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6th
Edition Practical Management Science
Wayne L. Winston
Kelley School of Business, Indiana University
S. Christian Albright
Kelley School of Business, Indiana University
Australia Brazil Mexico Singapore United Kingdom United States

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Printed in the United States of America

Print Number: 01 Print Year: 2017
To Mary, my wonderful wife, best friend, and constant companion
And to our Welsh Corgi, Bryn, who still just wants to play ball S.C.A.
To my wonderful family
Vivian, Jennifer, and Gregory W.L.W.
About the Authors
S. Christian Albright got his B.S. degree in Mathematics from
Stanford in 1968 and his Ph.D. degree in Operations Research
from Stanford in 1972. Until his retirement in 2011, he taught in
the Operations & Decision Technologies Department in the Kelley
School of Business at Indiana University. His teaching included
courses in management science, computer simulation, and statis-
tics to all levels of business students: undergraduates, MBAs, and
doctoral students. He has published over 20 articles in leading
operations research journals in the area of applied probability,
and he has authored several books, including Practical Manage-
ment Science, Data Analysis and Decision Making, Data Analysis for Managers, Spread-
sheet Modeling and Applications, and VBA for Modelers. He jointly developed StatTools,
a statistical add-in for Excel, with the Palisade Corporation. In “retirement,” he continues
to revise his books, and he has developed a commercial product, ExcelNow!, an extension
of the Excel tutorial that accompanies this book.
On the personal side, Chris has been married to his wonderful wife Mary for
46 years. They have a special family in Philadelphia: their son Sam, his wife Lindsay,
and their two sons, Teddy and Archer. Chris has many interests outside the academic
area. They include activities with his family (especially traveling with Mary), going to
cultural events, power walking, and reading. And although he earns his livelihood from
statistics and management science, his real passion is for playing classical music on the
piano.
Wayne L. Winston is Professor Emeritus of Decision

Sciences at the Kelley School of Business at Indiana University
and is now a Professor of Decision and Information Sciences
at the Bauer College at the University of Houston. Winston
received his B.S. degree in Mathematics from MIT and his
Ph.D. degree in Operations Research from Yale. He has written
the successful textbooks Operations Research: Applications
and Algorithms, Mathematical Programming: Applications
and Algorithms, Simulation Modeling with @Risk, Practical
Management Science, Data Analysis for Managers, Spreadsheet
Modeling and Applications, Mathletics, Data Analysis and Business Modeling with
Excel 2013, Marketing Analytics, and Financial Models Using Simulation and
Optimization. Winston has published over 20 articles in leading journals and has won
more than 45 teaching awards, including the school-wide MBA award six times. His
current interest is in showing how spreadsheet models can be used to solve business
problems in all disciplines, particularly in finance, sports, and marketing.
Wayne enjoys swimming and basketball, and his passion for trivia won him an
appearance several years ago on the television game show Jeopardy, where he won two
games. He is married to the lovely and talented Vivian. They have two children, Gregory
and Jennifer.
Brief Contents
Preface xiii
1 Introduction to Modeling 1
2 Introduction to Spreadsheet Modeling 19
3 Introduction to Optimization Modeling 71
4 Linear Programming Models 135
5 Network Models 219
6 Optimization Models with Integer Variables 277
7 Nonlinear Optimization Models 339
8 Evolutionary Solver: An Alternative Optimization Procedure 407
9 Decision Making under Uncertainty 457
10 Introduction to Simulation Modeling 515
11 Simulation Models 589
12 Queueing Models 667
13 Regression and Forecasting Models 715
14 Data Mining 771
References 809
Index 815
MindTap Chapters
15 Project Management 15-1
16 Multiobjective Decision Making 16-1
17 Inventory and Supply Chain Models 17-1
vii
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Contents
Preface xiii 3.4 Sensitivity Analysis  87
CHAPTER 1 Introduction to Modeling 1 3.5 Properties of Linear Models  97
1.1 Introduction 3 3.6 Infeasibility and Unboundedness  100
1.2 A Capital Budgeting Example 3 3.7 A Larger Product Mix Model  103
1.3 Modeling versus Models 6 3.8 A Multiperiod Production Model  111
1.4 A Seven-Step Modeling Process 7 3.9 A Comparison of Algebraic
and Spreadsheet Models  120
1.5 A Great Source for Management Science
Applications: Interfaces  13 3.10 A Decision Support System  121
1.6 Why Study Management Science?  13 3.11 Conclusion  123
1.7 Software Included with This Book 15 Appendix Information on Optimization Software  130
1.8 Conclusion 17 Case 3.1 Shelby Shelving  132
Chapter 4 Linear Programming Models  135
CHAPTER 2 Introduction to Spreadsheet
4.1Introduction  136
Modeling 19
4.2Advertising Models  137
2.1 Introduction  20
4.3Employee Scheduling Models  147
2.2 Basic Spreadsheet Modeling:
Concepts and Best Practices   21 4.4Aggregate Planning Models  155
2.3 Cost Projections  25 4.5Blending Models  166
2.4 Breakeven Analysis  31 4.6Production Process Models  174
2.5 Ordering with Quantity Discounts 4.7Financial Models  179
and Demand Uncertainty  39 4.8Data Envelopment Analysis (Dea)  191
2.6 Estimating the Relationship between 4.9Conclusion  198
Price and Demand  44 Case 4.1 Blending Aviation Gasoline at Jansen
2.7 Decisions Involving the Time Value of Gas  214
Money  54 CASE 4.2 Delinquent Accounts at GE Capital  216
2.8 Conclusion  59 CASE 4.3 Foreign Currency Trading  217
Appendix Tips for Editing and CHAPTER 5 Network Models  219
Documenting Spreadsheets  64 5.1Introduction  220
Case 2.1 Project Selection at Ewing Natural 5.2Transportation Models  221
Gas 66
5.3Assignment Models  233
Case 2.2 New Product Introduction at eTech 68
5.4Other Logistics Models  240
CHAPTER 3 Introduction to Optimization 5.5Shortest Path Models  249
Modeling  71 5.6Network Models in the Airline Industry  258
3.1 Introduction  72 5.7Conclusion  267
3.2 Introduction to Optimization  73 Case 5.1 Optimized Motor Carrier Selection at
3.3 A Two-Variable Product Mix Model  75 Westvaco  274
ix
Chapter 6 Optimization Models with Integer Chapter 9 Decision Making under
Variables   277 Uncertainty  457
6.1 Introduction  278 9.1Introduction  458
6.2 Overview of Optimization with Integer 9.2Elements of Decision Analysis  460
Variables  279 9.3Single-Stage Decision Problems  467
6.3 Capital Budgeting Models  283 9.4The PrecisionTree Add-In  471
6.4 Fixed-Cost Models  290 9.5Multistage Decision Problems  474
6.5 Set-Covering and Location-Assignment 9.6The Role of Risk Aversion  492
Models  303 9.7Conclusion  499
6.6 Cutting Stock Models  320 CASE 9.1 Jogger Shoe Company 510
6.7 Conclusion  324 CASE 9.2 Westhouser Paper Company 511
Case 6.1 Giant Motor Company  334 CASE 9.3 Electronic Timing System for
Case 6.2 Selecting Telecommunication Carriers to Olympics 512
Obtain Volume Discounts  336 CASE 9.4 Developing a Helicopter Component
Case 6.3 Project Selection at Ewing Natural Gas  337 for the Army 513
Chapter 7 Nonlinear Optimization Models  339 Chapter 10 Introduction to Simulation
7.1Introduction  340 Modeling  515
7.2Basic Ideas of Nonlinear Optimization  341 10.1 Introduction  516
7.3Pricing Models  347 10.2 Probability Distributions for Input
7.4Advertising Response and Selection Models  365 Variables  518
7.5Facility Location Models  374 10.3 Simulation and the Flaw of Averages  537
7.6Models for Rating Sports Teams  378 10.4 Simulation with Built-in Excel Tools  540
7.7Portfolio Optimization Models  384 10.5 Introduction to @RISK  551
7.8Estimating the Beta of a Stock  394 10.6 The Effects of Input Distributions on
7.9Conclusion  398 Results  568
Case 7.1 Gms Stock Hedging  405 10.7 Conclusion  577
Appendix Learning More About @Risk  583
Chapter 8 Evolutionary Solver: An Alternative CASE 10.1 Ski Iacket Production  584
Optimization Procedure  407
CASE 10.2 Ebony Bath Soap  585
8.1
Introduction  408
CASE 10.3 Advertising Effectiveness  586
8.2
Introduction to Genetic Algorithms  411
CASE 10.4 New Project Introduction at eTech  588
8.3
Introduction to Evolutionary Solver  412
8.4
Nonlinear Pricing Models  417 Chapter 11 Simulation Models  589
8.5
Combinatorial Models  424 11.1 Introduction  591
8.6
Fitting an S-Shaped Curve  435 11.2 Operations Models  591
8.7
Portfolio Optimization  439 11.3 Financial Models  607
8.8
Optimal Permutation Models  442 11.4 Marketing Models  631
8.9
Conclusion  449 11.5 Simulating Games of Chance  646
Case 8.1 Assigning Mba Students to Teams  454 11.6 Conclusion  652
Case 8.2 Project Selection at Ewing Natural Gas  455 Appendix Other Palisade Tools for Simulation  662
x Contents
CASE 11.1 College Fund Investment 664 References 809
CASE 11.2 Bond Investment Strategy 665
Index 815
CASE 11.3 Project Selection Ewing Natural Gas 666
Chapter 12 Queueing Models  667 MindTap Chapters

