretation of Solution 84
Chapter 4 Linear Programming Applications in Marketing,
Finance, and Operations Management 139
Chapter 5 Advanced Linear Programming Applications 195
Chapter 6 Distribution and Network Models 234
Chapter 7 Integer Linear Programming 291
Chapter 8 Nonlinear Optimization Models 336
Chapter 9 Project Scheduling: PERT/CPM 381
Chapter 10 Inventory Models 417
Chapter 11 Waiting Line Models 461
Chapter 12 Simulation 497
Chapter 13 Decision Analysis 543
Chapter 14 Multicriteria Decisions 613
Chapter 15 Time Series Analysis and Forecasting 654
Chapter 16 Markov Processes On Website
Chapter 17 Linear Programming: Simplex Method On Website
Chapter 18 Simplex-Based Sensitivity Analysis and Duality
On Website
Chapter 19 Solution Procedures for Transportation and
Assignment Problems On Website
Chapter 20 Minimal Spanning Tree On Website
Chapter 21 Dynamic Programming On Website
Appendices 711
Appendix A Building Spreadsheet Models 712
Appendix B Areas for the Standard Normal Distribution 741
Appendix C Values of e2l 743
Appendix D References and Bibliography 744
Appendix E Self-Test Solutions and Answers
to Even-Numbered Exercises On Website
Index 747

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 Contents

Preface xxi
About the Authors xxv
Chapter 1 Introduction 1
1.1 Problem Solving and Decision Making 3
1.2 Quantitative Analysis and Decision Making 4
1.3 Quantitative Analysis 6
Model Development 7
Data Preparation 9
Model Solution 10
Report Generation 12
A Note Regarding Implementation 12
1.4 Models of Cost, Revenue, and Profit 13
Cost and Volume Models 13
Revenue and Volume Models 14
Profit and Volume Models 14
Breakeven Analysis 14
1.5 Management Science Techniques 15
Methods Used Most Frequently 16
Summary 18
Glossary 18
Problems 19
Case Problem Scheduling a Golf League 23
Appendix 1.1 Using Excel for Breakeven Analysis 24

Chapter 2 An Introduction to Linear Programming 27

2.1 A Simple Maximization Problem 29
Problem Formulation 29
Mathematical Statement of the Par, Inc., Problem 32
2.2 Graphical Solution Procedure 33
A Note on Graphing Lines 41
Summary of the Graphical Solution Procedure
for Maximization Problems 43
Slack Variables 44
2.3 Extreme Points and the Optimal Solution 45
2.4 Computer Solution of the Par, Inc., Problem 46
Interpretation of Computer Output 47
2.5 A Simple Minimization Problem 48
Summary of the Graphical Solution Procedure for Minimization
Problems 50

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x Contents

Surplus Variables 50
Computer Solution of the M&D Chemicals Problem 52
2.6 Special Cases 53
Alternative Optimal Solutions 53
Infeasibility 54
Unbounded 56
2.7 General Linear Programming Notation 57
Summary 58
Glossary 60
Problems 61
Case Problem 1 Workload Balancing 75
Case Problem 2 Production Strategy 76
Case Problem 3 Hart Venture Capital 77
Appendix 2.1 Solving Linear Programs with Excel Solver 78
Appendix 2.2 Solving Linear Programs with LINGO 82

Chapter 3 Linear Programming: Sensitivity Analysis and

Interpretation of Solution 84
3.1 Introduction to Sensitivity Analysis 86
3.2 Graphical Sensitivity Analysis 86
Objective Function Coefficients 87
Right-Hand Sides 91
3.3 Sensitivity Analysis: Computer Solution 94
Interpretation of Computer Output 94
Cautionary Note on the Interpretation of Dual Values 96
The Modified Par, Inc., Problem 97
3.4 Limitations of Classical Sensitivity Analysis 100
Simultaneous Changes 101
Changes in Constraint Coefficients 102
Nonintuitive Dual Values 103
3.5 The Electronic Communications Problem 105
Problem Formulation 106
Computer Solution and Interpretation 107
Summary 110
Glossary 111
Problems 112
Case Problem 1 Product Mix 131
Case Problem 2 Investment Strategy 132
Case Problem 3 Truck Leasing Strategy 133
Appendix 3.1 Sensitivity Analysis with Excel Solver 133
Appendix 3.2 Sensitivity Analysis with Lingo 136

