Chapter 1

Introduction to Modeling
& Problem Solving

Introduction
We face numerous decisions in life
and professional settings.
We can use computers to analyze the
potential outcomes of decision
alternatives.
Spreadsheets are often the tool of
choice for todays problem-solvers.

What is Operations Research?

A field of study that uses computers,
statistics, and mathematics to solve
problems in a variety of settings.
Also known as:
Management Science
Decision science

What is Operations Research?

Operations Research (OR) is the field of
how to form mathematical models of
complex management decision problems
and how to analyze the models to gain
insight about possible solutions.

History of OR
Although scientists had (plainly) been
involved in the hardware side of warfare
(designing better planes, bombs, tanks, etc)
scientific analysis of the operational use
of military resources had never taken
place in a systematic fashion before the
Second World War. Military personnel,
often by no means stupid, were simply not
trained to undertake such analysis.

History of OR
These early OR workers came from many different
disciplines, one group consisted of a physicist, two
physiologists, two mathematical physicists and
a surveyor. What such people brought to their work
were "scientifically trained" minds, used to
querying
assumptions,
logic,
exploring
hypotheses, devising experiments, collecting
data, analysing numbers, etc. Many too were of
high intellectual calibre (at least four wartime OR
personnel were later to win Nobel prizes when they
returned to their peacetime disciplines).
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History of OR
Following the end of the war OR took a different
course in the UK as opposed to in the USA. In the
UK (as mentioned above) many of the distinguished
OR workers returned to their original peacetime
disciplines. As such OR did not spread particularly
well, except for a few isolated industries (iron/steel
and coal). In the USA OR spread to the
universities so that systematic training in OR
began.

History of OR
OR started just before World War II in Britain
with the establishment of teams of scientists
to study the strategic and tactical problems
involved in military operations. The
objective was to find the most effective
utilisation of limited military resources by
the use of quantitative techniques.

History of OR
You should be clear that the growth of OR
since it began (and especially in the last 30
years) is, to a large extent, the result of the
increasing
power
and
widespread
availability of computers. Most (though not
all) OR involves carrying out a large number
of numeric calculations. Without computers
this would simply not be possible.

History of OR
Manufacturers used operations research to
make products more efficiently, schedule
equipment maintenance, and control
inventory and distribution. And success in
these areas led to expansion into strategic
and financial planning and into such
diverse areas as criminal justice, education,
meteorology, and communications.

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Future of OR
A number of major social and economic
trends are increasing the need for
operations researchers. In todays global
marketplace, enterprizes must compete
more effectively for their share of profits than
ever before. And public and non-profit
agencies must compete for ever-scarcer
funding dollars.

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Future of OR
This means that all of us must become
more productive. Volume must be
increased. Consumers demands for better
products and services must be met.
Manufacturing and distribution must be
faster. Products and people must be
available just in time.

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Home Runs
in Operations Research
Motorola
Procurement of goods and services
account for 50% of its costs
Developed an Internet-based auction
system for negotiations with suppliers
The system optimized multi-product, multivendor contract awards
Benefits:
$600 million in savings

Home Runs
in Operations Research
Waste Management
Leading waste collection company in North
America
26,000 vehicles service 20 million residential &
2 million commercial customers
Developed vehicle routing optimization system
Benefits:
Eliminated 1,000 routes
Annual savings of $44 million

Home Runs
in Operations Research
Hong Kong International Terminals
Busiest container terminal in the world
122 yard cranes serve 125 ships per week
Thousands of trucks move containers in &
out of storage yard
Used OR to optimize operational decisions
involving trucks, cranes & storage locations
Benefits:
35% reduction in container handling costs
50% increase in throughput
30% improvement in vessel turnaround time

Home Runs in
Operations Research
John Deere Company
2500 dealers sell lawn equipment &
tractors with support of 5 warehouses
Each dealer stocks 100 products, creating
250,000 product-stocking locations
Demand is highly seasonal and erratic
Developed inventory system to optimize
stocking levels over a 26-week horizon
Benefits:
$1 billion in reduced inventory
Improved customer-service levels

What is a Computer Model?

