Applied management science : modeling, spreadsheet analysis, and communication for decision making

1171 Pages·2002·74.701 MB·English

by  Lawrence John A., Pasternack Barry A.

A p p l i e d
M a n a g e m e n t
S c i e n c e
Modeling, Spreadsheet Analysis, and
Communication for Decision Making
SECOND EDITION
JOHN A. LAWRENCE, JR.
California State University—Fullerton
BARRY A. PASTERNACK
California State University—Fullerton
John Wiley & Sons, Inc.
To our wives Shari and Kathleen
and our children:
Jami andjonelle Lawrence
and
Jeffrey, Laura, Julia, and Alyssa Pasternack
Acquisitions Editor Beth Lang Golub
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Library of Congress Cataloging in Publication Data:
Lawrence, John A.
Applied management science : modeling, spreadsheet analysis, and communication for
decision making / John A. Lawrence, Barry Alan Pasternack.—2nd ed.
p. cm.
Includes index.
ISBN 0-471-39190-5 (cloth : alk. paper)
1. Management—Mathematical models. 2. Decision support systems. 3. Communication in
management. 4. Management science. I. Pasternack, Barry Alan. II. Title.
HD30.25.L39 2001
658.4Ό33—dc21
2001045640
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
A b o u t th e A u t h o r s
John A. Lawrence, J r.
John Lawrence is a professor and a past department chairman of the Department of Infor­
mation Systems and Decision Sciences at California State University, Fullerton, where he
has received several awards for his teaching, professional, and service contributions. He has
spent over 30 years developing and teaching introductory and advanced upper division and
graduate courses in management science and statistics for students majoring in business and
economics at the university. He has presented and published several papers on the role
and structure of management science courses in business curricula. His current research in­
terest is in the area of distance learning.
Dr. Lawrence received his B.S. in Operations Research from Cornell University and
worked at IBM in Endicott, New York, and with NASA at the Kennedy Space Center at
Cape Canaveral, Florida. After serving as a communications officer with the U.S. Navy, he
received his M.S. and Ph.D. in Industrial Engineering and Operations Research from the
University of California, Berkeley, with a research emphasis in linear programming.
Dr. Lawrence has served as a consultant to several companies in the areas of linear pro­
gramming, inventory, and quality control and has published papers in these areas in profes­
sional journals. For over 15 years, he and coauthor Barry Pasternack wrote study guides for
the management science texts written by Anderson, Sweeney, and Williams and published
by West Publishing Company. He serves as secretary-treasurer of Inform-Ed, the educa­
tion forum of INFORMS, the Institute for Operations Research and Management Science.
Barry A. Pasternack
Barry Alan Pasternack is a professor and chair ot the Information Systems and Decision Sci­
ences Department at California State University, Fullerton. During his 24 years on the faculty,
he has been the recipient of numerous awards for teaching, research, and service. For five years
he served as the Executive Director of the University’s Center for Professional Development.
Currently, he is a member of the California State University Statewide Academic Senate and is
Chair of the California State University Computer Science and Information Systems Disci­
pline Council. He is a past President of the campus chapter of the California Faculty Associa­
tion, as well as a former member of the Association’s Statewide Board of Directors. He has also
served as a University Educational Policy Fellow and a Bautzer Faculty Fellow.
Dr. Pasternack received his B.A. in mathematics from Antioch College, having spent
his junior year studying statistics and operations research at the University of Birmingham
in England. He earned his M.S. and Ph.D. degrees in Operations Research from the Uni-
, versity of California, Berkeley, with a research emphasis in stochastic processes. Upon grad­
uation from Berkeley, Dr. Pasternack worked for three years in the Network Planning
Department of Bell Laboratories.
In addition to his teaching experience at Fullerton, Dr. Pasternack has also been a fac­
ulty member at Stevens Institute of Technology, Boston University, and California Poly­
technic University, Pomona, and an invited guest lecturer at universities in the Czech
Republic and Germany. He has served as a consultant to numerous corporations and gov­
ernments, including the nations of Thailand, Zambia, and Ghana. He has also done work
for NASA in the area of avionics and for the Department of Health and Human Services in
the area of mental health care utilization.
Dr. Pasternack’s research interests include inventory systems, channel coordination,
gambling theory, and optimal option strategies. He is the author of some two dozen publi­
cations, and his work has appeared in such journals as Naval Research Logistics, Marketing
Science, Inteifaces, SIAM Journal on Applied Mathematics, and Journal of the Operational Re­
search Society. Dr. Pasternack helped develop the Educational Testing Service assessment
examination in business and is one of the contributors to the latest edition.