Chapter 4 Linear Programming Applications in Marketing,

Finance, and Operations Management 139
4.1 Marketing Applications 140
Media Selection 140
Marketing Research 143

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 Contents xi

4.2 Financial Applications 146

Portfolio Selection 146
Financial Planning 149
4.3 Operations Management Applications 153
A Make-or-Buy Decision 153
Production Scheduling 157
Workforce Assignment 163
Blending Problems 166
Summary 171
Problems 171
Case Problem 1 Planning an Advertising Campaign 184
Case Problem 2 Schneider’s Sweet Shop 185
Case Problem 3 Textile Mill Scheduling 186
Case Problem 4 Workforce Scheduling 187
Case Problem 5 Duke Energy Coal Allocation 189
Appendix 4.1 Excel Solution of Hewlitt Corporation Financial Planning
Problem 191

Chapter 5 Advanced Linear Programming Applications 195

5.1 Data Envelopment Analysis 196
Evaluating the Performance of Hospitals 197
Overview of the DEA Approach 197
DEA Linear Programming Model 198
Summary of the DEA Approach 203
5.2 Revenue Management 203
5.3 Portfolio Models and Asset Allocation 209
A Portfolio of Mutual Funds 210
Conservative Portfolio 210
Moderate Risk Portfolio 213
5.4 Game Theory 216
Competing for Market Share 216
Identifying a Pure Strategy Solution 219
Identifying a Mixed Strategy Solution 219
Summary 226
Glossary 226
Problems 227

Chapter 6 Distribution and Network Models 234

6.1 Supply Chain Models 235
Transportation Problem 235
Problem Variations 240
A General Linear Programming Model 241
Transshipment Problem 242
Problem Variations 245
A General Linear Programming Model 247
6.2 Assignment Problem 248
Problem Variations 251
A General Linear Programming Model 252

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xii Contents

6.3 Shortest-Route Problem 253

A General Linear Programming Model 256
6.4 Maximal Flow Problem 257
6.5 A Production and Inventory Application 260
Summary 263
Glossary 264
Problems 265
Case Problem 1 Solutions Plus 281
Case Problem 2 Supply Chain Design 282
Appendix 6.1 Excel Solution of Transportation, ­Transshipment,
and Assignment Problems 284

Chapter 7 Integer Linear Programming 291

7.1 Types of Integer Linear Programming Models 293
7.2 Graphical and Computer Solutions for an All-Integer Linear
Program 295
Graphical Solution of the LP Relaxation 295
Rounding to Obtain an Integer Solution 295
Graphical Solution of the All-Integer Problem 297
Using the LP Relaxation to Establish Bounds 297
Computer Solution 298
7.3 Applications Involving 0-1 Variables 298
Capital Budgeting 299
Fixed Cost 300
Distribution System Design 302
Bank Location 305
Product Design and Market Share Optimization 309
7.4 Modeling Flexibility Provided by 0-1 Integer Variables 313
Multiple-Choice and Mutually Exclusive Constraints 313
k out of n Alternatives Constraint 313
Conditional and Corequisite Constraints 314
A Cautionary Note About Sensitivity Analysis 315
Summary 316
Glossary 316
Problems 317
Case Problem 1 Textbook Publishing 327
Case Problem 2 Yeager National Bank 328
Case Problem 3 Production Scheduling with Changeover Costs 329
Case Problem 4 Applecore Children’s Clothing 329
Appendix 7.1 Excel Solution of Integer Linear Programs 331
Appendix 7.2 Lingo Solution of Integer Linear Programs 334

Chapter 8 Nonlinear Optimization Models 336

8.1 A Production Application—Par, Inc., Revisited 338
An Unconstrained Problem 338
A Constrained Problem 339

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 Contents xiii

Local and Global Optima 341

Dual Values 344
8.2 Constructing an Index Fund 345
8.3 Markowitz Portfolio Model 349
8.4 Blending: The Pooling Problem 352
8.5 Forecasting Adoption of a New Product 356
Summary 361
Glossary 361
Problems 362
Case Problem 1 Portfolio Optimization with Transaction Costs 370
Case Problem 2 Cafe Compliance in the Auto Industry 373
Appendix 8.1 Solving Nonlinear Problems with Excel Solver 375
Appendix 8.2 Solving Nonlinear Problems with LINGO 378