A set of mathematical relationships and
logical assumptions implemented in a
computer as an abstract representation of
a real-world object of phenomenon.
Spreadsheets provide the most convenient
way for business people to build computer
models.

The Modeling Approach

to Problem Solving
Everyone uses models to make
decisions.
Types of models:
Mental (arranging furniture)
Visual (blueprints, road maps)
Physical/Scale (aerodynamics, buildings)
Mathematical (what well be studying)

Characteristics of Models
Models are usually simplified versions of
the things they represent
A valid model accurately represents the
relevant characteristics of the object or
decision being studied

Benefits of Modeling
Economy - It is often less costly to
analyze decision problems using
models.
Timeliness - Models often deliver
needed information more quickly than
their real-world counterparts.
Feasibility - Models can be used to do
things that would be impossible.
Models give us insight & understanding
that improves decision making.

Example of a Mathematical Model

Profit = Revenue - Expenses
or

Profit = f(Revenue, Expenses)

or

Y = f(X1, X2)

A Generic Mathematical Model

Y = f(X1, X2, , Xn)
Where:

Y = dependent (response) variable

(aka bottom-line performance measure)
Xi = independent (explanatory) variables
(inputs having an impact on Y)
f(.) = function defining the relationship between the Xi & Y

Mathematical Models & Spreadsheets

Most spreadsheet models are very similar
to our generic mathematical model:
Y = f(X1, X2, , Xn)

Most spreadsheets have input cells

(representing Xi) to which mathematical
functions ( f(.)) are applied to compute a
bottom-line performance measure (or Y).

Categories of Mathematical Models

Model
Category
Prescriptive

Form of f(.)

Independent
Variables

OR/MS
Techniques

known,
well-defined

known or under
decision makers
control

LP, Networks, IP,

CPM, EOQ, NLP,
GP, MOLP

Predictive

unknown,
ill-defined

known or under
decision makers
control

Regression Analysis,
Time Series Analysis,
Discriminant Analysis

Descriptive

known,
well-defined

unknown or
uncertain

Simulation, PERT,
Queueing,
Inventory Models

The Problem Solving Process

Identify
Problem

Formulate &
Implement
Model

Analyze
Model

unsatisfactory
results

Test
Results

Implement
Solution

The Psychology of Decision Making

Models can be used for technical
aspects of decision problems.
Other aspects cannot be modeled
easily, requiring intuition and judgment.
Caution: Human judgment and intuition
is not always rational!

Anchoring Effects
Arise when trivial factors influence initial
thinking about a problem.
Decision-makers usually under-adjust
from their initial anchor.
Example:
What is 1x2x3x4x5x6x7x8 ?
Median answer 512

What is 8x7x6x5x4x3x2x1 ?
Median answer 2,250

8! = 40,320

Framing Effects
Refers to how decision-makers view
alternatives in a problem, often from a
win-loss perspective.
The way a problem is framed often
influences choices in irrational ways
Suppose youve been given $1000 and
must choose between:
A. Receive $500 more immediately
B. Flip a coin and receive $1000 more if heads
occurs or $0 more if tails occurs

Framing Effects (Example)

Now suppose youve been given $2000
and must choose between:
A. Give back $500 immediately
B. Flip a coin and give back $0 if heads occurs
or give back $1000 if tails occurs

A Decision Tree for Both Examples

Payoffs
$1,500

Alternative A
Initial state
Heads (50%)
Alternative B
(Flip coin)

Tails (50%)

$2,000
$1,000

Good Decisions vs. Good Outcomes

Good decisions do not always lead to good
outcomes...

A structured, modeling approach to

decision making helps us make good
decisions, but cant guarantee good
outcomes.

End of Chapter 1