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1 Management Science

The document discusses the management science approach to problem solving using logical and mathematical modeling techniques. It describes the management science process of observing problems, defining them, constructing models, solving models, and implementing solutions. Examples are provided of common management science techniques like break-even analysis that are used in business applications and decision support systems.

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Marilla Regis
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568 views

1 Management Science

The document discusses the management science approach to problem solving using logical and mathematical modeling techniques. It describes the management science process of observing problems, defining them, constructing models, solving models, and implementing solutions. Examples are provided of common management science techniques like break-even analysis that are used in business applications and decision support systems.

Uploaded by

Marilla Regis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Management Science

by
Remark M. Montalban
Department of Accountancy

1
Objectives

 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

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

4
Steps in the Management Science Process

Observation
 Identification of a problem that exists (or may occur soon)
in a system or organization.
 Problems are not always a result of crisis that must be
reacted upon but involve an anticipatory or planning
situation.
 Management scientist may be hired specifically to identify
problems and solve problems using management science
techniques.

Chapter 1- Management Science 5


Steps in the Management Science Process

Definition of the Problem


 Problem must be clearly and consistently defined, showing its
boundaries and interactions with the objectives of the
organization.
 Limits of the problem and the degree to which it pervades
other units in the organization must also be included in
problem definition.
 The objectives of the organization must also be defined
because it focuses attention to what the problem really is.

Chapter 1- Management Science 6


Steps in the Management Science Process

Model Construction
 Development of the functional mathematical relationships that
describe the decision variables, objective function and
constraints of the problem.
 A model is an abstract representation of an existing problem
situation (e.g. chart, graphs or mathematical relationships).
 The model is a functional relationships that includes variables;
parameters which are derived from data; and equations.

Chapter 1- Management Science 7


Example of Model Construction (1 of 3)

Information and Data:


Business firm makes and sells a steel product
Product costs Php5 to produce
Product sells for Php20
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 8


Example of Model Construction (2 of 3)

Variables: X = number of units to produce (decision


variable)
P = total profit (in Php)
Model: P = 20X - 5X (objective function)
4X = 100 lb of steel (resource constraint)
Parameters: P20, P5, 4 lbs, 100 lbs (known values)
Formal Specification of Model:
maximize P = 20X - 5X
subject to 4X = 100

Chapter 1- Management Science 9


Steps in the Management Science Process

Model Solution
 Models are solved using management science techniques.
 A management science solution techniques usually applies to
a specific type of model.
 The value of the decision variable does not constitute an
actual decision, rather an information that serves as
recommendation or guideline only.
 Some may also not provide answer or recommendation,
instead they provide descriptive results.

Chapter 1- Management Science 10


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:

P = 20x - 5x
= (20)(25) – (5)(25)
= 375

(Produce 25 units, to yield a profit of P375)

Chapter 1- Management Science 11


Steps in the Management Science Process

Model Implementation
 Actual use of the model or its solution.
 Frequently the person responsible for putting the solution to
use is not the same person who developed the solution found.
 Sometimes people are also hesitant to change the normal
way they do things or try new things.

12
Management Science and Business Analytics

Business Analytics
 Process of using large amounts of data combined with
information technology, statistics, management science
techniques and mathematical modeling to help managers
solve problems and make decisions.
 Analytics is said to be descriptive, predictive and prescriptive.
 A key component of business analytics is “big data.”

13
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.
 BEP is a function of volume, cost and profit.

Chapter 1- Management Science 14


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

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


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

 Profit (p) - difference between total revenue TR (SP = unit


price) and total cost, i.e.
P = TR - TVC - FC

Chapter 1- Management Science 15


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:

TR - TVC – FC = 0

Chapter 1- Management Science 16


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

Example: Western Clothing Company

Fixed Costs: FC = P10,000


Variable Costs: VC = P8 per pair
Price : SP = P23 per pair

The Break-Even Point is:

x = (10,000)/(23 -8)
= 666.7 pairs

Chapter 1- Management Science 17


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

Graphical Solution

Figure 1.2 Break-Even Model


18
Model Building: Break-Even Analysis (6 of 8)

Figure 1.3
Sensitivity Analysis - Break-even Model with a Change in Price
19
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 20
Model Building: Break-Even Analysis (8 of 8)

Figure 1.5
Sensitivity Analysis - Break-Even Model with a Change in Fixed Cost
21
Break-Even Analysis: Excel Solution (1 of 5)

Exhibit 1.1
22
Classification of Management Science Techniques

Figure 1.6 Modeling Techniques


23
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.

24
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)

25
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.

26
Management Science Models
Decision Support Systems (2 of 2)

Figure 1.7 A Decision Support System


Chapter 1- Management Science 27
End of Chapter

Chapter 1- Management Science 28

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