Management Science | chapter 1: introduction to management science

Contents: o To continue our example, a production capacity constraint would be necessary if,
1. Body of Knowledge for instance, 5 hours are required to produce each unit and only 40 hours are
2. Problem Solving available per week. The production capacity constraint is given by 5x ≤ 40.
3. Model Development o The value of 5x is the total time required to produce x units; the symbol indicates
4. Mathematical Models that the production time required must be less than or equal to the 40 hours
5. Model Solution available.
6. Model Testing and Validation - Uncontrollable Inputs - environmental factors that are not under the control of the
7. Report Generation decision maker
8. Management Science Techniques o In the preceding mathematical model, the profit per unit ($10), the production time
9. Models of Cost, Profit, and Revenue per unit (5 hours), and the production capacity (40 hours) are environmental factors
not under the control of the manager or decision maker.
- Decision Variables - controllable inputs; decision alternatives specified by the decision
Body of knowledge
maker, such as the number of units of a product to produce.
- The body of knowledge involving quantitative approaches to decision making is referred to
o In the preceding mathematical model, the production quantity x is the controllable
as:
input to the model.
o Management Science
▪ A complete mathematical model for our simple production problem is:
o Operations Research
o Decision Science • Maximize 10x, (objective function)
- It had its early roots in World War II and is flourishing in business and industry due, in subject to: 5x ≤ 40 (constraint)
part, to: MaximizeE X ≥ 20 (constraint)
o numerous methodological developments (e.g. simplex method for solving linear • [The second constraint reflects the fact that it is not possible to
programming problems) manufacture a negative number of units.]
o a virtual explosion in computing power - Deterministic Model - if all uncontrollable inputs to the model are known and cannot vary
problem solving - Stochastic (or Probabilistic) Model - if any uncontrollable are uncertain and subject to
- 7 Steps of Problem Solving (First 5 steps are the process of decision making) variation
1. Define the problem o Stochastic models are often more difficult to analyze.
2. Determine the set of alternative solutions. o In our simple production example, if the number of hours of production time per
3. Determine the criteria for evaluating alternatives. unit could vary from 3 to 6 hours depending on the quality of the raw material,
4. Evaluate the alternatives. the model would be stochastic.
5. Choose an alternative (make a decision) - Cost/benefit considerations must be made in selecting an appropriate mathematical model.
6. Implement the selected alternative - Frequently a less complicated (and perhaps less precise) model is more appropriate than a
7. Evaluate the results. more complex and accurate one, due to cost and ease of solution considerations.
- Decision-Making Process
o Structuring the Problem
▪ Define the Problem
▪ Identify the Alternatives
▪ Determine the Criteria
o Analyzing the Problem
▪ Identify the Alternatives
▪ Choose an Alternative
• Problems in which the objective is to find the best solution with
respect to one criterion are referred to as single- criterion
decision problems. - Data preparation is not a trivial step, due to the time required and the possibility of data
• Problems that involve more than one criterion are referred to as collection errors.
multicriteria decision problems. - A model with 50 decision variables and 25 constraints could have over 1300 data elements!
- Analysis Phase of Decision-Making Process - Often, a large data base is needed.
o Qualitative Analysis - Information systems specialists might be needed.
▪ based largely on the manager's judgment and experience Model solution
▪ includes the manager's intuitive "feel" for the problem - The analyst attempts to identify the alternative (the set of decision variable values) that
▪ is more of an art than a science provides the "best" output for the model.
o Quantitative Analysis - The "best" output is the optimal solution.
▪ analyst will concentrate on the quantitative facts or data associated with - If the alternative does not satisfy all the model constraints, it is rejected as being
the problem infeasible, regardless of the objective function value.
▪ analyst will develop mathematical expressions that describe the - If the alternative satisfies all the model constraints, it is feasible and a candidate for
objectives, constraints, and other relationships that exist in the problem the "best" solution.
▪ analyst will use one or more quantitative methods to make a
recommendation
- Potential Reasons for a Quantitative Analysis Approach to Decision Making
o The problem is complex.
o The problem is very important
o The problem is new
o The problem is repetitive.
- Quantitative Analysis Process
1. Model Development - A variety of software packages are available for solving mathematical models.
2. Data Preparation o Microsoft Excel
3. Model Solution o LINGO
4. Report Generation Model testing and validation
Model development - Often, goodness/accuracy of a model cannot be assessed until solutions are generated.
- Models are representations of real objects or situations - Small test problems having known, or at least expected, solutions can be used for model
- Three forms of models are: testing and validation.
o Iconic models - physical replicas (scalar representations) of real objects - If the model generates expected solutions, use the model on the full-scale problem.
o Analog models - physical in form, but do not physically resemble the object being - If inaccuracies or potential shortcomings inherent in the model are identified, take corrective
modeled action such as:
o Mathematical models - represent real world problems through a system of o Collection of more-accurate input data
mathematical formulas and expressions based on key assumptions, estimates, or o Modification of the model
statistical analyses Report generation
- Generally, experimenting with models (compared to experimenting with the real - A managerial report, based on the results of the model, should be prepared.
situation): - The report should be easily understood by the decision maker. The report should include:
o requires less time o the recommended decision
o is less expensive o other pertinent information about the results (for example, how sensitive the
o involves less risk The more closely the model represents the real situation, the model solution is to the assumptions and data used in the model)
accurate the conclusions and predictions will be. management science techniques
Mathematical models 1. Linear programming is a problem-solving approach developed for situations involving
- Objective Function - a mathematical expression that describes the problem's objective, such maximizing or minimizing a linear function subject to linear constraints that limit the degree
as maximizing profit or minimizing cost to which the objective can be pursued.
o Consider a simple production problem. Suppose x denotes the number of units 2. Integer linear programming is an approach used for problems that can be set up as linear
produced and sold each week, and the firm's objective is to maximize total programs with the additional requirement that some or all the decision recommendations be
weekly profit. With a profit of $10 per unit, the objective function is 10x. integer values.
- Constraints - a set of restrictions or limitations, such as production capacities
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 Management Science | chapter 1: introduction to management science

