INTRODUCTION

Prof. Baguio|BSA 1 - 1st Semester | MANAGEMENT SCIENCE

INTRODUCTION MANAGEMENT SCIENCE IN ACTION

REVENUE MANAGEMENT AT AT&T PARK
MANAGEMENT SCIENCE Russ Stanley, Vice President of Ticket Services for the
San Francisco Giants, faced a dilemma during the 2010
● An approach to decision making based on the baseball season due to the team’s use of dynamic
scientific method, makes extensive use of pricing for ticket sales. Dynamic pricing, a revenue
quantitative analysis. management strategy used by airlines, adjusts ticket
● Also known as operations research and prices based on supply and demand in real time. For
decision science instance, when a flight nears its departure date and
● Today, these three terms are used seats are scarce, ticket prices rise. Conversely, if there
interchangeably are many available seats, prices drop.

SCIENTIFIC MANAGEMENT REVOLUTION The Giants applied this strategy to their game tickets,
● of the early 1900’s was initiated by Frederic charging more for high-demand games and less for
W. Taylor, who provided the foundation for lower-demand ones. In 2010, the team was in a tight
the use of quantitative methods in pennant race with the San Diego Padres, driving up
management. demand for tickets. The team was set to play the
● MODERN MANAGEMENT SCIENCE: Padres in the final three games of the season, and
Originated during the World War II period, while Stanley wanted the Giants to win, he also knew
when teams were formed to deal with that keeping the playoff race alive until the last game
strategic and tactical problems faced by the would maximize ticket revenue. Stanley admitted that
military. financially, it was better for the team to qualify for the
● These teams, which often consisted of people playoffs at the last moment.
with diverse specialties (e.g., mathematics,
engineers, and behavioral scientists), were Dynamic pricing resulted in a 7% to 8% revenue
joined together to solve a common problem increase per seat for the Giants during the 2010
by utilizing the scientific method. season. The team ultimately won its division on the
● TWO DEVELOPMENTS POST WORLD WAR II: last day of the season and went on to win the World
(a) continued research resulted in numerous Series. The Giants’ success with dynamic pricing
methodological developments, the most inspired other sports franchises to consider similar
significant being the discovery of George strategies.
Dantzig in 1947, of the simplex method for
solving linear programming problems and the This example shows the effectiveness of revenue
(b) Virtual explosion in computing power, management systems, not only for airlines but also for
where computers enabled practitioners to use industries like sports, hotels, and car rentals. By
the methodological advances to solve a large optimizing pricing in response to real-time demand,
variety of problems. organizations can increase profitability.
○ The computer technology explosion
continues; smart phones, tablets, and
other mobile-computing devices can
now be used to solve problems larger
than those solved on mainframe
computers in the 1990s.
● The explosive growth of data from sources
provides access to much more data today.
● The internet allows for easy sharing and
storage of data, proving extensive access to a
variety of users to the necessary inputs to
management-science models

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1.1 PROBLEM SOLVING AND DECISION York; Dallas, Texas; Greensboro, North
Carolina; and Pittsburgh, Pennsylvania. Thus,
MAKING
the alternatives for your decision problem can
be stated as follows:
PROBLEM SOLVING ○ Accept the position in Rochester.
● Problem solving can be defined as the process ○ Accept the position in Dallas.
of identifying a difference between the actual ○ Accept the position in Greensboro.
and the desired state of affairs and then ○ Accept the position in Pittsburgh.
taking action to resolve the difference.
● For problems important enough to justify the DETERMINE CRITERIA
time and effort of careful analysis, the ● Obviously, the starting salary is a factor of
problem-solving process involves the some importance. If salary were the only
following seven steps: criterion of importance to you, the alternative
1. Identify and define the problem. selected as “best” would be the one with the
2. Determine the set of alternative highest starting salary.
solutions.
3. Determine the criterion or criteria
that will be used to evaluate the
alternatives.
4. Evaluate the alternatives.
5. Choose an alternative.
6. Implement the selected alternative.
7. Evaluate the results to determine
whether a satisfactory solution has SINGLE-CRITERION DECISION PROBLEMS
been obtained. ● Problems in which the objective is to find the
best solution with respect to one criterion
DECISION MAKING
● Decision making is the term generally Suppose that you also conclude that the
associated with the first five steps of the potential for advancement and the location of the job
problem-solving process. Thus, the first step are two other criteria of major importance. Thus, the
of decision making is to identify and define three criteria in your decision problem are starting
the problem. Decision making ends with the salary, potential for advancement, and location.
choosing of an alternative, which is the act of
making the decision. MULTICRITERIA DECISION PROBLEMS
● Involves 5 steps ● Problems in which the objective is to find the
1. Define the problem. best solution with respect to one criterion
2. Identify the alternatives.
3. Determine the criteria. EVALUATE ALTERNATIVES
4. Evaluate the alternatives.
● For example, evaluating each alternative
5. Choose an alternative.
relative to the starting salary criterion is done
● The omission of the last 2 steps is not to
simply by recording the starting salary for
diminish the importance of these steps but to
each job alternative.
emphasize the more limited score of decision
● Evaluating each alternative with respect to the
making.
potential for advancement and the location of
the job is more difficult to do, however,
EXAMPLE because these evaluations are based primarily
on subjective factors that are often difficult to
IDENTIFY THE PROBLEM quantify. Suppose for now that you decide to
● For the moment assume that you are measure potential for advancement and job
currently unemployed and that you would like location by rating each of these criteria as
a position that will lead to a satisfying career. poor, fair, average, good, or excellent

