CHAPTER 1 1- The problem is complex for

 Decision modeling: is a scientific approach informal methods

to decision making. 2- The problem is very important
 It can also be defined as the 3- The problem is new
development of a model (usually 4- The problem is repetitive
mathematical) of a real-world problem  Because you do not need to start from
scenario or environment. the beginning each time the similar
 The scientific approach is: problem occurs, since you can use the
1- Without biases and emotions model created by quantitative analysis
2- Tested approach.
3- Systematic  Decision models:
 Decision modeling is also commonly 1- Are Generally mathematical
referred to as quantitative analysis, representations.
management science, operations 2- Provide analytical framework for
research, or operational research. evaluating modern business
 The correct use of decision modeling problems.
techniques usually results in solutions 3- Provide techniques applicable in
that are many areas
1- Timely  Production & operations management,
2- Accurate supply chain management, accounting,
3- Flexible logistics, marketing, finance, etc.
4- Economical  Decision models are subject to:
5- Reliable 1- Limitations
6- Easy to understand 2- Assumptions
7- Easy to use  Assuming is different than forecasting
 Management science had its early roots in and predicting.
World War II and is flourishing in business  Assumption is not evidence-based, it is
and industry with the aid of computers. without proof.
 In WWII, it was used to choose targets 3- Simplifications
to shoot because army had limited  Using assumptions real-world
resources. problems are simplified into solvable
 Management science provides insights virtual ones.
into the solution of the managerial  Models are not the real problems; they
problem: are just abstractions of them.
1- Whether the solution is beneficial d
ifi
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2- Whether it is robust or not
3- Whether it is sensitive or not analysis interpretation
 Management science persons role is
being a decision/system analyst.
MANAGERIAL
 Management science person is the JUDGEMENT
bridge between the problem and the
decision maker.
 Management science person supports abstraction
intuition

and guides the decision maker.

 We use quantitative analysis approach to
decision making when:
 Results of the model cannot directly
implemented to the real world problem.
 Variable: a measurable quantity that is
subject to change.
 Variables can be controllable or
uncontrollable.
 Decision variable: a controllable variable
 Parameter: a measurable quantity that is
inherent in the problem.
 Usually has a known value.
 Some kind of uncontrollable.
 In most cases, variables are unknown
quantities, whereas parameters (or input
data) are known quantities.
 Parameter is a data as a number, and
constraint is the statement that includes
it.
 Relate decision variables (controllable
inputs) with fixed or variable parameters
(uncontrollable inputs).
 Frequently seek to maximize or
minimize some performance measures
(objective function) subject to constraints.
 In other words, objective function
must have a direction.
 The values of the decision variables
that provide the mathematically-best
output are referred to as the optimal
solution for the model.
 Advantages of decision models are:
1- No emotion/no bias
2- Consistent
3- A systematic approach
4- Easy to express/easy to deal with
5- Easy to experiment on
 Experimenting with models when it
compared to experimenting with the real
situation are:
1- Require less time
2- Less expensive
3- Involve less risk
 Disadvantages of decision models are:
1- Constructing models could be hard
2- Models could be really hard to
solve if not impossible
3- Can lose the real problem
 Too much abstraction/assumptions
4- Quantitative analysis in expense of
qualitative analysis
 A complex model will give more accurate
solutions but it is more costly and hard to
solve.
 So, it is NOT APPROPRIATE!
 A less complicated model will be less
precise but it is less costly and easier to
solve.
 So, it is APPROPRIATE!
 Decision models can be broadly classified
into two categories, based on the type
and nature of the decision-making
problem environment under
consideration:
1- deterministic models
2- probabilistic models.
 Deterministic: means with complete
certainty.
 Deterministic models assume:
1- All the relevant input data values
are known with certainty
2- All the information needed for
modeling a decision-making
problem environment is available,
with fixed and known values.
 Most commonly used deterministic
modeling technique is linear
programming.
 Probabilistic (stochastic) models assume:
1- Some input data values are not
known with certainty
2- The values of some important
variables will not be known before
decisions are made
 It is important to incorporate this
“ignorance” into the model.
 Examples of probabilistic models are; the
decision of whether to start a new
business venture, and the decision of
which major to choose when students
enter the college.
 Probabilistic modeling techniques provide
a structured approach for managers to
incorporate uncertainty into their models
and to evaluate decisions under alternate
expectations regarding this uncertainty.
