# Chapter 1- Management Science

Chapter Topics

• The Management Science Approach to Problem Solving
• Model Building: Break-Even Analysis • Computer Solution • Management Science Modeling Techniques • Business Use of Management Science Techniques
Chapter 1- Management Science 1

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.

Chapter 1- Management Science

2

1 The Management Science Process Chapter 1.Management Science 3 .The Management Science Process Figure 1.

• Model Solution .Management Science 4 .Actual use of the model or its solution. Chapter 1. objective function and constraints of the problem. • Model Implementation .Steps in the Management Science Process • Observation .Identification of a problem that exists in the system or organization.Development of the functional mathematical relationships that describe the decision variables.problem must be clearly and consistently defined showing its boundaries and interaction with the objectives of the organization. • Definition of the Problem .Models solved using management science techniques. • Model Construction .

Business firm makes and sells a steel product . Chapter 1.Management Science 5 .Product requires 4 pounds of steel to make .Product sells for \$20 .Example of Model Construction (1 of 2) Problem Definition Information and Data: .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.Product costs \$5 to produce .

\$5x subject to 4x = 100 Chapter 1.Example of Model Construction (2 of 2) Mathematical Model Variables: x = number of units (decision variable) Z = total profit Model: Z = \$20x .Management Science 6 . 4 lbs. 100 lbs (known values) Formal specification of model: maximize Z = \$20x .\$5x (objective function) 4x = 100 lb of steel (resource constraint) Parameters: \$20. \$5.

Management Science 7 . volume) that will equate total revenue with total cost.Model Building Break-Even Analysis (1 of 7) • Used to determine the number of units of a product to sell or produce (i.e. • Profit at break-even point is zero. Chapter 1. • The volume at which total revenue equals total cost is called the break-even point.

Management Science 8 .costs that remain constant regardless of number of units produced Variable cost (cv) .function of volume (v) and variable per-unit cost Total cost (TC) .difference between total revenue vp (p=price) and total cost: Z = vp .unit cost of product Total variable cost (vcv) .cf .Model Building Break-Even Analysis (2 of 7) Model Components Fixed costs (cf) .vcv Chapter 1.total fixed cost plus total variable cost Profit(Z) .

7 pairs.Management Science 9 . break-even point Chapter 1.Model Building Break-Even Analysis (3 of 7) Computing the Break-Even Point The break-even point is that volume at which total revenue equals total cost and profit is zero: V = cf/(p-cv) Example: Western Clothing Company cf = \$10000 cv = \$8 per pair p = \$23 per pair v = 666.

Management Science 10 .2 Break-even model Chapter 1.Model Building Break-Even Analysis (4 of 7) Graphical Solution Figure 1.

3 Break-even model with a change in price Chapter 1.Model Building Break-Even Analysis (5 of 7) Sensitivity Analysis Figure 1.Management Science 11 .

Model Building Break-Even Analysis (6 of 7) Sensitivity Analysis (variable cost) Figure 1.4 Break-even model with a change in variable cost Chapter 1.Management Science 12 .

5 Break-even model with a change in fixed cost Chapter 1.Management Science 13 .Model Building Break-Even Analysis (7 of 7) Sensitivity Analysis (fixed cost) Figure 1.

Management Science 14 .Computer Solution (1 of 5) Excel Spreadsheets Exhibit 1.1 Chapter 1.

Management Science 15 .2 Chapter 1.Computer Solution (2 of 5) Excel QM Exhibit 1.

Computer Solution (3 of 5) Excel QM (continued) Exhibit 1.Management Science 16 .3 Chapter 1.

Computer Solution (4 of 5) QM for Windows Exhibit 1.Management Science 17 .4 Chapter 1.

5 Chapter 1.Management Science 18 .Computer Solution (5 of 5) QM for Windows (continued) Exhibit 1.

6 Chapter 1.Management Science 19 .Management Science Modeling Techniques Figure 1.

• Network techniques: model often formulated as diagram. • Probabilistic techniques: results contain uncertainty. restrictions on resources and requirements.Characteristics of Modeling Techniques • Linear mathematical programming: clear objective. • Other techniques: variety of deterministic and probabilistic methods for specific types of problems. Chapter 1. deterministic or probabilistic. parameters known with certainty. • Forecasting and inventory analysis techniques: probabilistic and deterministic methods in demand forecasting and inventory control.Management Science 20 .

Management Science 21 .Capital budgeting .Applications journal published by Institute for Operations Research and Management Sciences Chapter 1.Production planning .Project planning .Scheduling • Interfaces .Business Use of Management Science • Some application areas: .Inventory analysis .