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**A Practical Introduction to Management Science
**

4th edition

Cliff T. Ragsdale

Chapter 1

Introduction to Modeling & Problem Solving

1-2

Introduction We face numerous decisions in life & business. 1-3 . Spreadsheets are the tool of choice for today s managers. We can use computers to analyze the potential outcomes of decision alternatives.

statistics.What is Management Science? A field of study that uses computers. Also known as: Operations research Decision science 1-4 . and mathematics to solve business problems.

000 financial advisors Developed a model to design product features and pricing options to better reflect customer value Benefits: $80 million increase in annual revenue $22 billion increase in net assiets 1-5 .Home Runs in Management Science Merril Lynch 5 million customers 16.

000 pots & 220. Developed model to determine what to plant.5 million bulbs and produces 420. Benefits: 26% increase in revenue 32% increase in contribution margin 1-6 . and how to sell it.Home Runs in Management Science Jan de Wit Co. Brazil s largest lily farmer Annually plants 3. when to plant it.000 bundles of lilies in 50 varieties.

Home Runs in Management Science NBC Must determine program schedules Schedules must meet advertisers demographic and cost requirements Developed optimization model to determine optimal timing and pricing of commercials Benefits: $50 million increase in annual revenue 1-7 .

Home Runs in Management Science Samsung Electronics Leading DRAM manufacturer Semiconductor facilities cost $2-$3 billion High equipment utilization is key Developed comprehensive planning and scheduling system to control WIP Benefits: Cut cycle times in half $1 billion increase in annual revenue 1-8 .

1-9 . Spreadsheets provide the most convenient way for business people to build computer models.What is a Computer Model ? A set of mathematical relationships and logical assumptions implemented in a computer as an abstract representation of a real-world object of phenomenon.

road maps) Physical/Scale (aerodynamics. Types of models: Mental (arranging furniture) Visual (blueprints. buildings) Mathematical (what we ll be studying) 1-10 .The Modeling Approach to Decision Making Everyone uses models to make decisions.

Characteristics of Models Models are usually simplified versions of the things they represent A valid model accurately represents the relevant characteristics of the object or decision being studied 1-11 .

models can be used to do things that would be impossible. Models give us insight & understanding that improves decision making.models often deliver needed information more quickly than their real-world counterparts. Feasibility . 1-12 .it is often less costly to analyze decision problems using models. Timeliness .Benefits of Modeling Economy .

Example of a Mathematical Model Profit = Revenue . Expenses) or Y = f(X1.Expenses or Profit = f(Revenue. X2) 1-13 .

X2. Xn) Where: Y = dependent variable (aka bottom-line performance measure) Xi = independent variables (inputs having an impact on Y) f(.A Generic Mathematical Model Y = f(X1. «.) = function defining the relationship between the Xi & Y 1-14 .

«.Mathematical Models & Spreadsheets Most spreadsheet models are very similar to our generic mathematical model: Y = f(X1.)) are applied to compute a bottom-line performance measure (or Y). Xn) Most spreadsheets have input cells (representing Xi) to which mathematical functions ( f(. 1-15 . X2.

CPM. IP. Time Series Analysis. EOQ. GP. well-defined Independent Variables known or under decision maker s control known or under decision maker s control unknown or uncertain OR/MS Techniques LP. Queueing. Discriminant Analysis Simulation. ill-defined Descriptive known. well-defined .) known. Networks. NLP. PERT.Categories of Mathematical Models Model Category Prescriptive Form of f(. Inventory Models 1-16 Predictive unknown. MOLP Regression Analysis.

The Problem Solving Process Identify Problem Formulate & Implement Model Analyze Model Test Results Implement Solution unsatisfactory results 1-17 .

The Psychology of Decision Making Models can be used for structurable aspects of decision problems. Caution: Human judgment and intuition is not always rational! 1-18 . Other aspects cannot be structured easily and require intuition and judgment.

Anchoring Effects Arise when trivial factors influence initial thinking about a problem. Decision-makers usually under-adjust from their initial anchor . Example: What is 1x2x3x4x5x6x7x8 ? What is 8x7x6x5x4x3x2x1 ? 1-19 .

The way a problem is framed often influences choices in irrational ways Suppose you ve been given $1000 and must choose between: A. Flip a coin and receive $1000 more if heads occurs or $0 more if tails occurs 1-20 .Framing Effects Refers to how decision-makers view a problem from a win-loss perspective. Receive $500 more immediately B.

Framing Effects (Example) Now suppose you ve been given $2000 and must choose between: A. Flip a coin and give back $0 if heads occurs or give back $1000 if tails occurs 1-21 . Give back $500 immediately B.

000 $1.000 $1.A Decision Tree for Both Examples Payoffs Alternative A Initial state Heads (50%) Alternative B (Flip coin) $2.500 Tails (50%) 1-22 .

modeling approach to decision making helps us make good decisions. 1-23 ... Good Outcomes Good decisions do not always lead to good outcomes. A structured.Good Decisions vs. but can t guarantee good outcomes.

End of Chapter 1 1-24 .

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