 The decision modeling process involves
three distinct steps:
1- Formulation
2- Solution
3- interpretation.
 It is common to have an iterative
process between these three steps before
the final solution is obtained.
 Solution: is when the mathematical
 Solution can be classified into two parts:
 Formulation: is the process by which each
aspect of a problem scenario is translated
and expressed in terms of a mathematical
model.
 Formulation is the most challenging step
in decision modeling.
 Formulation can be classified into three
parts:
1- Defining the problem
 Develop a clear, concise statement of
the problem.
 The problem statement gives direction
and meaning to all the parts that follow it.
 It is essential to go beyond just the
symptoms of the problem at hand and
identify the true causes behind it.
 When a problem is difficult to quantify,
it may be necessary to develop specific,
measurable objectives.
2- Developing a model
 The model should be solvable, realistic,
and easy to understand and modify, and
the required input data should be
obtainable.
 The model should include the
appropriate amount of detail for the
model to be solvable yet realistic.
 Usually, it is a mathematical model.
3- Acquiring input data
 Acquired data should be accurate.
 Company reports and documents can
be used to obtain the necessary data.
 Sampling and direct measurement can
be used as a source of data.
 Statistical sampling procedures can be
used to obtain data.
 Managers can be used as a source of
data.
expressions resulting from the
formulation process are actually solved to
identify the optimal solution.
1- Developing a solution
 Involves manipulating the model to
arrive at the best (or optimal) solution to
the problem.
 May require that a set of mathematical
expressions be solved to determine the
best decision.
 Trial and error method can be used
 In some cases all possible values for
the variables should be tried to arrive the
best solution (complete enumeration)
 Complex and difficult problems need
the utilization of an algorithm/heuristic
 The accuracy of the solution depends
on the accuracy of the input data and the
decision model itself.
2- Testing the solution
 The input and the data model both
require testing.
 Input data can be tested by collecting
additional data from a different source
and using statistical tests to compare
these new data with the original data.
 The model should be checked to make
sure that it is logical and represents the
real situation.
 Algorithm: is a series of steps that are
repeated until attaining a satisfactory
solution.
 Interpretation can be classified into two
parts:
1- Analyzing the results and
sensitivity analysis
 Since the model is only an
approximation of reality, the sensitivity of
the solution to changes in the model and
input data should be analyzed by
conducting a sensitivity (what-if) analysis.
 When the optimal solution is very
sensitive to changes in the input data and
the model specifications, additional
testing must be performed to make sure
the model and input data are accurate
and valid.
2- Implementing the results
 optimal solution should not
implemented directly, it is only to give
insight.
 Solution implementation usually
requires making changes within the
organization.
 Managers of the company can resist to
the changes that should made.
 The solution should be closely
monitored even after implementation.
 Sensitivity analysis: determines how the
solutions will change with a different
model or input data.
 Possible problems that can be faced
during defining the problem:
1- Conflicting viewpoints
 The problem needs to be examined
from several viewpoints.
2- Impact on other departments
 The problem statement should be as
broad as possible and include inputs from
all concerned departments.
3- Real life is too ambiguous– a
jungle
4- Beginning assumptions
 A “good” solution to the right problem
is much better than an “optimal” solution
to the wrong problem, so beginning
assumptions should be carefully assumed.
5- Problems that change quickly
 Even if a problem has been specified
correctly at present, it can change during
the development of the model.
 Possible problems that can be faced
during developing the model:
1- Fitting textbook models
 A manager’s perception of a problem
does not always match the textbook
approach.
2- Understanding/accepting a model
 Managers do not use the results of a
model they do not understand, so the
model should be easier to understand.
 Possible problems that can be faced
during acquiring data:
1- Availability of the data
2- Accessibility to the data
3- Relevance of the data
4- Quality of the data
 Data should be good and clean
5- Missing data
 Possible problems that can be faced
during developing the solution:
1- Hard-to understand/complex
mathematics
 Although the mathematical models we
use may be complex and powerful, they
may not be completely understood.
2- The limitation of giving only one
answer
 Decision models usually give just one
answer to a problem, so insight is
important.
 Possible problems that can be faced
during testing a solution:
1- Complex models tend to give
solutions that are not intuitively
obvious.
 These type of solutions tend to be
rejected by managers, so decision analyst
should review the assumptions and
convince the manager of the validity of
the solutions.