Ill
S t u d e n t to S t u d e n t
You may be wondering why, as a business major, you are taking this management
science course. When I started taking the course at Cal State Fullerton, I was won­
dering the same thing. After a while, though, my professor, John Lawrence, one of
the authors of this text, showed me the importance of management science in my
education. In today’s information-based, fast-paced society, this course will play a
key role in your future, whatever path you may choose. The ideas presented in this
course provide reliable solutions to everyday problems that occur in business,
whether you work in Marketing, Accounting, Finance, Management, or Econom­
ics. At times you may find the information overwhelming and challenging, but it is
actually quite applicable. This text was written to help you gain an understanding
of how to apply the ideas presented in the many areas of business.
For as many hours as you have spent in the classroom, at some point, you
probably have wondered how you would apply what you have learned to your life.
As a full-time employee for a swimsuit manufacturer, that was the first question
that came to my mind. I wondered, “How can I apply these general ideas to spe­
cific day-to-day problems in my career?” As a purchasing manager, using tech­
niques discussed in this text, I have been able to solve quality problems concerning
our fabrics. I have used forecasting to aid in my future fabric and trim purchases.
And I have benefited from inventory modeling because it guides me in the total
quantities I need to order and a time frame in which to reorder. In the near future
I will be getting more involved in the production process, where I already see the
immediate application of linear programming to assist in determining our product
mix.
Management science is applicable to all segments of business. The following
are a few more examples:
• Decision analysis is used to evaluate various production scenarios given the
likelihood of sales, production shutdowns, and the like.
• Forecasting is useful in making long-term and short-term business decisions.
Controllers could use forecasting to make predictions on the future of their
companies.
• Quality control is extremely important to a company because its reputation,
costs and market shares, and legal responsibilities are at risk. In
manufacturing, it is important that a company design and produce a product
that conforms to the specification that satisfies the need of the end-user.
• In making any business decision, linear programming, PERT/CPM,
inventory modeling, queuing, and simulation assist the individual in making
the best decisions with a limited amount of resources available.
The best approach is to keep an open mind while using this text and listening
to your instructor. You may not believe it now, but many of the concepts pre­
sented here will most likely cross your path in the future as you use them to help
you make decisions in your chosen careers.
Dana Linderman
California State University Fullerton
College of Business and Economics
P r e f a c e
Management scientists are faced with dynamic, challenging situations that require
forethought, analysis, and solutions on a daily basis. How does American Airlines
management know how to schedule its flight crews for maximum efficiency? How
were the individual tasks necessary to rebuild the Santa Monica Freeway after the
1994 Los Angeles earthquake coordinated to complete the project? How does
Citibank management know how many tellers should be working at a particular time
during the day? Management science is an intriguing field that combines quantita­
tive procedures, hypothesis formulation, and reasoning to analyze such complex
problems with the goal of improving operations. Tt can be viewed as a process of:
• Developing mathematical models of complex situations
• Using or deriving solution techniques for analyzing these models
• Using spreadsheets or other specialized computer programs to perform the
necessary mathematical operations to solve the models
• Analyzing the results of the computer output in order to recommend
appropriate courses of action
• Communicating these recommendations to management
New in This Edition
Consistent with our goals of the first edition, in Applied Management Science, 2nd ed.,
we continue to stress model building, analysis of computer output, and communica­
tion of results of management science models. Reflecting current trends, in this edi­
tion, we focus on the use of spreadsheets, in particular Microsoft Excel, as our vehicle
for solving and generating computer output for the mathematical models developed
in each chapter. Although we give considerable coverage to creating attractive and ef­
fective spreadsheets to solve the various mathematical models, we have also developed
and included Excel templates for solving most models so that we do not deflect atten­
tion from the model building, analysis, and communication emphasis.
Besides the exclusive use of Excel, several pedagogical changes have been
made in this edition. We have condensed the total number of chapters from 16 in
the first edition (including three on CD) to 13 (including three on the CD), without
„ deleting topic coverage. In particular in this edition:
• The first two chapters from the first edition have been combined to form
Chapter 1, giving a basic text introduction and overview of the management
science process in one continuous, cohesive presentation.
• The three chapters on linear and integer programming models have now
been combined into two (Chapters 2 and 3) with new coverage of models for
data envelopment analysis and supply chain management.
• Treeplan, a commercial Excel Add-In program for solving decision models, is
discussed in the decision analysis chapter (Chapter 6). A student version of
Treeplan is included on the CD-ROM.
• An appendix discussing whether to include seasonal variables in forecasting
models when some variables cannot be shown to be statistically significant has
been added to the forecasting chapter (Chapter 7).
v
VI Preface
• The two chapters on inventory modeling in the first edition have been
reorganized. Material relating to MRP has been shifted to the CD-ROM.
• The analysis of single-period inventory models is now included with the
discussion of other inventory models in Chapter 8.
• The discussion of assembly-line balancing and statistical analysis of simulation
output has been shifted from the queuing and simulation chapters,
respectively, to the CD-ROM.