12.1
Introduction  668 Chapter 15 Project Management  15-1
12.2
Elements of Queueing Models  670 15.1 Introduction  15-2
12.3
The Exponential Distribution  673 15.2 The Basic CPM Model  15-4
12.4
Important Queueing Relationships  678 15.3 Modeling Allocation of Resources  15-14
12.5
Analytic Steady-State Queueing Models  680 15.4 Models with Uncertain Activity Times  15-30
12.6
Queueing Simulation Models  699 15.5 A Brief Look at Microsoft Project  15-35
Conclusion 709
12.7 15.6 Conclusion  15-39
Case 12.1 Catalog Company Phone Orders  713
Chapter 16 Multiobjective Decision Making  16-1
Chapter 13 Regression and Forecasting Models  715 16.1 Introduction  16-2
13.1
Introduction  716 16.2 Goal Programming  16-3
13.2
Overview of Regression Models  717 16.3 Pareto Optimality and Trade-Off Curves  16-12
13.3
Simple Regression Models  721 16.4 The Analytic Hierarchy Process (AHP)  16-20
13.4
Multiple Regression Models  734 16.5 Conclusion  16-25
13.5
Overview of Time Series Models  745
Chapter 17 Inventory and Supply Chain Models  17-1
13.6
Moving Averages Models  746
17.1 Introduction  17-2
Exponential Smoothing Models  751
13.7
17.2 Categories of Inventory and Supply Chain
13.8
Conclusion  762
Models  17-3
Case 13.1 Demand for French Bread at Howie’s
17.3 Types of Costs in Inventory and Supply Chain
Bakery  768
Models  17-5
Case 13.2 Forecasting Overhead at Wagner
17.4 Economic Order Quantity (EOQ) Models  17-6
Printers  769
17.5 Probabilistic Inventory Models  17-21
Case 13.3 Arrivals at the Credit Union  770
17.6 Ordering Simulation Models  17-34
Chapter 14 Data Mining  771 17.7 Supply Chain Models  17-40
14.1
Introduction  772 17.8 Conclusion  17-50
Classification Methods  774
14.2 Case 17.1 Subway Token Hoarding  17-57
14.3
Clustering Methods  795
Conclusion  806
14.4
Case 14.1 Houston Area Survey  808
Contents xi
Preface
Practical Management Science provides a spreadsheet- ■ Integrate Modeling with Finance, Marketing,
based, example-driven approach to management and Operations Management. We integrate
science. Our initial objective in writing the book was to modeling into all functional areas of business.
reverse negative attitudes about the course by making This is an important feature because the majority
the subject relevant to students. We intended to do this of business students major in finance and
by imparting valuable modeling skills that students can marketing. Almost all competing textbooks
appreciate and take with them into their careers. We are emphasize operations management–related
very gratified by the success of previous editions. examples. Although these examples are
The book has exceeded our initial objectives. We are important, and many are included in the book,
especially pleased to hear about the success of the book the application of modeling to problems in
at many other colleges and universities around the finance and marketing is too important to ignore.
world. The acceptance and excitement that has been Throughout the book, we use real examples from
generated has motivated us to revise the book and make all functional areas of business to illustrate the
the current edition even better. power of spreadsheet modeling to all of these
When we wrote the first edition, management areas. At Indiana University, this led to the
science courses were regarded as irrelevant or development of two advanced MBA electives
uninteresting to many business students, and the use of in finance and marketing that built upon the
spreadsheets in management science was in its early content in this book.
stages of development. Much has changed since the ■ Teach Modeling, Not Just Models. Poor attitudes
first edition was published in 1996, and we believe that among students in past management science
these changes are for the better. We have learned a lot courses can be attributed to the way in which they
about the best practices of spreadsheet modeling for were taught: emphasis on algebraic formulations
clarity and communication. We have also developed and memorization of models. Students gain more
better ways of teaching the materials, and we insight into the power of management science by
understand more about where students tend to developing skills in modeling. Throughout the
have difficulty with the concepts. Finally, we book, we stress the logic associated with model
have had the opportunity to teach this material at development, and we discuss solutions in this
several Fortune 500 companies (including Eli Lilly, context. Because real problems and real models
PricewaterhouseCoopers, General Motors, Tomkins, often include limitations or alternatives, we
Microsoft, and Intel). These companies, through their include several “Modeling Issues” sections to
enthusiastic support, have further enhanced the discuss these important matters. Finally, we
realism of the examples included in this book. include “Modeling Problems” in most chapters to
Our objective in writing the first edition was very help develop these skills.
simple—we wanted to make management science
■ Provide Numerous Problems and Cases.
relevant and practical to students and professionals.
Whereas all textbooks contain problem sets for
This book continues to distinguish itself in the market
students to practice, we have carefully and
in four fundamental ways:
judiciously crafted the problems and cases
■ Teach by Example. The best way to learn contained in this book. Each chapter contains
modeling concepts is by working through four types of problems: easier Level A Problems,
examples and solving an abundance of problems. more difficult Level B Problems, Modeling
This active learning approach is not new, but our Problems, and Cases. Most of the problems
text has more fully developed this approach than following sections of chapters ask students to
any book in the field. The feedback we have extend the examples in the preceding section.
received from many of you has confirmed the The end-of-chapter problems then ask students
success of this pedagogical approach for to explore new models. Selected solutions are
management science. available to students through MindTap and are
xiii
denoted by the second-color numbering of the require students to understand the material, and
problem. Solutions for all of the problems and many of them require students to solve problems
cases are provided to adopting instructors. In similar to those in the book. They are intended to
addition, shell files (templates) are available for help instructors where grading in large classes is
many of the problems for adopting instructors. a serious issue.
The shell files contain the basic structure of the
problem with the relevant formulas omitted. By MindTap: Empower Your Students
adding or omitting hints in individual solutions,
instructors can tailor these shell files to best meet MindTap is a platform that propels students from
the specific needs of students. memorization to mastery. It gives you the instructor
complete control of your course, so you can provide
engaging content, challenge every learner, and build
New to the Sixth Edition student confidence. You can customize interactive
The immediate reason for the sixth edition was the syllabi to emphasize priority topics, then add your
introduction of Excel 2016. Admittedly, this is not own material or notes to the eBook as desired. This
really a game changer, but it does provide new features outcomes-driven application gives you the tools
that ought to be addressed. In addition, once we were needed to empower your students and boost both
motivated by Excel 2016 to revise the book, we saw understanding and performance.
the possibility for other changes that will hopefully
improve the book. Important changes to the sixth Access Everything You Need in One Place
edition include the following: MindTap’s preloaded and organized course materials,
■ The book is now entirely geared to Excel 2016. including interactive multimedia, assignments,
In particular, all screenshots are from this newest quizzes, and more, allow you to cut down on prep
version of Excel. However, the changes are not time and teach more efficiently. In addition, the full
dramatic, and users of Excel 2013, Excel 2010, and textbook is available for smartphone via the MindTap
even Excel 2007 should have no trouble following. mobile app. This gives your students the power to
Also, the latest changes in the accompanying read, listen, and study on their phones, so that they can
@RISK, PrecisionTree, and StatTools add-ins learn in the way best suited to them.
have been incorporated into the text.
Empower Students to Reach their Potential
■ Many of the problems (well over 100) have new
data. Even though these problems are basically Twelve distinct metrics give you actionable insights