DETERMINE ALTERNATIVE SOLUTIONS CHOOSE AN ALTERNATIVE

● Suppose that your job search has resulted in ● What makes this choice phase so difficult is
offers from compa- nies in Rochester, New that the criteria are probably not all equally

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important, and no one alternative is “best”

with regard to all criteria. Although we will
present a method for dealing with situations
like this one later in the text, for now let us
suppose that after a care ful evaluation of the
data in Table 1.1, you decide to select
alternative 3; alternative 3 is thus referred to
as the decision.

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1.2 QUANTITATIVE ANALYSIS AND DECISION important consideration in the manager’s final
decision.
MAKING
● When using the quantitative approach, an
analyst will concentrate on the quantita tive
facts or data associated with the problem and
develop mathematical expressions that
describe the objectives, constraints, and other
relationships that exist in the problem.
○ Then, by using one or more
quantitative methods, the analyst will
make a recommendation based on
the quantitative aspects of the
problem.

COMPARISON
● Skills in the qualitative approach are inherent
in the manager and usually increase with
experience, while the skills of the quantitative
approach can be learned only by studying the
assumptions and methods of management
science.
● A manager can increase decision-making
effectiveness by learning more about
quantitative methodology and by better
understanding its contribution to the
decision-making process.
● A manager who is knowledgeable in
quantitative decision-making procedures is in
a much better position to compare and
evaluate the qualitative and quantitative
sources of recommendations and ultimately
to combine the two sources in order to make
the best possible decision.
● Reasons why a quantitative approach might
be used in the decision-making process:

● Figure 1.3 shows that the analysis phase of

the decision-making process may take two THE PROBLEM IS COMPLEX
basic forms: qualitative and quantitative. and the manager cannot develop a good solution
without the aid of quantitative analysis.
QUALITATIVE ANALYSIS
● is based primarily on the manager’s judgment THE PROBLEM IS ESPECIALLY IMPORTANT
and experience; it includes the manager’s (e.g., a great deal of money is involved), and the
intuitive “feel” for the problem and is more an be needed in a particular problem.
art than a science.
● If the manager has had experience with
THE PROBLEM IS NEW
similar problems or if the problem is relatively
and the manager has no previous experience from
simple, heavy emphasis may be placed upon a
which to draw.
qualitative analysis.

QUANTITATIVE ANALYSIS THE PROBLEM IS REPETITIVE

and the manager saves time and effort by relying
● If the manager has had little experience with
on quantitative procedures to make routine
similar problems, or if the problem is
decision recommendations.
sufficiently complex, then a quantitative
analysis of the problem can be an especially

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1.3 QUANTITATIVE ANALYSIS thermometer is another analog model

