Introduction to Management Science
decision variables, objective function
The Management Science Approach
• Management science is 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, business analytics, etc.,
involves a philosophy of problem
solving in a logical manner.
Figure 1.1 The Management Science Process
Steps in the Management Science Process
• Observation - Identification of a
problem that exists (or may occur
soon) in a system or organization.
• Problem Definition - The 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
and constraints of the problem.
• Model Solution - The model is solved
using management science
techniques.
• Model Implementation - Actual use
of the model or its solution.
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.
Variables: x = # 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
Model Solution: • The volume at which total revenue
equals total cost is called the break-
Solve the constraint equation:
even point.
4 x  100
• Profit at break-even point is zero.
 4 x   100 
4 4 Model Components
x  25 units
• Fixed Cost (cf) - costs that are
Substitute this value into the profit function: independent of the number of units
Z  $20 x  $5 x produced and remain constant.
  20  25    5  25 
• Variable Cost (cv) - unit production
 $375
cost of product.
(Produce 25 units, to yield a profit of $375) • Volume (v) - the number of units
Management Science and Business Analytics produced or sold

• Business analytics uses large amounts • Total variable cost (v cv) - function of
of data with management science volume (v) and unit variable cost.
techniques to help managers make • Total Cost (T C) - total fixed cost plus
decisions total variable cost.
• Brings together information
technology, statistics, management
TC  cf  vc v
science, computer science,
• Profit (Z) - difference between total
engineering, and data science
revenue v p (p = unit price) and total
• Big data cost, i.e.

Developing Analytical Career Skills Z  vp   cf  vcv 

• Critical thinking – purposeful and  vp  cf  vcv
goal-oriented problem definition and
solution Computing the Break-Even Point

• Collaborating – necessary in a project The break-even point is the volume at which

team-based environment total revenue equals total cost and profit is
zero:
• Information Technology & Computing
– reliance on computer software vp  cf  vcv  0
v  p  cv   cf
• Data Literacy – ability to access,
interpret, manipulate, communicate
The break-even point
and summarize data
cf
Break-Even Analysis v
• Used to determine the number of
p  cv
units of a product to sell or produce
that will equate total revenue with
total cost.
Break-Even Analysis Figure 1.5 Break-even model with a change in
fixed cost
Example: Western Clothing Company

Fixed Costs: cf = $10,000

Variable Costs: cv = $8 per pair

Price: p = $23 per pair

The Break-Even Point is:

cf Figure 1.6 Classification of Management
v
p  cv Science Techniques
$10,000
v
$23 / pair  $8 / pair
v  666.7pairs of jeans

Figure 1.2 Break-even model

Management Science Modeling Techniques:

Characteristics of Modeling Techniques

• Linear Mathematical Programming -

Figure 1.3 Break-even model with an increase clear objective; restrictions on
in price resources and requirements;
parameters known with certainty.
(Chapter 2-6, 9)

• Probabilistic Techniques - results

contain uncertainty. (Chapter 11-13)

• Network Techniques - model often

Figure 1.4 Break-even model with an increase
in variable cost
formulated as diagram; deterministic
or probabilistic. (Chapter 7-8)
• Other Techniques - variety of
deterministic and probabilistic
methods for specific types of
problems including forecasting,
inventory, simulation, multicriteria, A
H P (analytic hierarchy process), etc.
(Chapter 9, 14-16)

Business Usage of Management Science

• Some application areas:

– Project Planning
 – Capital Budgeting
– Inventory Analysis
– Production Planning
– Scheduling, and many others
• Interfaces - Applications journal
published by Institute for Operations
Research and Management Sciences (I
N F O R M S)
Management Science Models in Decision
Support Systems (D S S)
A decision support system is a computer-
based information system that a manager can
use to assist in an support decision making.
Model Components
Features of Decision Support Systems
• Interactive
• Uses databases & management
science models
• Address “what if” questions
• Perform sensitivity analysis
• Increasingly used over the Internet
• Objectives of business decisions
frequently involve maximizing profit
or minimizing costs.
• Linear programming uses linear
algebraic relationships to represent a
firm’s decisions, given a business
objective, and resource constraints.
• Steps in application:
1. Identify problem as solvable by linear
programming.
2. Formulate a mathematical model of
the unstructured problem.
3. Solve the model.
• Decision variables - mathematical
symbols representing levels of activity
by the firm.
• Objective function - a linear
mathematical relationship describing
an objective of the firm, in terms of
decision variables - this function is to
be maximized or minimized.

Examples include: • Constraints - requirements or

restrictions placed on the firm by the
E R P – Enterprise Resource Planning operating environment, stated in
O L A P – Online Analytical Processing linear relationships of the decision
variables.

• Parameters - numerical coefficients

and constants used in the objective
function and constraints.

Summary of Model Formulation Steps

Step 1: Define the decision variables

How many bowls and mugs to produce?

Chapter 2
Step 2: Define the objective function
Linear Programming: Model Formulation and
Maximize profit
Graphical Solution
Step 3: Define the constraints
Linear Programming: An Overview
The resources (clay and labor) available
L P Model Formulation 1 Objective Function:

Resource Requirements • Maximize Z = $40x1 + $50x2

Labor Clay Profit • Where Z = profit per day

produc
(Hr./Uni (Lb./Uni ($/Unit Resource Constraints:
t
t) t) ) 1x1  2 x2  40 hours of labor

Bowl 1 4 40 4 x1 + 3 x2  120 pounds of clay

Mug 2 3 50 Non-Negativity Constraints:

x1  0; x2  0

Complete Linear Programming Model:

Maximize
Z = $40 x1 + $50 x2

1x1 + 2 x2  40
4 x2 + 3 x2  120
x ,x  0
subject to: 1 2

A feasible solution does not violate any of the

constraints:

Figure 2.1 Beaver Creek Pottery Company
• Product mix problem - Beaver Creek
Pottery Company
• How many bowls and mugs should be
produced to maximize profits given
labor and materials constraints?
• Product resource requirements and
unit profit:
Resource Availability:
• 40 hrs of labor per day
• 120 lbs of clay
Decision Variables:
• x1 = number of bowls to produce per
day
• x2 = number of mugs to produce per
day
Example:
x1  5 bowls
x2  10 mugs
Z  $40 x1  $50 x2  $700
Labor constraint check:
1 5  + 2 10  = 25  40 hours
Clay constraint check:
4  5  + 3 10  = 70  120 pounds
An infeasible solution violates at least one of
the constraints:
Example:
x1  10 bowls
x2  20 mugs
Z  $40 x1  $50 x2  $1400
Labor constraint check:
110   2  20   50  40 hours