the same as before, the new data results in into student engagement. You can identify topics
different solutions. Similarly, the time series data troubling your entire class and instantly communicate
in several of the chapter examples have been with those struggling. Students can track their scores
updated. to stay motivated towards their goals.
■ A new chapter on Data Mining has been added.
Control Your Course—and Your Content
It covers classification problems (including a
section on neural networks) and clustering. To MindTap gives you the flexibility to reorder textbook
keep the size of the physical book roughly the chapters, add your own notes, and embed a variety
same as before, the chapter on Inventory and of content, including Open Educational Resources
Supply Chain Models has been moved online as (OER). You can personalize course content to your
Chapter 17. students’ needs. Students can even read your notes,
■ Probably the single most important change is add their own, and highlight key text to aid their
that the book is now incorporated into Cengage’s learning.
MindTap platform. This provides an enhanced
learning environment for both instructors and Get a Dedicated Team, Whenever You Need
students. Importantly, dozens of new multiple Them
choice questions are included in MindTap. These MindTap isn’t just a tool. It is backed by a personalized
are not of the memorization variety. Instead, they team eager to support you. We can help set up your
xiv Preface
course and tailor it to your specific objectives, so you Example Files, Data Sets, Problem Files,
will be ready to make an impact from day one. You and Cases
can be confident that we will be standing by to help
you and your students until the final day of the term. Also on the student website are the Excel files for
all of the examples in the book, as well as many
data files required for problems and cases. As in
Student Website previous editions, there are two versions of the example
Access to the companion site for this text can be found files: a completed version and a template to get students
at cengage.com/login. Students will need to set up a started. Because this book is so example- and problem-
free account and then search for this text and edition by oriented, these files are absolutely essential. There
author name, title, and/or ISBN. are also a few extra example files, in Extra Examples
The site includes access to the student problem folders, that are available to instructors and students.
files, example files, case files, an Excel tutorial, and These extras extend the book examples in various ways.
SolverTable. In addition, a link to access download
instructions for Palisade’s DecisionTools Suite is
Ancillaries
available. Note: An access code is not needed to access
this software; only the index that is in the back of this Instructor Materials
textbook is needed to download the Decision Tools Suite.
Adopting instructors can obtain all resources online.
Please go to login.cengage.com to access the following
Software resources:
We continue to be very excited about offering
■ PMS6e Problem Database.xlsx file, which
the most comprehensive suite of software ever
contains information about all problems in the
available with a management science textbook. The
book and the correspondence between them and
commercial value of the software available with
those in the previous edition
this text exceeds $1,000 if purchased directly. This
software is available free with new copies of the sixth ■ Solution files (in Excel format) for all of the
edition. The following Palisade software is available problems and cases in the book and solution
from www.cengagebrain.com. shells (templates) for selected problems
■ PowerPoint® presentation files
■ Palisade’s DecisionTools™ Suite, including the
award-winning @RISK, PrecisionTree, ■ Test Bank in Word format and also in the online
StatTools, TopRank, NeuralTools, Evolver, testing service, Cognero
and BigPicture. This software is not available Albright also maintains his own website at www
with any competing textbook and comes in an .kelley.iu.edu/albrightbooks. Among other things, the
educational version that is only slightly scaled- instructor website includes errata for each edition.
down from the expensive commercial version.
(StatTools replaces Albright’s StatPro add-in that
came with the second edition. Although it is no Companion VBA Book
longer maintained, StatPro is still freely available Soon after the first edition appeared, we began using
from www.kelley.iu.edu/albrightbooks.) For Visual Basic for Applications (VBA), the programming
more information about the Palisade Corporation language for Excel, in some of our management science
and the DecisionTools Suite, visit Palisade’s courses. VBA allows you to develop decision support
website at www.palisade.com. systems around the spreadsheet models. (An example
■ To make sensitivity analysis for optimization appears near the end of Chapter 3.) This use of VBA
models useful and intuitive, we continue to has been popular with our students, and many instructors
provide Albright’s SolverTable add-in (which is have expressed interest in learning how to do it. For
also freely available from www.kelley.iu.edu additional support on this topic, a companion book by
/albrightbooks). SolverTable provides data table– Albright, VBA for Modelers, 5e (ISBN 9781285869612)
like sensitivity output for optimization models is available. It assumes no prior experience in computer
that is easy to interpret. programming, but it progresses rather quickly to the
Preface xv
development of interesting and nontrivial applications. good ones, and we have attempted to incorporate
The sixth edition of Practical Management Science them. We would like to extend our appreciation to:
depends in no way on this companion VBA book, but Mohammad Ahmadi, University of Tennessee at
we encourage instructors to incorporate some VBA into Chattanooga
their management science courses. This is not only fun, Ehsan Elahi, University of Massachusetts–Boston
but students quickly learn to appreciate its power. If you Kathryn Ernstberger, Indiana University Southeast
are interested in adopting VBA for Modelers, contact Levon R. Hayrapetyan, Houston Baptist University
your local Cengage Learning representative. Bradley Miller, University of Houston
Sal Agnihothri, Binghamton University, SUNY
Ekundayo Shittu, The George Washington
Mac Users University
We are perfectly aware that more students, maybe Yuri Yatsenko, Houston Baptist University
even the majority of students, are now using Macs. We would also like to thank three special
This is a fact of life, and we can no longer assume people. First, we want to thank our original editor
that we’re targeting only Windows users. There are Curt Hinrichs. Curt’s vision was largely responsible
two possible solutions for you Mac users. First, you for the success of the early editions of Practical
can use a Windows emulation program such as Boot Management Science. Second, we were then lucky
Camp or Parallels. Our Mac users at IU have been to move from one great editor to another in Charles
doing this for years with no problems. Second, you McCormick. Charles is a consummate professional.
can use Excel for the Mac, with the latest 2016 version He was both patient and thorough, and his experience
highly recommended. Its user interface is now very in the publishing business ensured that the tradition
similar to the Windows version, so it should be easy Curt started was carried on. Third, after Charles’s
to get used to. However, you should be aware that retirement, we were fortunate to be assigned to one
not everything will work. Specifically, the Palisade more great editor, Aaron Arnsparger, for the current
and SolverTable add-ins will not work with Excel for edition. We hope to continue working with Aaron far
Mac, and this is not likely to change in the future. into the future.
Also, some features of Excel for Windows (mostly We would also enjoy hearing from you—we can
advanced features not covered in this book such be reached by e-mail. And please visit either of the
as pivot charts and histograms) have not yet been following websites for more information and
incorporated in Excel for the Mac. occasional updates:
■ www.kelley.iu.edu/albrightbooks
Acknowledgments ■ www.cengagebrain.com
This book has gone through several stages of reviews, S. Christian Albright ([email protected])
and it is a much better product because of them. The Bloomington, Indiana
majority of the reviewers’ suggestions were very Wayne L. Winston ([email protected])
xvi Preface
CHAPTER
1 Introduction to Modeling
©michaeljung/Shutterstock.com
BUSINESS ANALYTICS PROVIDES INSIGHTS
AND IMPROVES PERFORMANCE
T his book is all about using quantitative modeling to help companies