representing temperature.
QUANTITATIVE ANALYSIS ● A third classification of models—the type we
will primarily be studying—includes
● begins once the problem has been structured. representations of a problem by a system of
It usually takes imagination, teamwork, and symbols and mathematical relationships or
considerable effort to transform a rather expressions. Such models are referred to as
general problem description into a mathematical models and are a critical part of
well-defined problem that can be approached any quantitative approach to decision making.
via quantitative analysis. ○ For example, the total profit from the
● The more the analyst is involved in the sale of a product can be determined
process of structuring the problem, the more by multiplying the profit per unit by
likely the ensuing quantitative analysis will the quantity sold. If we let x represent
make an important contribution to the the number of units sold and P the
decision-making process. total profit, then, with a profit of $10
● To successfully apply quantitative analysis to per unit, the following mathematical
decision making, the management scientist model defines the total profit earned
must work closely with the manager or user of by selling x units:
the results.
● When both the management scientist and the
manager agree that the problem has been
adequately structured, work can begin on
developing a model to represent the problem ● The purpose/value of any model: is that it
mathematically. Solution procedures can then enables us to make inferences about the real
be employed to find the best solution for the situation by studying and analyzing the model.
model. This best solution for the model then ○ For example, an airplane designer
becomes a recommendation to the decision might test an iconic model of a new
maker. airplane in a wind tunnel to learn
● The process of developing and solving about the potential flying
models is the essence of the quantitative characteristics of the full-size airplane.
analysis process. ○ Similarly, a mathematical model may
be used to make inferences about how
much profit will be earned if a
1. MODEL DEVELOPMENT
specified quantity of a particular
product is sold.
MODELS ● According to the mathematical model of
● Models are representations of real objects or equation (1.1), we would expect selling three
situations and can be presented in various units of the product (x=3)) would provide a
forms. profit of P = 10(3) = $30.
○ For example, a scale model of an ● In general, experimenting with models
airplane is a representation of a real requires less time and is less expensive than
airplane. Similarly, a child’s toy truck experimenting with the real object or
is a model of a real truck. The model situation.
airplane and toy truck are examples of ○ A model airplane is certainly quicker
models that are physical replicas of and less expensive to build and study
real objects. than the full-size airplane.
● In modeling terminology, physical replicas are ● Similarly, the mathematical model in equation
referred to as iconic models. (1.1) allows a quick identification of profit
● A second classification includes models that expectations without actually requiring the
are physical in form but do not have the same manager to produce and sell x units.
physical appearance as the object being ● Models also have the advantage of reducing
modeled. Such models are referred to as the risk associated with experimenting with
analog models. the real situation. In particular, bad designs or
○ The speedometer of an automobile is bad decisions that cause the model airplane to
an analog model; the position of the crash or a mathematical model to project a
needle on the dial represents the $10,000 loss can be avoided in the real
speed of the automobile. A situation.

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● The value of model-based conclusions and should be scheduled each week to maximize
decisions is dependent on how well the profit?
model represents the real situation.
○ The more closely the model airplane
represents the real airplane, the more
accurate the conclusions and
predictions will be.
● Similarly, the more closely the mathematical
model represents the company’s true
profit–volume relationship, the more accurate ● The x >= 0 constraint requires the production
the profit projections will be. quantity x to be greater than or equal to zero,
● When initially considering a managerial which simply recognizes the fact that it is not
problem, we usually find that the problem possible to manufacture a negative number of
definition phase leads to a specific objec tive, units.
such as maximization of profit or minimization ● The optimal solution to this model can be
of cost, and possibly a set of restrictions or easily calculated and is given by x = 8, with an
constraints, such as production capacities. associated profit of $80.
● The success of the mathematical model and ● This model is an example of a linear
quantitative approach will depend heavily on programming model.
how accurately the objective and constraints
can be expressed in terms of mathematical UNCONTROLLABLE INPUTS
equations or relationships.
● In the preceding mathematical model, the
profit per unit ($10), the production time per
Herbert A. Simon, a Nobel Prize winner in unit (5 hours), and the production capacity (40
economics and an expert in deci- sion making, said hours) are environmental factors that are not
that a mathematical model does not have to be under the control of the manager or decision
exact; it just has to be close enough to provide maker.
better results than can be obtained by common ● Such environmental factors, which can affect
sense. both the objective function and the
constraints, are referred to as uncontrollable
inputs to the model.
OBJECTIVE FUNCTION
● A mathematical expression that describes the CONTROLLABLE INPUTS
problem’s objective is referred to as the ● Inputs that are completely controlled or
objective function. determined by the decision maker are
● For example, the profit equation P = 10x referred to as controllable inputs to the
would be an objective function for a firm model.
attempting to maximize profit. ● In the example given, the production quantity
● A production capacity constraint would be x is the controllable input to the model.
necessary if, for instance, 5 hours are required ● Controllable inputs are the decision
to produce each unit and only 40 hours of alternatives specified by the manager and
production time are available per week. Let x thus are also referred to as the decision
indicate the number of units produced each variables of the model.
week. The production time constraint is given
by ● Once all controllable and uncontrollable
inputs are specified, the objective function
and constraints can be evaluated and the
output of the model determined.
● The value of 5x is the total time required to ● In this sense, the output of the model is
produce x units; the symbol <= indicates that simply the projection of what would happen
the production time required must be less if those particular environmental factors and
than or equal to the 40 hours available. decisions occurred in the real situation.
● The decision problem or question is the ● Cost/benefit considerations must be made in
following: How many units of the product selecting an appropriate mathematical model.
○ Frequently a less complicated (and
perhaps less precise) model is more