Chapter 9 Project Scheduling: PERT/CPM 381

9.1 Project Scheduling Based on Expected Activity Times 382
The Concept of a Critical Path 383
Determining the Critical Path 385
Contributions of PERT/CPM 389
Summary of the PERT/CPM Critical Path Procedure 390
9.2 Project Scheduling Considering Uncertain Activity Times 391
The Daugherty Porta-Vac Project 391
Uncertain Activity Times 391
The Critical Path 394
Variability in Project Completion Time 395
9.3 Considering Time–Cost Trade-Offs 399
Crashing Activity Times 400
Linear Programming Model for Crashing 402
Summary 404
Glossary 404
Problems 405
Case Problem 1 R. C. Coleman 414
Appendix 9.1 Finding Cumulative Probabilities for N
­ ormally Distributed
Random Variables 416

Chapter 10 Inventory Models 417

10.1 Economic Order Quantity (EOQ) Model 418
The How-Much-to-Order Decision 422
The When-to-Order Decision 423
Sensitivity Analysis for the EOQ Model 424
Excel Solution of the EOQ Model 425
Summary of the EOQ Model Assumptions 426
10.2 Economic Production Lot Size Model 427
Total Cost Model 427
Economic Production Lot Size 429

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xiv Contents

10.3 Inventory Model with Planned Shortages 430

10.4 Quantity Discounts for the EOQ Model 434
10.5 Single-Period Inventory Model with Probabilistic Demand 436
Neiman Marcus 437
Nationwide Car Rental 440
10.6 Order-Quantity, Reorder Point Model with Probabilistic Demand 441
The How-Much-to-Order Decision 443
The When-to-Order Decision 443
10.7 Periodic Review Model with Probabilistic Demand 445
More Complex Periodic Review Models 448
Summary 449
Glossary 449
Problems 450
Case Problem 1 Wagner Fabricating Company 457
Case Problem 2 River City Fire Department 458
Appendix 10.1 Development of the Optimal Order Quantity (Q)
Formula for the EOQ Model 459
Appendix 10.2 Development of the Optimal Lot Size (Q*) Formula for
the Production Lot Size Model 460

Chapter 11 Waiting Line Models 461

11.1 Structure of a Waiting Line System 463
Single-Server Waiting Line 463
Distribution of Arrivals 463
Distribution of Service Times 464
Queue Discipline 465
Steady-State Operation 465
11.2 Single-Server Waiting Line Model with Poisson Arrivals and
Exponential Service Times 466
Operating Characteristics 466
Operating Characteristics for the Burger Dome Problem 467
Managers’ Use of Waiting Line Models 468
Improving the Waiting Line Operation 468
Excel Solution of Waiting Line Model 469
11.3 Multiple-Server Waiting Line Model with Poisson Arrivals and
Exponential Service Times 470
Operating Characteristics 471
Operating Characteristics for the Burger Dome Problem 472
11.4 Some General Relationships for Waiting Line Models 475
11.5 Economic Analysis of Waiting Lines 476
11.6 Other Waiting Line Models 478
11.7 Single-Server Waiting Line Model with Poisson Arrivals and Arbitrary
Service Times 479
Operating Characteristics for the M/G/1 Model 479
Constant Service Times 480

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 Contents xv

11.8 Multiple-Server Model with Poisson Arrivals, Arbitrary Service Times,

and No Waiting Line 481
Operating Characteristics for the M/G/k Model with Blocked Customers
Cleared 481
11.9 Waiting Line Models with Finite Calling Populations 483
Operating Characteristics for the M/M/1 Model with a Finite Calling
Population 483
Summary 486
Glossary 487
Problems 487
Case Problem 1 Regional Airlines 494
Case Problem 2 Office Equipment, Inc. 495