make better decisions and improve performance. We have been teach-
ing management science for decades, and companies have been using
the management science methods discussed in this book for decades
to improve performance and save millions of dollars. Indeed, the applied
journal Interfaces, discussed later in this chapter, has chronicled management
science success stories for years. Therefore, we were a bit surprised when
a brand new term, Business Analytics (BA), became hugely popular several
years ago. All of a sudden, BA promised to be the road to success. By using
quantitative BA methods—data analysis, optimization, simulation, prediction,
and others—companies could drastically improve business performance.
Haven’t those of us in management science been doing this for years? What
is different about BA that has made it so popular, both in the academic
world and even more so in the business world?
The truth is that BA does use the same quantitative methods that have
been the hallmark of management science for years, the same methods
you will learn in this book. BA has not all of a sudden invented brand new
quantitative methods to eclipse traditional management science methods.
The main difference is that BA uses big data to solve business problems
and provide insights. Companies now have access to huge sources of data,
1
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now to explore a rich
collection of eBooks, textbook
and enjoy exciting offers!
and better/faster algorithms and technology are now available to use huge data sets for
statistical and quantitative analysis, predictive modeling, optimization, and simulation. In
short, the same quantitative methods that have been available for years can now be even
more effective by utilizing big data and the corresponding algorithms and technology.
For a quick introduction to BA, you should visit the BA Wikipedia site (search
the Web for “business analytics”). Among other things, it lists areas where BA plays a
prominent role, including the following: retail sales analytics; financial services analytics;
risk and credit analytics; marketing analytics; pricing analytics; supply chain analytics;
and transportation analytics. If you glance through the examples and problems in this
book, you will see that most of them come from these same areas. Again, the d ifference
is that we use relatively small data sets to get you started—we do not want to
overwhelm you with gigabytes of data—whereas real applications of BA use huge data
sets to advantage.
A more extensive discussion of BA can be found in the Fall 2011 research report,
Analytics: The Widening Divide, published in the MIT Sloan Management Review in collabo-
ration with IBM, a key developer of BA software (search the Web for the article’s title).
This 22-page article discusses what BA is and provides several case studies. In addition, it
lists three key competencies people need to compete successfully in the BA world—and
hopefully you will be one of these people.
Competency
■ 1: Information management skills to manage the data. This
competency involves expertise in a variety of techniques for managing data. Given
the key role of data in BA methods, data quality is extremely important. With data
coming from a number of disparate sources, both internal and external to an organi-
zation, achieving data quality is no small feat.
Competency 2: Analytics skills and tools to understand the data. We
■
were not surprised, but rather very happy, to see this competency listed among the
requirements because these skills are exactly the skills we cover throughout this
book—optimization with advanced quantitative algorithms, simulation, and others.
Competency 3: Data-oriented culture to act on the data. This refers to the
■
culture within the organization. Everyone involved, especially top management, must
believe strongly in fact-based decisions arrived at using analytical methods.
The article argues persuasively that the companies that have these competencies
and have embraced BA have a distinct competitive advantage over companies that are
just starting to use BA methods or are not using them at all. This explains the title of the
article. The gap between companies that embrace BA and those that do not will only
widen in the future.
One final note about the relationship between BA and management science is that
the journal Management Science published a special issue in June 2014 with an emphasis
on BA. The following is an excerpt from the Call for Papers for this issue (search the
Web for “management science business analytics special issue”).
“We envision business analytics applied to many domains, including, but surely not
limited to: digital market design and operation; network and social-graph analysis; pricing
and revenue management; targeted marketing and customer relationship management;
fraud and security; sports and entertainment; retailing to healthcare to financial services
to many other industries. We seek novel modeling and empirical work which includes,
among others, probability modeling, structural empirical models, and/or optimization
methods.”
This is even more confirmation of the tight relationship between BA and
management science. As you study this book, you will see examples of most of the topics
listed in this quote. ■
2 Chapter 1 Introduction to Modeling