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appropriate than a more complex and tax rates as the only uncontrollable input
accurate one, due to cost and ease of would be a deterministic model.
solution considerations. ● Distinguishing feature: is that the
● A flowchart of how controllable and uncontrollable input values are known in
uncontrollable inputs are transformed by the advance.
mathematical model into output is shown in
Figure 1.4. STOCHASTIC/PROBABILISTIC MODEL
● If any of the uncontrollable inputs are
uncertain to the decision maker, the model is
referred to as a stochastic or probabilistic
model.
● An uncontrollable input to many produc- tion
planning models is demand for the product.
● A mathematical model that treats future
demand—which may be any of a range of
● A similar flowchart showing the specific details
values—with uncertainty would be called a
of the production model is shown in Figure
stochastic model.
1.5.
● Distinguishing feature: is that the value of the
output cannot be determined even if the
value of the controllable input is known
because the specific values of the
uncontrollable inputs are unknown. In this
respect, stochastic models are often more
difficult to analyze.

COMPARISON
● In the production model, the number of hours
● As stated earlier, the uncontrollable inputs are of production time required per unit, the total
those the decision maker cannot influence. hours available, and the unit profit were all
● The specific controllable and uncontrollable uncontrollable inputs.
inputs of a model depend on the particular ● Because the uncontrollable inputs were all
problem or decision-making situation. In the known to take on fixed values, the model was
production problem, the production time deterministic.
available (40) is an uncontrollable input. ● If, however, the number of hours of
However, if it were possible to hire more production time per unit could vary from 3 to
employees or use overtime, the number of 6 hours depending on the quality of the raw
hours of production time would become a material, the model would be stochastic.
controllable input and therefore a decision
variable in the model. 2. DATA PREPARATION
DATA
UNCONTROLLABLE INPUTS ● in this sense refer to the values of the
● Uncontrollable inputs can either be known uncontrollable inputs to the model.
exactly or be uncertain and subject to ● All uncontrollable inputs or data must be
variation. specified before we can analyze the model
and recommend a decision or solution for the
DETERMINISTIC MODEL problem.
● If all uncontrollable inputs to a model are ● In the production model, the values of the
known and cannot vary, the model is referred uncontrollable inputs or data were $10 per
to as a deterministic model. unit for profit, 5 hours per unit for production
● Corporate income tax rates are not under the time, and 40 hours for production capacity.
influence of the manager and thus constitute ● In the development of the model, these data
an uncontrollable input in many decision values were known and incorporated into the
models. Because these rates are known and model as it was being developed.
fixed (at least in the short run), a ● If the model is relatively small and the
mathematical model with corporate income uncontrollable input values or data required

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are few, the quantitative analyst will probably ● The time required to prepare these data and
combine model development and data the possibility of data collection errors will
preparation into one step. make the data preparation step a critical part
● In these situations the data values are of the quantitative analysis process.
inserted as the equations of the mathematical ● Often, a fairly large data-base is needed to
model are developed. support a mathematical model, and
● However, in many mathematical modeling information systems specialists may become
situations, the data or uncontrollable input involved in the data preparation step.
values are not readily available. I
○ In these situations the management 3. MODEL SOLUTION
scientist may know that the model will ● In this step, the analyst will attempt to identify
need profit per unit, production time, the values of the decision variables that
and production capacity data, but the provide the “best” output for the model.
values will not be known until the
accounting, production, and OPTIMAL SOLUTION
engineering departments can be
consulted. ● The specific decision-variable value or values
● Rather than attempting to collect the required providing the “best” output will be referred to
data as the model is being developed, the as the optimal solution for the model.
analyst will usually adopt a general notation
for the model development step, and then a ● For the production problem, the model
separate data preparation step will be solution step involves finding the value of the
performed to obtain the uncontrollable input production quantity decision variable x that
values required by the model. maximizes profit while not causing a violation
● Using the general notation of the production capacity constraint.
● One procedure that might be used in the
model solution step involves a trial-and-error
approach in which the model is used to test
and evaluate various decision alternatives.
● In the production model, this procedure would
● the model development step of the mean testing and evaluating the model under
production problem would result in the various production quantities or values of x.
following general model: Note, in Figure 1.5, that we could input trial
values for x and check the corresponding
output for projected profit and satisfaction of
the production capacity constraint.