Chapter 12 Simulation 497

12.1 What-If Analysis 499
Sanotronics 499
Base-Case Scenario 499
Worst-Case Scenario 500
Best-Case Scenario 500
12.2 Simulation of Sanotronics Problem 500
Use of Probability Distributions to Represent Random Variables 501
Generating Values for Random Variables with Excel 502
Executing Simulation Trials with Excel 506
Measuring and Analyzing Simulation Output 507
12.3 Inventory Simulation 510
Simulation of the Butler Inventory Problem 512
12.4 Waiting Line Simulation 514
Black Sheep Scarves 515
Customer (Scarf) Arrival Times 515
Customer (Scarf) Service (Inspection) Times 515
Simulation Model 516
Simulation of Black Sheep Scarves 519
Simulation with Two Quality Inspectors 520
Simulation Results with Two Quality Inspectors 521
12.5 S
 imulation Considerations 523
Verification and Validation 523
Advantages and Disadvantages of Using Simulation 524
Summary 524
Summary of Steps for Conducting a Simulation Analysis 525
Glossary 525
Problems 526
Case Problem 1 Four Corners 532
Case Problem 2 Harbor Dunes Golf Course 534
Case Problem 3 County Beverage Drive-Thru 535
Appendix 12.1 Probability Distributions for Random Variables 537
Appendix 12.2 Simulation with Analytic Solver 540

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xvi Contents

Chapter 13 Decision Analysis 543

13.1 Problem Formulation 545
Influence Diagrams 545
Payoff Tables 546
Decision Trees 546
13.2 Decision Making Without Probabilities 547
Optimistic Approach 548
Conservative Approach 548
Minimax Regret Approach 549
13.3 Decision Making with Probabilities 550
Expected Value of Perfect Information 553
13.4 Risk Analysis and Sensitivity Analysis 554
Risk Analysis 554
Sensitivity Analysis 555
13.5 Decision Analysis with Sample Information 559
Influence Diagram 559
Decision Tree 560
Decision Strategy 562
Risk Profile 564
Expected Value of Sample Information 568
Efficiency of Sample Information 568
13.6 Computing Branch Probabilities with Bayes’ Theorem 568
13.7 Utility Theory 572
Utility and Decision Analysis 574
Utility Functions 577
Exponential Utility Function 580
Summary 582
Glossary 582
Problems 584
Case Problem 1 Property Purchase Strategy 597
Case Problem 2 Lawsuit Defense Strategy 599
Case Problem 3 Rob’s Market 600
Case Problem 4 College Softball Recruiting 601
Appendix 13.1 Decision Trees with Analytic Solver 602

Chapter 14 Multicriteria Decisions 613

14.1 Goal Programming: Formulation and Graphical Solution 614
Developing the Constraints and the Goal Equations 615
Developing an Objective Function with Preemptive Priorities 616
Graphical Solution Procedure 617
Goal Programming Model 620
14.2 Goal Programming: Solving More Complex Problems 621
Suncoast Office Supplies Problem 621
Formulating the Goal Equations 622
Formulating the Objective Function 623
Computer Solution 624

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 Contents xvii

14.3 Scoring Models 626

14.4 Analytic Hierarchy Process 630
Developing the Hierarchy 631
14.5 Establishing Priorities Using AHP 631
Pairwise Comparisons 632
Pairwise Comparison Matrix 633
Synthesization 635
Consistency 636
Other Pairwise Comparisons for the Car Selection Problem 637
14.6 Using AHP to Develop an Overall Priority Ranking 639
Summary 641
Glossary 642
Problems 642
Case Problem 1 EZ Trailers, Inc. 651
Appendix 14.1 Scoring Models with Excel 652

Chapter 15 Time Series Analysis and Forecasting 654

15.1 Time Series Patterns 656
Horizontal Pattern 656
Trend Pattern 657
Seasonal Pattern 660
Trend and Seasonal Pattern 660
Cyclical Pattern 660
Selecting a Forecasting Method 662
15.2 Forecast Accuracy 663
15.3 Moving Averages and Exponential Smoothing 668
Moving Averages 668
Weighted Moving Averages 671
Exponential Smoothing 672
15.4 Linear Trend Projection 675
15.5 Seasonality 679
Seasonality Without Trend 679
Seasonality with Trend 682
Models Based on Monthly Data 684
Summary 685
Glossary 685
Problems 686
Case Problem 1 Forecasting Food and Beverage Sales 693
Case Problem 2 Forecasting Lost Sales 694
Appendix 15.1 Forecasting with Excel Data Analysis Tools 695
Appendix 15.2 Using the Excel Forecast Sheet 703