1.1 INTRODUCTION
The purpose of this book is to expose you to a variety of problems that have been solved
successfully with management science methods and to give you experience in modeling
these problems in the Excel spreadsheet package. The subject of management science has
evolved for more than 60 years and is now a mature field within the broad category of
applied mathematics. This book emphasizes both the applied and mathematical aspects
of management science. Beginning in this chapter and continuing throughout the rest of
the book, we discuss many successful management science applications, where teams of
highly trained people have implemented solutions to the problems faced by major com-
panies and have saved these companies millions of dollars. Many airlines, banks, and oil
companies, for example, could hardly operate as they do today without the support of
management science. In this book, we will lead you through the solution procedure for
many interesting and realistic problems, and you will experience firsthand what is required
to solve these problems successfully. Because we recognize that most of you are not highly
trained in mathematics, we use Excel spreadsheets to solve problems, which makes the
quantitative analysis much more understandable and intuitive.
The key to virtually every management science application is a mathematical model.
In simple terms, a mathematical model is a quantitative representation, or idealization, of
a real problem. This representation might be phrased in terms of mathematical expressions
(equations and inequalities) or as a series of related cells in a spreadsheet. We prefer the lat-
ter, especially for teaching purposes, and we concentrate primarily on spreadsheet models
in this book. However, in either case, the purpose of a mathematical model is to represent
the essence of a problem in a concise form. This has several advantages. First, it enables
managers to understand the problem better. In particular, the model helps to define the
scope of the problem, the possible solutions, and the data requirements. Second, it allows
analysts to use a variety of the mathematical solution procedures that have been developed
over the past half century. These solution procedures are often computer-intensive, but
with today’s cheap and abundant computing power, they are usually feasible. Finally, the
modeling process itself, if done correctly, often helps to “sell” the solution to the people
who must work with the system that is eventually implemented.
In this introductory chapter, we begin by discussing a relatively simple example of a
mathematical model. Then we discuss the distinction between modeling and a collection
of models. Next, we discuss a seven-step modeling process that can be used, in essence if
not in strict conformance, in most successful management science applications. Finally, we
discuss why the study of management science is valuable, not only to large corporations,
but also to students like you who are about to enter the business world.
1.2 A Capital Budgeting EXAMPLE