INFEASIBLE
● A separate data preparation step to identify ● If a particular decision alternative does not
the values for c, a, and b would then be satisfy one or more of the model constraints,
necessary to complete the model. the decision alternative is rejected as being
● Many inexperienced quantitative analysts infeasible, regardless of the objective function
assume that once the problem has been value.
defined and a general model has been
developed, the problem is essentially solved.
FEASIBLE
These individuals tend to believe that data
preparation is a trivial step in the process and ● If all constraints are satisfied, the decision
can be easily handled by clerical staff. alternative is feasible and a candidate for the
Actually, this assumption could not be “best” solution or recommended decision.
further from the truth, especially with
large-scale models that have numerous data TRIAL-AND-ERROR PROCESS
input values. ● Through this trial-and-error process of
● For example, a small linear programming evaluating selected decision alternatives, a
model with 50 decision variables and 25 decision maker can identify a good—and
constraints could have more than 1300 data possibly the best—feasible solution to the
elements that must be identified in the data problem. This solution would then be the
preparation step. recommended decision for the problem.

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solution really is. Even though the analyst has

undoubtedly taken many precautions to
develop a realistic model, often the goodness
or accuracy of the model cannot be assessed
until model solutions are generated.

MODEL TESTING AND VALIDATION

● are frequently conducted with relatively small
“test” problems that have known or at least
● Table 1.2 shows the results of a trial-and-error
expected solutions.
approach to solving the production model of
● If the model generates the expected solutions,
Figure 1.5. The recommended decision is a
and if other output information appears
production quantity of 8 because the feasible
correct, the go-ahead may be given to use the
solution with the highest projected profit
model on the full-scale problem.
occurs at x = 8.
● However, if the model test and validation
● Although the trial-and-error solution process
identify potential problems or inaccuracies
is often acceptable and can provide valuable
inherent in the model, corrective action, such
information for the manager, it has the
as model modifica
drawbacks of (1) not necessarily providing
tion and/or collection of more accurate input
the best solution and (2) of being inefficient
data, may be taken. Whatever the corrective
in terms of requiring numerous calculations if
action, the model solution will not be used in
many decision alternatives are tried.
practice until the model has satisfactorily
● Thus, quantitative analysts have developed
passed testing and validation.
special solution procedures for many models
that are much more efficient than the
trial-and-error approach. Throughout this text, 4. REPORT GENERATION
you will be introduced to solution procedures ● An important part of the quantitative analysis
that are applicable to the specific process is the preparation of managerial
mathematical models that will be formulated. reports based on the model’s solution.
● Some relatively small models or problems can ● In Figure 1.3, we see that the solution based
be solved by hand computations, but most on the quantitative analysis of a problem is
practical applications require the use of a one of the inputs the manager considers
computer. before making a final decision.
● Model development and model solution ● Thus, the results of the model must appear in
steps are not completely separable. An analyst a managerial report that can be easily
will want both to develop an accurate model understood by the decision maker.
or representation of the actual problem ● The report includes the recommended
situation and to be able to find a solution to decision and other pertinent information
the model. If we approach the model about the results that may be helpful to the
development step by attempting to find the decision maker.
most accurate and realistic mathematical
model, we may find the model so large and A NOTE REGARDING IMPLEMENTATION
complex that it is impossible to obtain a ● As discussed in Section 1.2, the manager is
solution. responsible for integrating the quantitative
○ In this case, a simpler and perhaps solution with qualitative considerations in
more easily understood model with a order to make the best possible decision.
readily available solution procedure is ● After completing the decision-making process,
preferred even if the recommended the manager must oversee the
solution is only a rough approximation implementation and follow-up evaluation of
of the best decision. the decision. The manager should continue to
● As you learn more about quantitative solution monitor the contribution of the model during
procedures, you will have a better idea of the the implementation and follow-up.
types of mathematical models that can be ● At times this process may lead to requests for
developed and solved. model expansion or refinement that will cause
● After a model solution is obtained, both the the management scientist to return to an
management scientist and the manager will earlier step of the quantitative analysis
be interested in determining how good the process.

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● Successful implementation of results is of