Chapter 16 Markov Processes 16-1 On Website

16.1 Market Share Analysis 16-2
16.2 Accounts Receivable Analysis 16-10
Fundamental Matrix and Associated Calculations 16-11
Establishing the Allowance for Doubtful Accounts 16-12

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xviii Contents

Summary 16-14
Glossary 16-15
Problems 16-15
Case Problem 1 Dealer’s Absorbing State Probabilities in
Blackjack 16-20
Appendix 16.1 Matrix Notation and Operations 16-21
Appendix 16.2 Matrix Inversion with Excel 16-24

Chapter 17  inear Programming: Simplex Method 17-1

L
On Website
17.1 An Algebraic Overview of the Simplex Method 17-2
Algebraic Properties of the Simplex Method 17-3
Determining a Basic Solution 17-3
Basic Feasible Solution 17-4
17.2 Tableau Form 17-6
17.3 Setting up the Initial Simplex Tableau 17-7
17.4 Improving the Solution 17-9
17.5 Calculating the Next Tableau 17-11
Interpreting the Results of an Iteration 17-13
Moving Toward a Better Solution 17-14
Summary of the Simplex Method 17-16
17.6 Tableau Form: The General Case 17-17
Greater-Than-or-Equal-to Constraints 17-17
Equality Constraints 17-21
Eliminating Negative Right-Hand-Side Values 17-22
Summary of the Steps to Create Tableau Form 17-22
17.7 Solving a Minimization Problem 17-24
17.8 Special Cases 17-26
Infeasibility 17-26
Unboundedness 17-27
Alternative Optimal Solutions 17-28
Degeneracy 17-29
Summary 17-31
Glossary 17-32
Problems 17-33

Chapter 18  implex-Based Sensitivity Analysis and Duality 18-1

S
On Website
18.1 Sensitivity Analysis with the Simplex Tableau 18-2
Objective Function Coefficients 18-2
Right-Hand-Side Values 18-6
18.2 Duality 18-12
Economic Interpretation of the Dual Variables 18-14
Using the Dual to Identify the Primal Solution 18-16
Finding the Dual of Any Primal Problem 18-16

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 Contents xix

Summary 18-18
Glossary 18-18
Problems 18-19

Chapter 19  olution Procedures for Transportation

S
and Assignment Problems 19-1 On Website
19.1 Transportation Simplex Method: A Special-Purpose Solution
Procedure 19-2
Phase I: Finding an Initial Feasible Solution 19-3
Phase II: Iterating to the Optimal Solution 19-6
Summary of the Transportation Simplex Method 19-14
Problem Variations 19-16
19.2 Assignment Problem: A Special-Purpose Solution Procedure 19-17
Finding the Minimum Number of Lines 19-19
Problem Variations 19-20
Glossary 19-23
Problems 19-24

Chapter 20 Minimal Spanning Tree 20-1 On Website

20.1 A Minimal Spanning Tree Algorithm 20-2
Glossary 20-5
Problems 20-5
Case Problem Hinds County Realty Partners, Inc. 20-7

Chapter 21 Dynamic Programming 21-1 On Website

21.1 A Shortest-Route Problem 21-2
21.2 Dynamic Programming Notation 21-6
21.3 The Knapsack Problem 21-9
21.4 A Production and Inventory Control Problem 21-15
Summary 21-19
Glossary 21-20
Problems 21-20
Case Problem Process Design 21-24
Appendices 711
Appendix A Building Spreadsheet Models 712
Appendix B Areas for the Standard Normal Distribution 741
Appendix C Values of e2l 743
Appendix D References and Bibliography 744
Appendix E Self-Test Solutions and Answers to Even-Numbered
Exercises On Website
Index 747

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