As indicated earlier, a mathematical model is a set of mathematical relationships that rep-
resent, or approximate, a real situation. Models that simply describe a situation are called
descriptive models. Other models that suggest a desirable course of action are called optimi-
zation models. To get started, consider the following simple example of a mathematical
model. It begins as a descriptive model, but it then becomes an optimization model.
A Descriptive Model
A company faces capital budgeting decisions. (This type of model is discussed in detail
in Chapter 6.) There are seven potential investments. Each has an investment cost and a
1.2 A Capital Budgeting Example 3

A B C D E F G H
Figure 1.1
1 Capital budgeting model
Costs and NPVs for 2
Capital Budgeting 3 Input data on potential investments ($ millions)
Model 4 Investment 1 2 3 4 5 6 7
5 Cost $5.0 $2.4 $3.5 $5.9 $6.9 $4.5 $3.0
6 NPV $5.6 $2.7 $3.9 $6.8 $7.7 $5.1 $3.3
7 ROI 12.0% 12.5% 11.4% 15.3% 11.6% 13.3% 10.0%
corresponding stream of cash flows (including the investment cost) summarized by a net
present value (NPV). These are listed in Figure 1.1. Row 7 also lists the return on invest-
ment (ROI) for each investment, the ratio of NPV to cost, minus 1.
The company must decide which of these seven investments to make. There are two
constraints that affect the decisions. First, each investment is an all-or-nothing decision. The
company either invests entirely in an investment, or it ignores the investment completely.
It is not possible to go part way, incurring a fraction of the cost and receiving a fraction of
the revenues. Second, the company is limited by a budget of $15 million. The total cost of
the investments it chooses cannot exceed this budget. With these constraints in mind, the
company wants to choose the investments that maximize the total NPV.
A descriptive model can take at least two forms. One form is to show all of the
elements of the problem in a diagram, as in Figure 1.2. This method, which will be used
extensively in later chapters, helps the company to visualize the problem and to better
understand how the elements of the problem are related. Our conventions are to use red
ovals for decisions, blue rectangles for given inputs, yellow rounded rectangles for calcu-
lations, and gray-bordered rectangles for objectives to optimize. (These colors are visible
when you open the files in Excel.)
Although the diagram in Figure 1.2 helps the company visualize the problem, it
does not provide any numeric information. This can be accomplished with the second
descriptive form of the model in Figure 1.3. Any set of potential decisions, 0/1 values,
can be entered in row 10 to indicate which of the investments are undertaken. Then sim-
ple Excel formulas that relate the decisions to the inputs in rows 5 and 6 can be used to
calculate the total investment cost and the total NPV in cells B14 and B17. For example,
the formula in cell B14 is
=SUMPRODUCT(B5:H5,B10:H10)
(If you don’t already know Excel’s SUMPRODUCT function, you will learn it in the next
chapter and then use it extensively in later chapters.) The company can use this model to
investigate various decisions. For example, the current set of decisions looks good in terms
of total NPV, but it is well over budget. By trying other sets of 0/1 values in row 10, the
company can play “what-if” to attempt to find a good set of decisions that stays within
budget.
Figure 1.2
Whether to Investment cost
Relationships invest
among Elements of
the Model
Total cost of
<= Budget
investments
Maximize
Investment NPV
total NPV

A B C D E F G H
Figure 1.3
Descriptive Model 2
for What-If Analysis 3 Input data on potential investments ($ millions)
4 Investment 1 2 3 4 5 6 7
5 Cost $5.0 $2.4 $3.5 $5.9 $6.9 $4.5 $3.0
6 NPV $5.6 $2.7 $3.9 $6.8 $7.7 $5.1 $3.3
7 ROI 12.0% 12.5% 11.4% 15.3% 11.6% 13.3% 10.0%
8
9 Decisions: whether to invest
10 1 if yes, 0 if no 0 1 1 0 1 1 0
11
12 Budget constraint
13 Total cost Budget
14 $17.3 $15
15
16 Objective to maximize
17 Total NPV $19.4
Because there are two possible values for each cell in row 10, 0 or 1, there are 27 5 128
possible sets of decisions, some of which will be within the budget and some of which
will be over the budget. This is not a huge number, so the company could potentially try
each of these to find the optimal investment strategy. However, you can probably see that
this “exhaustive search” strategy can easily become overwhelming. For example, if there
were 14 potential investments, the number of possible sets of decisions would increase to
214 5 16,384. The company would probably not want to search through all of these, which
is why the optimization model discussed next is so useful.
An Optimization Model
The company’s dream at this point is to have software that can quickly search through all
potential sets of decisions and find the one that maximizes total NPV while staying within the
budget. Fortunately, this software exists, and you own it! It is called Solver, an add-in to Excel,
and it is discussed in detail in Chapters 3 to 8. All the company needs to do, after creating the
descriptive model in Figure 1.3, is to invoke Solver. This opens a dialog box (not shown here)
where the company can specify the objective cell, the range of decision variable cells, and any
constraints. Then Solver finds the optimal solution, usually in a matter of seconds.
The optimal solution for this particular model appears in Figure 1.4. The company
should undertake investments 3, 5, and 6, and it should ignore the others. Although not
quite all of the budget is used, the company is guaranteed that no other set of decisions can
obtain a higher total NPV and stay within the budget.
Optimal solutions are sometimes surprising. You might have expected the company to
choose the investments with the largest ROIs, at least until the budget runs out. However,
this is not what the optimal solution prescribes. For example, investment 4 has the largest
ROI, but it is not chosen, and investment 5, which is chosen, has a lower ROI than three
of the investments that are not chosen. As this example illustrates, an optimization model
often provides insights that your intuition alone cannot provide.
Incorporating Uncertainty
Most of the optimization models in this book are deterministic, meaning that there is no
uncertainty about any of the model inputs. Specifically, the NPVs in row 6 of the c apital
budgeting model are assumed to be known when the company makes its investment
1.2 A Capital Budgeting Example 5