critical importance to the management 1. Enhance Decision-Making Efficiency: By
scientist as well as the manager. synchronizing production plans, inventory
○ If the results of the quantitative management, and transportation policies, SCOP aimed
analysis process are not correctly to improve overall decision-making across the supply
implemented, the entire effort may be chain.
of no value.
○ It doesn’t take too many unsuccessful 2. Integrate Core Business Processes: SCOP was
implementations before the designed to integrate planning and budgeting with
management scientist is out of work. supply chain operations to streamline processes and
Because implementation often enhance coordination.
requires people to do things
differently, it often meets with 3. Achieve System-Wide Cost Reductions: The
resistance. platform sought to reduce costs through global
● People want to know, “What’s wrong with the optimization, meaning that it aimed to find the most
way we’ve been doing it?” and so on. cost-effective solutions for the entire supply chain
● One of the most effective ways to ensure rather than optimizing individual components in
successful implementation is to include users isolation.
throughout the modeling process.
○ A user who feels a part of identifying The implementation of SCOP has been highly
the problem and developing the successful for Heracles. SCOP has successfully achieved
solution is much more likely to these goals by enhancing decision-making, improving
enthusiastically implement the internal coordination, reducing costs, and boosting
results. operational efficiency. It also helps Heracles better
○ The success rate for implementing the respond to demand and cost fluctuations, resulting in
results of a management science increased customer satisfaction.
project is much greater for those
projects characterized by extensive
user involvement.

MANAGEMENT SCIENCE IN ACTION

QUANTITATIVE ANALYSIS AND SUPPLY CHAIN
MANAGEMENT AT THE HERACLES GENERAL CEMENT
COMPANY
The Heracles General Cement Company, founded in
1911, is Greece's largest cement producer, operating
three cement plants in the prefecture of
Evoia—specifically in Volos, Halkis, and Milaki. The
company has a substantial annual production capacity
of 9.6 million tons of cement and manages 10 quarries
that provide essential raw materials like limestone,
clay, and schist. Seven of these quarries are near the
cement plants, while three are operated by its affiliate
LAVA. Heracles also runs six distribution centers across
Greece, handling 2.5 million tons of domestic cement
sales each year, which represents over 40% of the
country’s total domestic cement sales.

Given the scale and complexity of its operations,

Heracles faces significant logistical challenges in
transporting cement to its customers efficiently. To
address these challenges, the company decided to
enhance its supply chain operations in 2005 by
developing a Supply Chain Optimization and Planning
(SCOP) platform using mathematical programming.
The goals for creating SCOP were:

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1.4 MODELS OF COST, REVENUE, AND PROFIT

● Some of the most basic quantitative models
arising in business and economic applications
are those involving the relationship between a
volume variable—such as production volume
● Once a production volume is established, the
or sales volume—and cost, revenue, and
model in equation (1.3) can be used to
profit.
compute the total production cost. For
● Through the use of these models, a manager
example, the decision to produce x = 1200
can determine the projected cost, revenue,
units would result in a total cost of C(1200) =
and/or profit associated with an established
3000 + 2(1200) = $5400.
production quantity or a forecasted sales
volume.
● Financial planning, production planning, sales MARGINAL COST
quotas, and other areas of decision making ● Marginal cost is defined as the rate of change
can benefit from such cost, revenue, and of the total cost with respect to production
profit models. volume.
● That is, it is the cost increase associated with a
COST AND VOLUME MODELS one-unit increase in the production volume.
● The cost of manufacturing or producing a ● In the cost model of equation (1.3), we see
product is a function of the volume produced. that the total cost C(x) will increase by $2 for
● This cost can usually be defined as a sum of each unit increase in the production volume.
two costs: fixed cost and variable cost. Thus, the marginal cost is $2.
● With more complex total cost models,
marginal cost may depend on the production
FIXED COST
volume. In such cases, we could have marginal
● Fixed cost is the portion of the total cost that cost increasing or decreasing with the
does not depend on the production volume; production volume x.
this cost remains the same no matter how
much is produced. REVENUE AND VOLUME MODELS
● Management of Nowlin Plastics will also want
VARIABLE COST information on the projected revenue
● Variable cost, on the other hand, is the associated with selling a specified number of
portion of the total cost that is dependent on units. Thus, a model of the relationship
and varies with the production volume. between
● To illustrate how cost and volume models can revenue and volume is also needed. Suppose that each
be developed, we will consider a Viper cover sells for $5. The model for total revenue
manufacturing problem faced by Nowlin can be written as
Plastics.
● Nowlin Plastics produces a line of cell phone
covers. Nowlin’s best-selling cover is its Viper
model, a slim but very durable black and gray
plastic cover. Several products are produced
on the same manufacturing line, and a setup
cost is incurred each time a changeover is
made for a new product. Suppose that the MARGINAL REVENUE
setup cost for the Viper is $3000. This setup ● Marginal revenue is defined as the rate of
cost is a fixed cost that is incurred regardless change of total revenue with respect to sales
of the number of units eventually produced. In volume.
addition, suppose that variable labor and ● That is, it is the increase in total revenue
material costs are $2 for each unit produced. resulting from a one-unit increase in sales
The cost–volume model for producing x units volume.
of the Viper can be written as ● In the model of equation (1.4), we see that the
marginal revenue is $5. In this case, marginal
revenue is constant and does not vary with the
sales volume.