 Possible problems that can be faced
during analyzing the results:
1- The results must be analyzed in
terms of how they will affect the
total organization.
 The analyst should ascertain who must
change and by how much, if the people
who must change will be better or worse
off, and who has the power to direct the
change.
 Possible problems that can be faced
during implementing the results:
1- Resistance for change
 If results suggest large changes in
organizational policy, the decision analyst
can expect resistance.
 Management support and user
involvement are important in
implementing results
2- Time dimension
 There can be no immediate effects.
CHAPTER 2
 The most widely used decision modeling
technique designed to help managers in
resource allocation is called mathematical
programming.
 The most widely used modeling
technique designed to help managers in
planning and decision making is linear
programming (LP).
 When developing LP (and other
mathematical programming)–based
decision models, we assume that all the
relevant input data and parameters are
known with certainty.
 LP has been applied extensively to:
1- Medical problems
2- Transportation problems
3- Operations problems
4- Financial problems
5- Marketing problems
6- Accounting problems
7- Human resources problems
8- Agricultural problems.
in different sizes and complexities.
 LP models have three steps:
1- Formulation
 The process by which each aspect of a
problem scenario is translated and
expressed in terms of simple
mathematical expressions.
2- Solution
 The mathematical expressions
resulting from the formulation process
are solved to identify an optimal (or best)
solution to the model.
3- Interpretation
 Allow the manager to evaluate the
impact of several different types of what-
if questions regarding the problem.
 Properties of an LP model:
1- Objective function
 Problems seek to maximize or
minimize an objective which is usually
minimizing cost or maximizing profit.
2- Constraints
limit the degree to which we can
pursue our objective.
 We want to maximize or minimize a
quantity (the objective) subject to limited
resources.
 An LP model usually includes a set of
constraints known as nonnegativity
constraints.
3- Alternatives
 There must be alternative courses of
action from which we can choose.
4- Linearity
 The objective and constraints in LP
problems must be expressed in terms of
linear equations or inequalities.
 In linear mathematical relationships, all
terms used in the objective function and
constraints are of the first degree.
 Feasible solution: satisfies all the
problem's constraints.
 Optimal solution: satisfies all the
problems constraints, and results in the
largest possible objective function values
when maximizing / results in the
minimum possible objective value when
minimizing.
 All optimal solutions are feasible!
 Not all feasible solutions are optimal!
 Assumptions of an LP model:
1- Certainty
 Numbers used in the objective function
and constraints are known with certainty
and do not change during the period
being studied.
2- Proportionality
 Exists in the objective function and
constraints.
3- Additivity
 The total of all activities equals the
sum of the individual activities.
4- Divisibility
 Solutions need not necessarily be in
whole numbers (integers).
 Solutions may take any fractional
value.
 If a fraction of a product cannot be
produced, an integer programming
problem exists.
 Problem formulation (modeling): is the
process of translating a verbal statement
of a problem into a mathematical
statement.
 Steps in problem formulation:
1- Define the decision variables
2- Construct the objective function
3- Formulate the constraints
 One of the most common LP applications
is the product mix problem.
 Product mix problems use LP
to decide how much of each product to
make, given a series of resource
restrictions.
 The structured approach for formulating
LP problems:
1- Decision variables
 Decision variables are the unknown
entities in a problem. The problem is
solved to find values for decision
variables.
 Decision variables are expressed in the
problems using alphanumeric symbols.
 Different decision variables in the same
model can be measured in different units.
2- The objective function
 Identifying optimal solution by:
 The objective function states the goal
of a problem / the motivation for solving a
problem.
 An LP model must have a single
objective function.
3- Constraints
 Constraints represent restrictions on
the values the decision variables can take.
 Each constraint is expressed as a
mathematical expression and can be
independent of the other constraints in
the model.
 It is very common in practice for a
single LP model to include constraints
with different signs (i.e.  , ≤ , and = ).
4- A key principle of LP is that
interactions exist between
variables.
5- Nonnegativity constraints specify
that decision variables cannot
have negative values.
6- In LP models, we do not specify
that decision variables should only
have integer values.
 A model in which some or all of the
decision variables are restricted only to
integer values is called an integer
programming (IP) model.
 IP models do not allow detailed
sensitivity analysis whereas LP models
allow detailed sensitivity analysis.