A B C D E F G H
Figure 1.4
Optimal Solution 2
3 Input data on potential investments ($ millions)
4 Investment 1 2 3 4 5 6 7
5 Cost $5.0 $2.4 $3.5 $5.9 $6.9 $4.5 $3.0
6 NPV $5.6 $2.7 $3.9 $6.8 $7.7 $5.1 $3.3
7 ROI 12.0% 12.5% 11.4% 15.3% 11.6% 13.3% 10.0%
8
9 Decisions: whether to invest
10 1 if yes, 0 if no 0 0 1 0 1 1 0
11
12 Budget constraint
13 Total cost Budget
14 $14.9 $15
15
16 Objective to maximize
17 Total NPV $16.7
d ecisions. This is clearly a strong assumption; uncertainties about future revenues almost
surely exist. This uncertainty can be built into the model by replacing fixed input values by
probability distributions. This takes us into the realm of simulation models, which are dis-
cussed in detail in Chapters 10 and 11. Simulation lets the company see how an output such as
total NPV varies, for any given set of decisions, as uncertain inputs vary over their ranges of
possible values. Fortunately, another Excel add-in called @RISK for performing simulations
is available with this book, and it is used extensively in Chapters 10 and 11. @RISK even has
a tool called RISKOptimizer that can be used to find the optimal set of decisions in the face
of uncertainty. We discuss RISKOptimizer only briefly, but it is very powerful software.
1.3 MODELING VERSUS MODELS

Management science, at least as it has been taught in many traditional courses, has
evolved as a collection of mathematical models. These include various linear program-
ming models (the transportation model, the product mix model, the shortest route model,
and others), inventory models, queueing models, and more. Much time has been devoted
to teaching the intricacies of these particular models. Management science practitio-
ners, however, have justifiably criticized this emphasis on specific models. They argue
that the majority of real-world management science problems cannot be neatly cate-
gorized as one of the handful of models typically included in a management science
textbook. That is, there is often no “off-the-shelf” model that can be used, at least not
without modification, to solve a company’s real problem. Unfortunately, management
science students might get the impression that all problems must be “shoe-horned” into
one of the textbook models.
The good news is that this emphasis on specific models has been changing in the past
decade or two, and our goal in this book is to embrace this change. Specifically, this book
stresses modeling, not models. The distinction between modeling and models will become
clear as you proceed through the book. Learning specific models is essentially a memori-
zation process—memorizing the details of a particular model, such as the transportation
model, and possibly learning how to “trick” other problems into looking like a transporta-
tion model. Modeling, on the other hand, is a process in which you abstract the essence of a
real problem into a model, spreadsheet or otherwise. Although many problems fall naturally
into several categories, successful modelers do not try to shoe-horn each problem into one

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— Voilà ! dit simplement M. Buc.
Nous nous quittâmes, ravis.
— Ne me trahissez pas, dit le bonhomme, en me reconduisant ; il
y va de votre nomination à Chantefoy.
Assurément je ne le trahirai pas.
Je laisse ma vaisselle emballée.
17 août. — M. Buc est à l’hospice !

Le maire de Chantefoy lui avait envoyé un médecin, l’inspecteur
d’académie lui en avait envoyé un autre. Fidèle à son programme, le
bonhomme a dû leur tenir d’étonnants discours. Si bien que deux
infirmiers sont venus le chercher hier matin ! Il s’est débattu, il s’est
défendu. Les infirmiers, deux sombres brutes, après l’avoir
laidement accoutré de horions, l’ont ficelé et jeté dans la voiture
comme un paquet. Les gens du village avaient, paraît-il, les larmes
aux yeux.
Ceci passe la plaisanterie. Heureusement pour M. Buc, je suis là.
18 août. — J’arrive de Chantefoy. J’ai vu le maire, j’ai vu la

servante de M. Buc, j’ai vu les voisins. Ils n’ont rien compris à ce que
je leur ai expliqué ! Quelles cervelles obtuses ! Il y a, sous le soleil,
des gens bien réfractaires à la plus simple vérité !
Ils m’ont donné, cependant, l’adresse du neveu de M. Buc.
Je lui écris dès ce soir.
20 août. — Je suis allé à la consultation du premier médecin qui

examina M. Buc. Il n’a prêté à mon histoire qu’une oreille distraite.
— Tranquillisez-vous, m’a-t-il dit ; cet homme est nettement fou.
Je n’ai pas insisté. Je lui ai demandé si je lui devais quelque
argent pour le service qu’il me rendait. Il m’a répondu :
— Cent sous !
21 août. — Le médecin de l’administration ne m’a pas demandé

d’argent ; il m’a envoyé promener.
Le neveu ne répond pas. Je lui télégraphie. Je commence à
m’énerver.
25 août. — J’ai ma nomination à Chantefoy. Cela, c’est bon.

Sous prétexte de remercier l’inspecteur d’académie, je vais aller lui
conter cette lamentable aventure. Il avisera.
27 août. — M. l’inspecteur d’académie, étant fort occupé, ne m’a

accordé que cinq minutes d’entretien. Il m’a félicité ironiquement
d’être plus clairvoyant que deux médecins réputés et que les
éminents psychiatres de l’hospice.
28 août. — Réponse du neveu. Il se moque de cette affaire. Pour

lui, d’ailleurs, l’oncle était fou depuis longtemps.
Ça va bien !
Cette semaine, il faut que je m’occupe de mon déménagement.
J’aurai fini, je pense, samedi matin. Samedi soir, je vais droit à
l’hospice et je leur dirai ce que j’ai sur le cœur, aux éminents
psychiatres !
J’en ai assez, à la fin !
3 septembre. — M. le médecin-chef n’a pas voulu me recevoir.