• Crystal Ball and Extend, two commercial Excel Add-In simulation packages,
are discussed in the simulation chapter (Chapter 10). Student versions of
Crystal Ball and Extend are also included on the CD-ROM.
Many of the opening vignettes have been updated, and several new modelinj^situ-
ations have been added to the text. In addition, numerous problems have “been
added. Each chapter in the main text now has 50 varied problems (ten of which are
on the CD), while each of the supplementary chapters on the CD-ROM has over
30 problems. Approximately three or four larger, more complex case problems
that can be used as the basis for generating business reports are also included in
each chapter.
Goals
Our primary objective in writing this text is to provide a balanced approach reflec­
tive of our teaching pedagogy and professional and consulting experiences. In
meeting this overarching objective, we have identified three goals that exemplify
the message of our book. We feel that it is important for students of management
science:
• To be aware of the pitfalls encountered in building mathematical models and to be
able to build the most appropriate model possible fi'om the available data
• To be cognizant of the solution techniques available to solve the models
• To be able to analyze and effectively present results to the appropriate decision
maker
These issues are the primary focus of our text.
Features
The goals we set out to meet are intended to take mathematical modeling a couple
of steps further by emphasizing the decision-making process and the communica­
tion of results. In the model-building process, great care is taken to emphasize the
model’s assumptions and limitations. Each chapter is then organized around a
clearly defined set of pedagogical features designed to guide the student through
the management science process.
RELEVANCE
Every chapter opens with a brief vignette describing a scenario reflective of those
which managers face every day. Throughout the chapter a number of similar sce­
narios are introduced in highlighted applications. Many of these are revisited
throughout the chapter as new concepts are introduced.
Preface νιι
STUDENT PEDAGOGY
With the textual narrative, important terminology is introduced that is critical to
understanding the concepts applied to solving the problem at hand. These key
concepts are boldfaced throughout the text and defined in a highlighted box so
that the student can easily find the explanation when first learning the concept and
when reviewing for exams. Key equations and calculations are treated similarly, boxed
and highlighted for easy recognition. The steps involved in calculating many of
the equations are accentuated, helping the student grasp and recall the procedures.
The last section of each chapter is a summary of the concepts and main points of
the chapter material. The summary is written in an approachable, narrative style,
providing a review of the key concepts of the chapter.
ANALYSIS OF THE MODELS
Each model introduced in the chapter is solved using Excel and analyzed from a
manager’s perspective. We demonstrate for each technique how the appropriate
Excel spreadsheet can be constructed, and we also provide easy-to-use templates
that facilitate the model analysis. The actual algorithms and other solution ap­
proaches for solving each model are included on the accompanying CD-ROM
(packaged with this text), not because we feel they are any less important, but be­
cause including them within the text disrupts the flow of the discussion of the
model formulations and analyses.
COMMUNICATION OF RESULTS
The management scientist’s job does not end when a solution is found. In fact, the
most important responsibility of the management scientist is to communicate the
results of the analysis to the organization’s management. Therefore, we have de­
voted an entire section of Chapter 1 to instructing the student in how to commu­
nicate the results of a management science study to an organization’s
management. The student is asked to take the perspective of a member of a con­
sulting group called the Student Consulting Group. All subsequent chapters in­
clude additional business memorandums developed by the Student Consulting
Group to various organizations. These memorandums analyze the situation at
hand, evaluate various decision alternatives, and recommend an appropriate course
of action. While the use of memoranda is our medium of communication in this
text, the principles developed here extend naturally to other communication mod­
els such as PowerPoint presentations or web development.
PROBLEM SOLVING
Consistent with our philosophy of problem solving as an integral component of the
management science process, the text is replete with numerous problems and cases,
many based on actual real-world situations (with modified data for illustrative pur­
poses). We have included a wide variety of problems selected from the functional
areas of business as well as from the government and public sectors. The cases at
the end of each chapter represent more elaborate models that frequently require
the use of more than one management science technique. Each can be used as a
project requiring a comprehensive written report. Solutions to approximately 40%
of the problems are included in the back of the text.
UNIQUE CONTENT FEATURES
The 10 chapters of the parent text include the topics typically covered in an
introductory management science course. In addition to these 10 chapters,
VIII Preface
auxiliary topics that are frequently omitted in the introductory course due to the
degree of complexity or lack of time are included on the CD-ROM. Also on the
CD-ROM are additional topics that supplement the ten text chapters of the book
are included on the CD-ROM.
The following is a list of other topics covered on the CD-ROM:
• In our experience, many management science studies involve issues of quality.
Therefore, we have devoted an entire chapter, Chapter 11, “Quality
Management Models,” to this topic, which bridges the gap between
management science, operations management, and statistics.