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● With more complex models, we may find that

marginal revenue increases or decreases as ● This profit may be enough to justify
the sales volume x increases. proceeding with the production and sale of
the product. We see that a volume of 500
PROFIT AND VOLUME MODELS units will yield a loss, whereas a volume of
● One of the most important criteria for 1800 provides a profit.
management decision making is profit.
● Managers need to be able to know the profit BREAKEVEN POINT
implications of their decisions. If we assume ● The volume that results in total revenue
that we will only produce what can be sold, equaling total cost (providing $0 profit) is
the production volume and sales volume will called the breakeven point.
be equal. We can combine equations (1.3) and ● If the breakeven point is known, a manager
(1.4) to develop a profit–volume model that can quickly infer that a volume above the
will determine the total profit associated with breakeven point will result in a profit, whereas
a specified production–sales volume. a volume below the breakeven point will
TOTAL PROFIT, denoted P(x) result in a loss.
● Total profit, denoted P(x), is total revenue ● Thus, the breakeven point for a product
minus total cost; therefore, the following provides valuable information for a manager
model provides the total profit associated who must make a yes/no decision concerning
with producing and selling x units: production of the product.
● Let us now return to the Nowlin Plastics
example and show how the total profit model
in equation (1.5) can be used to compute the
Thus, the profit–volume model can be derived from breakeven point. The breakeven point can be
the revenue–volume and cost–volume found by setting the total profit expression
models. equal to zero and solving for the production
volume. Using equation (1.5), we have
BREAKEVEN ANALYSIS
● Using equation (1.5), we can now determine P(x) = -3000 + 3x = 0
the total profit associated with any produc 3x = 3000
tion volume x. For example, suppose that a x = 1000
demand forecast indicates that 500 units of
the product can be sold. The decision to ● With this information, we know that
produce and sell the 500 units results in a production and sales of the product must be
projected profit of greater than 1000 units before a profit can be
expected.
P(500) = -3000 + 3(500) = -1500 ● The graphs of the total cost model, the total
revenue model, and the location of the
breakeven point are shown in Figure 1.6. In
Appendix 1.1 we also show how Excel can be
used to perform a breakeven analysis for the
Nowlin Plastics production example.

● In other words, a loss of $1500 is predicted. If

sales are expected to be 500 units, the
manager may decide against producing the
product. However, a demand forecast of 1800
units would show a projected profit of

P(1800) = -3000 + 3(1800) = 2400

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1.5 MANAGEMENT SCIENCE TECHNIQUES Inventory models are used by managers faced with
the dual problems of maintaining sufficient
LINEAR PROGRAMMING inventories to meet demand for goods and, at the
same time, incurring the lowest possible inventory
Linear programming is a problem-solving approach holding costs.
developed for situations involving maximizing or
minimizing a linear function subject to linear Waiting-Line or Queueing Models
constraints that limit the degree to which the
objective can be pursued. The production model Waiting-line or queueing models have been
developed in Section 1.3 (see Figure 1.5) is an developed to help managers understand and make
example of a simple linear programming model. better decisions concerning the operation of
systems involving waiting lines.
Integer Linear Programming
Simulation Simulation
is an approach used for problems that can be set up
as linear programs, with the additional requirement This is a technique used to model the operation of a
that some or all programs, with the additional system. This technique employs a computer
requirement that some or all of the decision program to model the operation and perform
variables be integer values. simulation computations.

Distribution and Network Models Decision Analysis

A network is a graphical description of a problem Decision analysis can be used to determine optimal
consisting of circles called nodes that are strategies in situations involving several decision
interconnected by lines called arcs. Specialized alternatives and an uncertain or risk-filled pattern
solution procedures exist for these types of of events.
problems, enabling us to quickly solve problems in
such areas as supply chain design, information Goal Programming
system design, and project
Goal programming is a technique for solving
scheduling.
multicriteria decision problems, usually within the
framework of linear programming.
Nonlinear Programming

Many business processes behave in a nonlinear Analytic Hierarchy Process

manner. For example, the price of a bond is a
This multicriteria decision-making technique
nonlinear function of interest rates; the quantity
permits the inclusion of subjective factors in
demanded for a product is usually a nonlinear
arriving at a recommended decision.
function of the price. Nonlinear programming is a
technique that allows for maximizing or minimizing
Forecasting
a nonlinear function subject to nonlinear
constraints.
Forecasting methods are techniques that can be
used to predict future aspects of a business
Project Scheduling: PERT/CPM
operation.
In many situations, managers are responsible for
Markov Process Models
planning, scheduling, and controlling projects that
consist of numerous separate jobs or tasks
Markov process models are useful in studying the
performed by a variety of departments, individuals,
evolution of certain systems over repeated trials.
and so forth. The PERT (Program Evaluation and
For example, Markov processes have been used to
Review Technique) and CPM (Critical Path Method)
describe the probability that a machine, functioning
techniques help managers carry out their project
in one period, will function or break down in
scheduling responsibilities.
another period.
Inventory Models