Je n’ai vu qu’une vieille infirmière barbue qui, d’ailleurs, ne m’a pas
écouté.
Le règlement s’oppose formellement, paraît-il, à ce que je voie M.
Buc.
10 septembre. — Cette pitoyable affaire me rend malade. Je ne
mange plus, je ne dors plus. Je suis empoisonné.
Je n’ose plus dire ce que je sais : on finirait peut-être par
m’enfermer, moi aussi.
19 septembre. — Enfin ! Je vais donc tirer ce malheureux de

l’enfer ! J’ai rencontré, hier, à la ville, un jeune médecin nouvellement
attaché à l’hospice. Un homme délicieux !
Il m’a écouté ! il m’a compris ! Il s’est discrètement égayé lorsque
j’ai représenté le père Buc en piqueur et en marin.
Je ne lui reprocherais que l’apparence d’un certain dilettantisme
moral : il m’a semblé qu’il souriait aussi de mon étonnement et de
mon indignation.
Il s’occupera de l’affaire : c’est le point essentiel. Il va, pendant
quinze jours, remplacer le médecin-chef qui prend un congé. Il m’a
dit :
— Je serai à l’hospice tous les matins, de neuf à onze heures.
Venez à onze heures par exemple… et ne craignez pas d’être
importun. Il sera peut-être bon, cependant, que vous m’accordiez
quatre ou cinq jours pour examiner ce cas tout à loisir.
Quatre ou cinq minutes suffiraient largement à mon avis ! Mais
enfin, je veux bien laisser à ce médecin si scrupuleux le temps qu’il
lui faudra pour arriver à une certitude absolue. J’irai à l’hospice
dimanche matin.
Monsieur Buc, vous me devrez une fière chandelle !
25 septembre. — Le jeune médecin me reçut tout de suite.

— Eh bien, docteur ?
— Eh bien, il est fou ! me répondit-il en souriant.
Je ne suis pas d’une patience surprenante. Le sourire du
médecin me sembla cynique et exaspérant. Je me levai avec
brusquerie et je ne fus pas avare d’insolences ! Je crois bien même
que je parlai du procureur de la République et d’un ami journaliste
singulièrement féroce.
— Car enfin ! il n’est pas fou ! Je l’ai vu le 10 août ; il simulait la
folie, mais il n’était pas fou ! Non, monsieur ! et c’est tout simplement
monstrueux !
Le médecin me laissait aller. Quand je fus à bout de souffle, il
parla à son tour :
— Monsieur, me dit-il, rien ne m’autorise à penser que vous vous
soyez trompé. Le 10 août, notre malade simulait la folie, votre parole
m’en est un sûr garant. Certains indices me porteraient à croire que,
le 16 août, à son entrée dans cet établissement, il était exaspéré,
mais lucide. Quelques jours d’hébétude ont suivi. Les premiers
symptômes nettement spécifiques se placeraient, je crois, entre le
27 et le 30 août. Vous excuserez, monsieur, ce manque de
précision : je ne suis attaché à l’établissement que depuis le 5
septembre.
— En somme, repris-je, il est entré ici sain d’esprit et il en sortira
radicalement fou !
— Il n’en sortira vraisemblablement pas, répondit doucement le
médecin. Il présente un cas typique de vésanie incurable. Il simulait
la folie, disiez-vous, afin d’être mis à la retraite ? maintenant il a
repris la férule et il enseigne passionnément du matin au soir ; sa
grande terreur est qu’on ne le trouve pas assez zélé. Il est, d’ailleurs,
tout à fait inoffensif. Voulez-vous le voir ?
Non, à la vérité, je ne voulais plus le voir ! Mais je ne répondis
pas : j’étais écrasé.
Le médecin pria un infirmier de l’aller chercher.
Et je le revis, M. Buc ! Sans ventre, sans bajoues, sans double
menton, avec des yeux… des yeux de fou, enfin !
Il récitait la table de multiplication…
Devant moi, il hésita une seconde ; du moins il me sembla qu’il
hésitait comme on hésite devant une figure aperçue autrefois dans
le lointain des années.
— Non ! dit-il, je ne suis pas bon pour la retraite ; j’ai vingt-huit
ans depuis hier matin.
Il me regarda encore, et si fixement que je baissai les yeux.
— Toi, reprit-il, tu m’as l’air d’un traître ! Tu me conjugueras dix
verbes au subjonctif ! et je te ferai extraire des racines carrées, tu
m’entends ! carrées ! carrées ! et même cubiques ! vilain étourneau
paresseux !
Sur un signe du médecin, l’infirmier l’emmena. Je n’avais plus
qu’une idée : m’en aller ! fuir cette maison !
— Je vous remercie, bredouillai-je, vous êtes bien bon… Je sais
qu’il sera convenablement soigné chez vous… Je connais votre
zèle, votre dévouement, votre savoir…
— A votre service ! me dit le jeune médecin avec son gracieux
sourire.
29 septembre. — Je n’avais pas d’épuisette. Je pêchais le

gardon avec une racine quasi imperceptible et j’ai piqué une brème
de deux livres ! Je n’aurais jamais cru pouvoir sortir une bête pareille
au bout d’un fil d’araignée. Je l’ai eue quand même, mais je l’ai bien
tenue sur l’eau pendant trois quarts d’heure !
La main me tremble encore en écrivant et je sens mon cœur
battre comme après une course rapide. J’ai faim ; de pareilles
émotions creusent.
Après tout, je crois que je vais être richement bien à Chantefoy !
FIN
TABLE
Pages
I. — Sous la bonne étoile 1
II. — Conte de la fille qui aurait voulu être un garçon 49
III. — Sur la pointe des pieds 79
IV. — Camille et les bonnes choses 119
V. — En se dandinant 139
VI. — Comment l’esprit vint à Philémon 195
VII. — Comme un rasoir ! 221
VIII. — La retraite de M. Buc, instituteur 239
PARIS
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