Chapter 01

Management Science
Chapter 1
Copyright © 2016 Pearson Education, Inc. 1-1

Chapter Topics
 The Management Science Approach to Problem

Solving
 Management Science and Business Analytics
 Model Building: Break-Even Analysis
 Computer Solution
 Management Science Modeling Techniques
 Business Usage of Management Science Techniques
 Management Science Models in Decision Support
Systems
The Management Science Approach
 Management science is a scientific approach to

solving management problems.
 It is used in a variety of organizations to solve many
different types of problems.
 It encompasses a logical mathematical approach to
problem solving.
 Management science, also known as operations
research, quantitative methods, business analytics,
etc., involves a philosophy of problem solving in a
logical manner.
Co
y
Examples of Quantitative
ig
t
©
0
5
e
rs
Analyses
n
Ed
c
ti
 Taco Bell saved over $150 million using
n
forecasting and scheduling quantitative analysis
n
. models
 NBC television increased revenues by over $200
million between 1996 and 2000 by using
quantitative analysis to develop better sales plans
 Continental Airlines saves over $40 million every
year using quantitative analysis models to quickly
recover from weather delays and other
disruptions
1–4
1-4
Co
y
ig
t
©
0
5
What is Quantitative Analysis?
e
rs
n
Ed
c
ti Quantitative analysis is a scientific approach to
managerial decision making in which raw data
n
n
. are processed and manipulated to produce
meaningful information
Quantitative Meaningful
Raw Data Analysis Information
1–5
1-5
Co
y
ig
t
©
0
5
e
rs
n • Quantitative factors are data that can be
Ed
c
ti
accurately calculated
n – Different investment alternatives
n
.
– Interest rates
– Inventory levels
– Demand
– Labor cost
• Qualitative factors are more difficult to quantify
but affect the decision process
– The weather
– State and federal legislation
– Technological breakthroughs
1–6
1-6
Co
y
ig
t
©
0
5
e
rs
Quantitative and qualitative factors may have

n
Ed 
c
ti
n
different roles
n
.
 Decisions based on quantitative data can be
automated
 Generally quantitative analysis will aid the
decision-making process
 Important in many areas of management
 Production/Operations Management
 Supply Chain Management
 Business Analytics
1–7
1-7
Co
y
ig
t
©
0
5
Business Analytics
e
rs
A data-driven approach to decision making

n
Ed 
c
ti
n
 Large amounts of data
n
 Information technology is very important
.
 Statistical and quantitative analysis are used to
analyze the data and provide useful information
 Descriptive analytics – the study and
consolidation of historical data
 Predictive analytics – forecasting future
outcomes based on patterns in the past data
 Prescriptive analytics – the use of
optimization methods
1–8
1-8
The Management Science Process
Figure 1.1 The management science process

Steps in the Management Science Process
 Observation - Identification of a problem that exists (or may occur

soon) in a system or organization.
 Problem Definition - The problem must be clearly and consistently
defined, showing its boundaries and interactions with the objectives
of the organization.
 Model Construction - Development of the functional mathematical
relationships that describe the decision variables, objective function
and constraints of the problem.
 Model Solution - Models solved using management science
techniques.
 Model Implementation - Actual use of the model or its solution.

Example of Model Construction (1 of 3)
Information and Data:

 Business firm makes and sells a steel product
 Product costs $5 to produce
 Product sells for $20
 Product requires 4 pounds of steel to make
 Firm has 100 pounds of steel
Business Problem:
 Determine the number of units to produce to make the
most profit, given the limited amount of steel available.

Variables: x = # units to produce (decision variable)

Z = total profit (in $)
Model: Z = $20x - $5x (objective function)
4x = 100 lb of steel (resource constraint)
Parameters: $20, $5, 4 lbs, 100 lbs (known values)
Formal Specification of Model:
maximize Z = $20x - $5x
subject to 4x = 100

Model Solution:
Solve the constraint equation:
4x = 100
(4x)/4 = (100)/4
x = 25 units
Substitute this value into the profit function:

Z = $20x - $5x
= (20)(25) – (5)(25)
= $375
(Produce 25 units, to yield a profit of $375)
Management Science
and Business Analytics
 Business analytics uses large amounts of
data with management science techniques
to help managers make decisions
 Brings together information technology,
statistics, management science, and
mathematical modeling
 Big data

Model Building:
Break-Even Analysis (1 of 9)
■ Used to determine the number of units of a product to

sell or produce that will equate total revenue with total
cost.
■ The volume at which total revenue equals total cost is

called the break-even point.
■ Profit at break-even point is zero.

