AE 4 MANAGEMENT SCIENCE

• Model Solution
MANAGEMENT SCIENCE ❖ A technique applies to a specific model
• Application of scientific approach to solving type.
management problems in order to help ❖ A model is solved because a model represents
managers make better decisions. a problem.
• Encompasses numerous mathematically ❖ A Management Science Solution can be either
oriented techniques that adapted from other a recommended decision or information that helps
disciplines. a manager make a decision.
• A recognized and established discipline in
business. • Implementation
• Also known as the Operations Research, ❖ The final step in the management science
Quantitative Methods, Quantitative Analysis, and process for problem solving.
Decision Science ❖ It is the actual use of the model once it has
been developed or a solution is found.
Management Science is a scientific approach to
solving management problems. It can be used in MATHEMATICAL FORMULAS:
a variety of organizations to solve man different TOTAL COST
types of problems. It encompasses a logical TC= Fixed Cost + Volume (Variable Cost)
approach to problem solving.
PROFIT
Z= Volume x Price - [Fixed Cost + Volume (Variable Cost)]
MANAGEMENT SCIENCE PROCESS
• Observation
REVENUE
❖ The first step in the management science
R= Volume x Price
process is the identification of problem that
exist in the system. The problems are identified
not just only because of crisis, but also through
MANAGEMENT SCIENCE PROCESS
observation.
❖ Management Scientist is a trained person that
identifies the problem. They are also skilled in
the techniques of management science.

Definition of Problem
❖ Improper definition of the problem can easily
result in no solution or an inappropriate solution.
❖ The existence of the problem implies that the
objectives are not met in some way, the goals of
the organization must also be clearly defined.

• Model Construction
❖ A management science model is an abstract
representation of an existing problem
MODEL BUILDING: BREAK – EVEN ANALYSIS
situation.
❖ It can be in a form of graph or chart, but
• Also called as Profit Analysis
frequently it is a model consists of set of
• Provides a convenient means to demonstrate
mathematical relationships.
the different ways management science models
can be solved mathematically, graphically and
Mathematical Relationships are made up of
with computer.
numbers and symbols (variable).
❖ Variable – a symbol used to represent an item
• Components of Break – Even Analysis
that can take on any value.
❖ The three components are volume, cost and
❖ Parameters – these are constant values that
profit.
are generally coefficients of the variables in an
equation.
❖ Volume is the level of sales or production by
❖ Data – pieces of information from the
a company. It can be expressed as the number of
problem environment.
units produced and sold.
❖ Functional Relationship – a model that
includes variables, parameters, and equations.
❖ Decision variable – refers to the variable that
❖ Cost
represents a potential or recommended
o Fixed Costs are independent of the volume of
decision to the manager.
units produced and sold. It remains constant
regardless of how many units of products are
produced with a given range.
o Variable Costs are determined on a per – unit
basis. It depends on the number of items
produced.
o Total Cost is the sum of total fixed cost and
variable cost.
❖ Profit
is the difference between the total revenue
(volume multiplied by price) and the total cost.
Z = vp – (cf + vc)
❖ Break – Even Point is the volume (v) that
equates total revenue with total cost where profit
is zero
Sensitivity Analysis
-the study of changes on a management
science models. In this analysis, we analyze the
effect of other variables. For instance, instead of
volume, we make price as our decision variable.
Increasing the price lowers the break – even point
and all other things remain constant. Although the
decision to increase price looks inviting, it must be
remembered that the lower the break-even
volume and higher profit are possible but not
guaranteed.
MANAGEMENT SCIENCE MODELING
TECHNIQUE
1. Linear Mathematical Programming Techniques
2. Probabilistic Techniques
3. Network Techniques
4. Analytical Hierarchy Process
5. Nonlinear Programming Techniques
6. Simulation
7. Forecasting
8. Inventory management
LINEAR PROGRAMMING: MODEL
FORMULATION and GRAPHICAL SOLUTION
Model Formulation
• Consists of certain common components and
characteristics.
• Include decision variables (objective function)
and model constraints (parameters).
• Decision variables are mathematical symbols
that represent levels of activity by the firm.
• Objective functions are linear mathematical
relationship that describes the objective
of the firm in terms of the decision variables. It is
always consisting of either maximizing or
minimizing some value (e.g. maximizing profit,
minimizing cost). It is a linear relationship that
reflects the objective of an operation.
• Constraint is a linear relationship that
represents a restriction on decision making.
Restrictions can be in the form of limited
resources or restrictive guidelines.
• Parameters are numerical values that are
included in the objective functions and
constraints.
Maximization/ Minimization Model
❖ Step 1: Define the Decision Variable
❖ Step 2: Define the objective function
❖ Step 3: Define the constraints.
The sets of possible solutions on the given
Problem called the extreme points. These
extreme points are corner points on the
boundary of the feasible solution area.
LINEAR PROGRAMMING: Using Computer
Solution (Microsoft Excel)
Steps in Using Microsoft Excel in Solving
Linear Programming Problems
1. Organize the data for your problem in the
spreadsheet in a logical manner.
2. Choose a spreadsheet cell to hold the value of
each decision variable in your model.
3. Create a spreadsheet formula in a cell that
calculates the objective function for your model.
4. Create formulas in cells to calculate the left
hand sides of each constraint.
5. Use the dialogs in Excel to tell the Solver about
your decision variables, the objective, constraints,
and desired bounds on constraints and variables.
6. Run the Solver to find the optimal solution.
MAXIMIZATION/MINIMIZATION MODEL
Step 1: Organize the data for your problem in the
spreadsheet in a logical manner.
Step 2: Choose a spreadsheet cell to hold the
value of each decision variable in your model.
Step 3: Create a spreadsheet formula in a cell
that calculates the objective function for y
Step 4: Create formulas in cells to calculate the
left hand sides of each constraint.
Step 5: Use the dialogs in Excel to tell the Solver
about your decision variables,
the objective, constraints, and desired bounds on
constraints and variables.
a. Click the cell of your objective function.
b. Choose between Max, Min. or Value of
c. Fill in the ‘By Changing Variable Cells’ field with
the cells of our decision variables.
d. Click ‘Add’ to put the constraints.
e. Choose ‘Simplex LP’ as Solving Method
f. Then click ‘Solve’.