• Chapter 12 provides a comprehensive overview of “Markov Process Models.”
• Nonlinear models are grouped together in Chapter 13, “Nonlinear Models:
Dynamic, Goal, and Nonlinear Programming.”
• Five supplementary units on the CD-ROM provide coverage of more
complicated mathematical concepts and derivations: Duality,'The Simplex
Method, Branch and Bound Algorithms for Integer Programming Models,
Algorithms for Network Models, and Production Inventory Models.
• An additional supplementary unit, Review of Probability and Statistics
Concepts, provides a brief review of material covered in a first course in
statistics (up through regression). While many topics in the text can be taught
without the use of statistics, many cannot, and a course in probability and
statistics is assumed to be a prerequisite. This brief statistical review can be
used as the basis for a first lecture or review assignment in the course so that
all students are “up to speed” with statistics. In some cases, more advanced
statistical topics are necessary to solve some problems; these are discussed in
the appropriate chapter rather than in the review supplement.
• Beginning with Chapter 3, additional chapter appendices are included on the
CD-ROM to provide more extensive mathematical and theoretical coverage
of the algorithms, mathematical derivations, heuristics, and calculations used
in the models.
• Excel templates as well as Excel files for the problems and applications
presented in Chapters 2—13 are included on the CD-ROM.
• The CD-ROM also includes student versions of three software packages,
TreePlan, an Excel add-in for solving decision tree problems, Crystal Ball, an
Excel supplement for analyzing simulations, and Extend, a software program
for conducting simulations.
• The CD-ROM contains Power Point slides paralleling the topics in the 13
chapters. Many slides include motion that allow the reader to view
dynamically the concepts discussed in the text.
• To conserve space, ten additional problems per chapter (problems 41-50),
additional cases, problem motivations for topics covered in the chapter, and
additional topic coverage are included on the CD-ROM.
C o m p u ter In te g ra tio n
As has been mentioned, we use Excel to solve models developed in the text. Al­
though this is not a text on programming mathematical models into spreadsheets
we not only include sample spreadsheets that show how a student can program
Excel to utilize the technique being studied, but also provide easy-to-use templates
that students can use to solve problems without the need to program Excel. Exam­
ples of both approaches are included in the text, and the corresponding Excel files
are contained on the accompanying CD-ROM. Appendices are included at the end
of each chapter, giving detailed explanations on the use of the Excel templates de-
Preface IX
scribed in the chapter. (We have elected to focus on Excel because there are liter­
ally millions of copies of Excel in use worldwide and many problems can be solved
fairly easily using a spreadsheet approach.)
Supplements
In addition to the CD-ROM packaged with the text, Applied Management Science:
A Computer-Integrated Approach for Decision Making is supplemented by a compre­
hensive ancillary package, which includes the following:
• Instructor's Manual with Complete Solutions ' 1 his manual contains
suggestions for first-time instructors and extensive outlines and objectives for
each chapter of the text and CD-ROM. In addition, complete solutions for
all end-of-chapter problems and cases are provided in this valuable teaching
tool.
• Test Bank This comprehensive test package includes approximately 1000
multiple-choice, computer-based, short answer, true-false, and critical
thinking questions. An IBM computerized version of the entire test bank is
also available with editing features to help instructors customize exams.
• Wiley /Nightly Business Report Video Series This video collection contains
segments from the highly respected Nightly Business Report program. Selected
for their applicability to management science topics, each of the segments is
approximately 3 to 5 minutes long and can be used to introduce topics to the
student, enhance lecture material, and provide dynamic real-world business
examples directly related to the concepts introduced in the text.
• Internet Website You can access the Wiley home page at
www.wiley.com/college. The Lawrence/Pasternack website supports and
extends the text presentation with links to companies, internet exercises, and
other material.
• Quantitative Business Custom Publishing Program This custom publishing
program allows you to choose a subset of chapters from Applied Management
Science: Modeling, Spreadsheet Analysis, and Communication for Decision Making,
and supplement it with selected chapters from other Wiley texts in
Operations Management and Business Statistics to create your own custom
textbook. Contact your local Wiley sales representative for more details.
• WinQSB is available separately or in a special package with Applied
Management Science. A new manual, prepared by Kiran Desai, relates
Win QSB to each chapter of the second edition.
Flexible Stru ctu rin g of a
Course A round this T ext
Applied Management Science: Modeling, Spreadsheet Analysis, and Communication for
Decision Making is part of a comprehensive learning program that can be adapted
to virtually any emphasis one wishes to place on the course. We envision using this
text in either a one- or two-semester course to meet any or all of the following
objectives:
• Teach modeling and analysis of output: Utilize the extensive problem set
included in the text.
• Include a focus on communication/presentation: Accentuate the study of
Chapter 1 and cover one or more of the numerous cases included in the text.