Model Building:
Model Components
 Fixed Cost (cf) - costs that remain constant regardless of
number of units produced.
 Variable Cost (cv) - unit production cost of product.
 Volume (v) – the number of units produced or sold
 Total variable cost (vcv) - function of volume (v) and

unit variable cost.
Model Building:
Model Components
 Total Cost (TC) - total fixed cost plus total variable
cost.
TC  c f  vcv
 Profit (Z) - difference between total revenue vp (p =

unit price) and total cost, i.e.
Z  vp - (c  vc )
f v

Model Building:
Computing the Break-Even Point
The break-even point is that volume at which total
revenue equals total cost and profit is zero:

The break-even
point
Model Building:
Example: Western Clothing Company
Fixed Costs: cf = $10000

Variable Costs: cv = $8 per pair
Price : p = $23 per pair
The Break-Even Point is:
v = (10,000)/(23 -8)
= 666.7 pairs of jeans
Model Building:
Example: Western Clothing Company
Fixed Costs: cf = $10000

Variable Costs: cv = $8 per pair
Price : p = $23 per pair
The Break-Even Point is:
p = TC/v
p = (10,000)+(8*666.7)/666.7
p = $ 22.99
Model Building:
Figure 1.2 Break-even model

Model Building:
Figure 1.3 Break-even model with an increase in

price
Model Building:
Figure 1.4 Break-even model with an increase in variable cost

Model Building:
Figure 1.5 Break-even model with a change in fixed cost

Classification of Management Science Techniques
Figure 1.6 Classification of management science techniques

Characteristics of Modeling Techniques
 Linear Mathematical Programming - clear objective;

restrictions on resources and requirements; parameters
known with certainty. (Chap 2-6, 9)
 Probabilistic Techniques - results contain uncertainty.
(Chap 11-13)
 Network Techniques - model often formulated as
diagram; deterministic or probabilistic. (Chap 7-8)
 Other Techniques - variety of deterministic and
probabilistic methods for specific types of problems
including forecasting, inventory, simulation,
multicriteria, AHP (analytic hierarchy process), etc.
(Chap 9, 14-16)
Business Usage of Management Science
 Some application areas:

- Project Planning
- Capital Budgeting
- Inventory Analysis
- Production Planning
- Scheduling
 Interfaces - Applications journal published by
Institute for Operations Research and Management
Sciences (INFORMS)

Management Science Models in
Decision Support Systems (DSS)
A decision support system is a computer-based system that helps
decision makers address complex problems that cut across
different parts of an organization and operations.
Features of Decision Support Systems

 Interactive
 Uses databases & management science models
 Address “what if” questions
 Perform sensitivity analysis
Examples include:
ERP – Enterprise Resource Planning
OLAP – Online Analytical Processing

Management Science Models
Decision Support Systems (2 of 2)
Figure 1.7 A decision support system

Modeling
Versus
Model
1-30
Mathematical Models
A Descriptive Model
Versus
An Optimization Model
1-31
A Descriptive Model
Models that simply describe a situation
Example: Statistically describing a firm

like 7-Eleven
Central tendency, variation, skewness,
1-32
A Descriptive Model
Alsoknown as prescriptive model
Suggests a desirable course of action
1-33
Optimization Model
 A model used to find the best possible
choice out of a set of alternatives. It may
use the mathematical expression of a
problem to maximize or minimize some
function. The alternatives are frequently
restricted by constraints on the values of
the variables.
1-34
Business Model vs. Business Plan
 A business plan is essentially a more
detailed version of your business model.
 The business model explains how an
organization expects to make a profit and
how it is positioned within the value chain.
Source:
http://chanimal.com/html/business_model
s.html
1-35
A business model describes
the rationale of how
an organization creates, delivers, and
captures value (economic, social, or
other forms of value). The process of
business model construction is part
of business strategy.
1-36
1-37
1-38
1-39
1-40
Modeling
 A process of abstracting the essence of a real problem
into a model like spreadsheet, computational models
(i.e. accounting), financial schemes (i.e. mortgage)
and operations research models.
1-41
Investment Model
1-42
Decision Tree Model
1-43
Accounting model
1-44
Data Analysis Model
1-45
C
p
ri
h
© Advantages of Mathematical Modeling