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METHODS USED MOST FREQUENTLY how mathematical models can be used in

● Our experience as both practitioners and this type of analysis.
educators has been that the most frequently ● The difference between the model and the
used management science techniques are situation or managerial problem it
linear programming, integer programming, represents is an important point.
network models (including supply chain ● Mathematical models are abstractions of
models), and simulation. real-world situations and, as such, cannot
● Depending upon the industry, the other capture all the aspects of the real situation.
methods in the preceding list are used more However, if a model can capture the major
or less frequently. relevant aspects of the problem and can
● Helping to bridge the gap between the then provide a solution recommendation, it
manager and the management scientist is a can be a valuable aid to decision making.
major focus of the text. We believe that the ● One of the characteristics of management
barriers to the use of management science science that will become increasingly
can best be removed by increasing the apparent as we proceed through the text is
manager’s understanding of how the search for a best solution to the
management science can be applied. problem. In carrying out the quantitative
analysis, we shall be attempting to develop
MANAGEMENT SCIENCE IN ACTION procedures for finding the “best” or optimal
solution.
IMPACT OF OPERATIONS RESEARCH ON EVERYDAY
LIVING
Mark Eisner, associate director at Cornell University's GLOSSARY:
School of Operations Research and Industrial Analog model Although physical in form, an analog
Engineering, describes operations research (OR) as model does not have a physical appearance similar
"the effective use of scarce resources under dynamic to the real object or situation it represents.
and uncertain conditions." Despite its significant Breakeven point The volume at which total revenue
impact, OR is often underappreciated. equals total cost.
Constraints Restrictions or limitations imposed on a
For instance, when you book a flight on Orbitz, OR problem.
algorithms find the cheapest fares, schedule flights Controllable inputs The inputs that are controlled
and crews, and set ticket prices. When renting a car or or determined by the decision maker.
shipping packages, OR models optimize pricing and Decision The alternative selected.
logistics. Even Netflix uses OR to recommend movies Decision making The process of defining the
based on your preferences. problem, identifying the alternatives, determining
the criteria, evaluating the alternatives, and
In healthcare, OR plays a critical role. For example, the choosing an alternative.
Regional Healthcare Ecosystem Analyst (RHEA), Decision variable Another term for controllable
developed by institutions like Johns Hopkins and the input.
University of Pittsburgh, uses OR to study how Deterministic model A model in which all
infections like vancomycin-resistant enterococci (VRE) uncontrollable inputs are known and cannot vary.
spread between hospitals. By analyzing this data, Feasible solution A decision alternative or solution
RHEA helps in developing strategies to reduce infection that satisfies all constraints.
rates and associated treatment costs. Fixed cost The portion of the total cost that does
not depend on the volume; this cost remains the
same no matter how much is produced.
SUMMARY:
Iconic model A physical replica, or representation,
● This text is about how management science
of a real object.
may be used to help managers make better
Infeasible solution A decision alternative or
decisions.
solution that does not satisfy one or more
● The focus of this text is on the
constraints.
decision-making process and on the role of
Marginal cost The rate of change of the total cost
management science in that process.
with respect to volume.
● We discussed the problem orientation of
Marginal revenue The rate of change of total
this process and in an overview showed
revenue with respect to volume.

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Mathematical model Mathematical symbols and

expressions used to represent a real situation.
Model A representation of a real object or
situation.
Multicriteria decision problem A problem that
involves more than one criterion; the objective is to
find the “best” solution, taking into account all the
criteria.
Objective function A mathematical expression that
describes the problem’s objective.
Optimal solution The specific decision-variable
value or values that provide the “best” output for
the model.
Problem solving The process of identifying a
difference between the actual and the
desired state of affairs and then taking action to
resolve the difference.
Single-criterion decision problem A problem in
which the objective is to find the “best” solution
with respect to just one criterion.
Stochastic (probabilistic) model A model in which
at least one uncontrollable input is uncertain and
subject to variation; stochastic models are also
referred to as probabilistic models.
Uncontrollable inputs The environmental factors or
inputs that cannot be controlled by the decision
maker.
Variable cost The portion of the total cost that is
dependent on and varies with the volume.

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