7- To find an optimal solution to an
LP problem, we must first identify
a set, or region, of feasible
solutions.
 The first step in doing so is to plot each
of the problem’s constraints on a graph.
 We can plot either decision variable on
the horizontal (X) axis of the graph, and
the other variable on the vertical (Y) axis.
 The nonnegativity constraints imply
that we are working only in the first (or
positive) quadrant of a graph.
 The feasible region of minimization
problems is often unbounded (i.e., open
outward).
 1- Drawing level lines
 Also called isocost, isoprofit lines.
 We use the objective function to point
us toward the optimal solution.
 We draw a series of parallel level lines
until we find the one that corresponds to
the optimal solution.
 An optimal solution to an LP model
must lie at one of the corner points in the
feasible region.
 Solving for the coordinates of a corner
point requires the use of simultaneous
equations.
2- Corner point method
 eliminates the need for graphing and
using level objective function lines
 Identifies an optimal solution by
evaluating the objective function value at
every corner point in the problem.
 Notes for developing a correct LP model:
1- All terms within the same
expression must refer to the same
entity.
2- All terms within the same
expression must be measured in
the same units.
3- Address each constraint
separately.
 There is no single “mega” expression
that will take care of all constraints in the
model at one time.
 Each constraint is a separate issue, and
expressions for each must be written
separately.
 Special situations in LP:
1- Redundancy
 A redundant constraint is a constraint
that does not affect the feasible solution
region in any way.
 If redundant constraint is close to
feasible region, it may be important!
 Excel does not detect redundant
constraints!
2- Infeasibility
 A condition that arises when no single
solution satisfies all of an LP problem’s
constraints.
 No feasible solution region exists.
 Infeasibility is not related with
objective function.
 Lack of a feasible solution region can
occur if constraints conflict with one
another.
 Excel shows infeasibility!
 If we have infeasibility, we cannot
solve the problem.
3- Alternate optima
 There is more than one optimal
solution.
 Occurs when a binding constraint (that
is a constraint defining the optimal
solution) and the objective function have
same slope.
 Far from causing problems, the
presence of more than one optimal
solution actually allows management
greater flexibility in deciding which
solution to select.
The optimal objective function value
remains the same at all alternate
solutions.
4- Unboundedness
 When a problem has an unbounded
feasible region, it may not have a finite
solution.
 When an LP model has a bounded
feasible region, it has an identifiable
optimal corner point solution.
 If the feasible region is unbounded in
one or more directions, depending on the
objective function, the model may or may
not have a finite solution.
 If our objective function is unbounded,
our feasible region is also unbounded.
When the solution is unbounded in a
maximization problem, the objective
function value can be made infinitely
large without violating any constraints.
 When the solution is unbounded in a
minimization problem, the objective
function value can be made infinitely
minimum without violating any
constraints.
  In real-world situations, the occurrence  In a binding constraint there is no slack or
of an unbounded solution usually means surplus.
the problem has been formulated CHAPTER 4
improperly.  Network flow models are special LP
 Excel warns unboundedness! models.
 Applications of LP in businesses:  Types of network flow models are:
1- Marketing applications 1- Transportation
 Media selection problem and 2- Transshipment
marketing research problem 3- Assignment
2- Manufacturing applications 4- Maximal-flow
 Product mix problem 5- Shortest-path
3- Employee scheduling applications 6- Minimal-spanning tree models
 Labor planning problem  Networks consists of nodes and arcs that
4- Financial applications connect nodes together.
 Portfolio selection problem
5- Transportation applications
 Truck-loading problem
6- Ingredient blending applications
 Diet problem and ingredient
mix/blending problem
7- Multiperiod applications
 Product scheduling problem and
sinking fund problem
 In ‘’Answer Report’’ in Excel, ‘’contin’’
means continuous.
 This situation points out the divisibility
characteristic of LP models.
 In ‘’status’’ in the ‘’Answer Report’’ in
Excel:
1- Binding means LHS = RHS
 It means that I am fully using the
constraint.
2- Not binding means LHS is not
equal to RHS
 It means that I am not fully using the
constraint.
 In a less than or equal to (<=) constraint,
amount of unused resources called slack.
 Slack = RHS – LHS
 In a greater than or equal to (>=)
constraint, amount of over satisfaction
called surplus/excess.
 Surplus = LHS – RHS
 Whether it is a slack or surplus, Excel
name both of them as slack in its answer
report!