0
5
P
a
E
s
n 1. Models can accurately represent
u
a
o
reality
Models can help a decision maker
,
n
.
2.
formulate problems
3. Models can give us insight and
information
4. Models can save time and money in
decision making and problem
solving 1 – 46
1-46
C
p
ri
h
©
0
Models Categorized by Risk
5
P
a
E
s
n
 Mathematical models that do not
u
a
o
involve risk or chance are called
n
,
.
deterministic models
 All of the values used in the model
are known with complete certainty
 Mathematical models that involve
risk or chance are called
probabilistic models
 Values used in the model are 1 – 47
1-47
C
p
ri
h
©
0
Computers and Spreadsheet Models
5
P
a
s
n
POM-QM for
E Windows
u
a • An easy to use
o
, decision support
n system for use in
.
POM and QM
courses
• This is the main
menu of quantitative
models
• An Excel add-in
PROGRAM 1.1 – Main Menu
1 – 48
1-48
C
p
ri
h
©
0
5
P
a
s
n
E
u
a
o
,
n
.
PROGRAM 1.2A – Entering Data
1 – 49
1-49
C
p
ri
h
©
0
5
P
a
s
n
E
u
a
o
,
n
.
PROGRAM 1.2B – Solution Screen
1 – 50
1-50
C
p
ri
h
©
0
5
P
a
s
n
E
u
a
o
,
n
.
PROGRAM 1.3 – Excel Ribbon and Menu
1 – 51
1-51
C
p
ri
h
©
0
5
P
a
s
n
E
u
a
o
,
n
.
PROGRAM 1.4 – Entering Data
1 – 52
1-52
C
p
ri
h
©
0
5
P
a
s
n
E
u
a
o
,
n
.
PROGRAM 1.5 – Using Goal Seek
1 – 53
1-53
Co
y
ig
t
©
0 Possible Problems in the Quantitative Analysis Approach
5
e
rs
n
Ed
c
ti
 Defining the problem
n
 Problems may not be easily identified
n
.  Conflicting viewpoints
 Impact on other departments
 Beginning assumptions
 Solution outdated
 Developing a model
 Fitting the textbook models
 Understanding the model
1 – 54
1-54
Co
y
ig
t
©
0 Possible Problems in the Quantitative Analysis Approach
5
e
rs
n
Ed
c
ti
• Acquiring accurate input data
n – Using accounting data
n – Validity of the data
.
• Developing a solution
– Hard-to-understand mathematics
– Only one answer is limiting
• Testing the solution
• Solutions not always intuitively obvious
• Analyzing the results
• How will it affect the total organization
1 – 55
1-55
Co
y
ig
t
© Implementation –
0
5
Not Just the Final Step
e
rs
n
Ed
c
 Lack of commitment and resistance to
ti
n change
n
.
 Fear formal analysis processes will reduce
management’s decision-making power
 Fear previous intuitive decisions exposed as
inadequate
 Uncomfortable with new thinking patterns
 Action-oriented managers may want “quick and
dirty” techniques
 Management support and user involvement are
important
1 – 56
1-56
Co
y
ig
t
© Implementation –
0
5
Not Just the Final Step
e
rs
n
Ed
c  Lack of commitment by quantitative
ti
n analysts
n
.
 Analysts should be involved with the problem
and care about the solution
 Analysts should work with users and take their
feelings into account
1 – 57
1-57
1-58
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of the publisher.
Printed in the United States of America.

Chapter 01

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 01

Uploaded by

Copyright:

Available Formats

Management Science

Copyright © 2016 Pearson Education, Inc. 1-1

 The Management Science Approach to Problem

 Management science is a scientific approach to

Quantitative and qualitative factors may have

A data-driven approach to decision making

Figure 1.1 The management science process

 Observation - Identification of a problem that exists (or may occur

Copyright © 2016 Pearson Education, Inc. 1-10

Information and Data:

Copyright © 2016 Pearson Education, Inc. 1-11

Variables: x = # units to produce (decision variable)

Copyright © 2016 Pearson Education, Inc. 1-12

Substitute this value into the profit function:

Copyright © 2016 Pearson Education, Inc. 1-14

■ Used to determine the number of units of a product to

■ The volume at which total revenue equals total cost is

■ Profit at break-even point is zero.

Copyright © 2016 Pearson Education, Inc. 1-15

number of units produced.

 Variable Cost (cv) - unit production cost of product.

 Volume (v) – the number of units produced or sold

 Total variable cost (vcv) - function of volume (v) and

 Profit (Z) - difference between total revenue vp (p =

Copyright © 2016 Pearson Education, Inc. 1-17

Example: Western Clothing Company

Fixed Costs: cf = $10000

The Break-Even Point is:

Example: Western Clothing Company

Fixed Costs: cf = $10000

The Break-Even Point is:

Figure 1.2 Break-even model

Copyright © 2016 Pearson Education, Inc. 1-21

Figure 1.3 Break-even model with an increase in

Figure 1.4 Break-even model with an increase in variable cost

Figure 1.5 Break-even model with a change in fixed cost

Figure 1.6 Classification of management science techniques

 Linear Mathematical Programming - clear objective;

 Some application areas:

Copyright © 2016 Pearson Education, Inc. 1-27

Features of Decision Support Systems

Copyright © 2016 Pearson Education, Inc. 1-28

Figure 1.7 A decision support system

Example: Statistically describing a firm

© Advantages of Mathematical Modeling

PROGRAM 1.1 – Main Menu

PROGRAM 1.2A – Entering Data

PROGRAM 1.2B – Solution Screen

PROGRAM 1.3 – Excel Ribbon and Menu

PROGRAM 1.4 – Entering Data

PROGRAM 1.5 – Using Goal Seek

Copyright © 2016 Pearson Education, Inc. 1-59

You might also like