Management Science

Chapter 1

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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

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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, quantitative methods, etc., involves a philosophy of problem solving in a logical manner.
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The Management Science Process

Figure 1.1
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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.

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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.
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Example of Model Construction (2 of 3)

Variables:
Model: Parameters:

X = # units to produce (decision variable)

Z = total profit (in $) Z = $20X - $5X (objective function) 4X = 100 lb of steel (resource constraint) $20, $5, 4 lbs, 100 lbs (known values) maximize Z = $20X - $5X

Formal Specification of Model:

subject to 4X = 100
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Example of Model Construction (3 of 3)

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)
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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.
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Model Building: Break-Even Analysis (2 of 9)

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.
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Model Building: Break-Even Analysis (3 of 9)

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 f - vc v

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Model Building: Break-Even Analysis (4 of 9)

Computing the Break-Even Point

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

vp c f vcv 0 v( p cv ) c f
The break-even point

cf p cv
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Model Building: Break-Even Analysis (5 of 9)

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
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Model Building: Break-Even Analysis (6 of 9)

Figure 1.2
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Model Building: Break-Even Analysis (7 of 9)

Figure 1.3
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Model Building: Break-Even Analysis (8 of 9)

Figure 1.4
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Model Building: Break-Even Analysis (9 of 9)

Figure 1.5
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Break-Even Analysis: Excel Solution (1 of 5)

Exhibit 1.1
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Break-Even Analysis: Excel QM Solution (2 of 5)

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Exhibit 1.2

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Break-Even Analysis: Excel QM Solution (3 of 5)

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Exhibit 1.3

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Break-Even Analysis: QM Solution (4 of 5)

Exhibit 1.4
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Break-Even Analysis: QM Solution (5 of 5)

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Exhibit 1.5

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Classification of Management Science Techniques

Figure 1.6

Modeling Techniques
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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, etc. (Chap 10, 14-16)
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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)

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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 Use databases & management science models Address what if questions Perform sensitivity analysis

Examples include: ERP Enterprise Resource Planning OLAP Online Analytical Processing
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Management Science Models Decision Support Systems (2 of 2)

Figure 1.7 A Decision Support System

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