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By Bernard W. Taylor III: Introduction To Management Science

The document provides an overview of management science and its problem-solving approach. It discusses the management science process, which includes observing problems, defining them, constructing models, solving models, and implementing solutions. It also covers specific techniques like break-even analysis, sensitivity analysis, and decision support systems that use management science models. The chapter aims to introduce readers to the logical, mathematical methods of management science and its diverse business applications.

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522 views

By Bernard W. Taylor III: Introduction To Management Science

The document provides an overview of management science and its problem-solving approach. It discusses the management science process, which includes observing problems, defining them, constructing models, solving models, and implementing solutions. It also covers specific techniques like break-even analysis, sensitivity analysis, and decision support systems that use management science models. The chapter aims to introduce readers to the logical, mathematical methods of management science and its diverse business applications.

Uploaded by

fadwa
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 22

Introduction to Management Science

by Bernard W. Taylor III

Chapter 1
Management Science

Chapter 1- Management Science 1


Chapter Topics

 The Management Science Approach to Problem Solving


 Model Building : Break-Even Analysis
 Computer Solution
 Management Science Modeling Techniques
 Business Usage of Management Science Techniques
 Management Science Models in Decision Support
Systems

Chapter 1- Management Science 2


The Management Science Approach

 Management science uses 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, Decision Sciences, etc., involves a philosophy
of problem solving in a logical manner.

Chapter 1- Management Science 3


The Management Science Process

Figure 1.1
The Management Science Process

Chapter 1- Management Science 4


Steps in the Management Science Process

Observation - Identification of a problem that exists (or may


occur soon) in a system or organization.
Definition of the Problem - 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.

Chapter 1- Management Science 5


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.

Chapter 1- Management Science 6


Example of Model Construction (2 of 3)

Variables: X = number of 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

Chapter 1- Management Science 7


Example of Model Construction (3 of 3)

Model
Solution
Consider the constraint equation:

4x = 100
or 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)

Chapter 1- Management Science 8


Model Building:
Break-Even Analysis (1 of 8)

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


or produce (i.e. volume) 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.

Chapter 1- Management Science 9


Model Building:
Break-Even Analysis (2 of 8)
Model Components
 Fixed Costs (cf) - costs that remain constant regardless of
number of units produced.
 Variable Cost (cv) - unit production cost of product.

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


variable cost.
 Total Cost (TC) - total fixed cost plus total variable cost.

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


price) and total cost, i.e.
Z = vp - cf - vcv

Chapter 1- Management Science 10


Model Building:
Break-Even Analysis (3 of 8)

Computing the Break-Even Point


The break-even point is that volume at which total revenue
equals total cost and profit is zero:

vp - cf – vcv = 0
or v = cf/(p - cv)
(Break-Even Point)

Chapter 1- Management Science 11


Model Building:
Break-Even Analysis (4 of 8)

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

Chapter 1- Management Science 12


Model Building: Break-Even Analysis (5 of 8)

Graphical Solution

Figure 1.2 Break-Even Model


Chapter 1- Management Science 13
Model Building: Break-Even Analysis (6 of 8)

Figure 1.3
Sensitivity Analysis - Break-even Model with a Change in Price
Chapter 1- Management Science 14
Model Building: Break-Even Analysis (7 of 8)

Figure 1.4
Sensitivity Analysis - Break-Even Model with a Change in Variable Cost
Chapter 1- Management Science 15
Model Building: Break-Even Analysis (8 of 8)

Figure 1.5
Sensitivity Analysis - Break-Even Model with a Change in Fixed Cost
Chapter 1- Management Science 16
Classification of Management Science Techniques

Figure 1.6 Modeling Techniques


Chapter 1- Management Science 17
Characteristics of Modeling Techniques

 Linear Mathematical Programming - clear objective;


restrictions on resources and requirements; parameters
known with certainty.
 Probabilistic Techniques - results contain uncertainty.
 Network Techniques - model often formulated as diagram;
deterministic or probabilistic.
 Forecasting and Inventory Analysis Techniques -
probabilistic and deterministic methods in demand
forecasting and inventory control.
 Other Techniques - variety of deterministic and
probabilistic methods for specific types of problems.

Chapter 1- Management Science 18


Business Use 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)

Chapter 1- Management Science 19


Management Science Models
Decision Support Systems (1 of 2)
 A decision support system (DSS) is a computer-based
system that helps decision makers address complex
problems that cut across different parts of an organization
and operations.
 A DSS is normally interactive, combining various
databases and different management science models and
solution techniques with a user interface that enables the
decision maker to ask questions and receive answers.
 Online analytical processing system (OLAP), the
analytical hierarchy process (AHP), and enterprise
resource planning (ERP) are types of decision support
systems.
 Decision support systems are most useful in answering
“what-if?” questions and performing sensitivity analysis.

Chapter 1- Management Science 20


Management Science Models
Decision Support Systems (2 of 2)

Figure 1.7 A Decision Support System


Chapter 1- Management Science 21
End of Chapter

Chapter 1- Management Science 22

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