3. Nonlinear Programming Techniques are used to solve problems where the objective function
or constraints are not linear.
4. Network models are specialized solution procedures for problems in transportation system
design, information system design, project scheduling......
5. Project scheduling: PERT (Program Evaluation and Review Technique) and CPM (Critical
Path Method) help managers responsible for planning, scheduling. and controlling projects
that consist of numerous separate jobs or tasks performed by a variety of departments,
individuals, and so forth.
6. Inventory models are used by managers faced with the dual problems of maintaining
sufficient inventories to meet demand for goods and, at the same time, incurring the lowest
possible inventory holding costs.
7. Waiting line (or queuing) models help managers understand and make better decisions
concerning the operation of systems involving waiting lines.
8. Simulation is a technique used to model the operation of a system. This technique employs
a computer program to model the operation and perform simulation computations.
9. Decision analysis can be used to determine optimal strategies in situations involving several
decision alternatives and an uncertain pattern of future events.
10. Forecasting methods are techniques that can be used to predict future aspects of a
business operation.
11. Goal programming is a technique for solving multi- criteria decision problems, usually within
the framework of linear programming.
12. Analytic hierarchy process is a multi-criteria decision- making technique that permits the
inclusion of subjective factors in arriving at a recommended decision.
13. Markov-process models are useful in studying the evolution of certain systems over
repeated trials (such as describing the probability that a machine, functioning in one period,
will function or break down in another period).
Models of cost, revenue, and profit
- Cost = FIXED COST + VARIABLE COST (X)
o Fixed Cost - Costs that do not change regardless of the production level. (does
not depend on the production volume)
o Variable Cost - Costs that vary depending on production output. (dependent on the
production volume)
o Marginal Cost - Additional cost incurred by providing one more unit of a good or
service. Helps determine the cost impact of increasing production and is crucial in
decision-making about production levels and pricing. Marginal cost may depend on
the production volume.
▪ MC = Changes in Total Cost/Changes in Quantity
- Revenue = SELLING PRICE (X)
o Marginal revenue - Additional revenue that a business earns from selling one
more unit of a goods/service. it helps understand the financial impact of increasing
sales, it also determines the optimal level of production
▪ MR = Changes in Total Revenue/Changes in Quantity
- Profit = REVENUE - COST
o Cost refers to the resources or expenses incurred in achieving a specific objective
or producing a good or service.
o Revenue refers to the income generated by a business from its primary operations.
It typically comes from the sale of goods or services.
o Break-even analysis is the financial tool used to determine the point at which a
company's total revenue equals its total costs, resulting in neither a profit nor a
loss. This point is known as the break-even point.

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