MANAGEMENT SCIENCE 2.
How to acquire and process data and
MANAGEMENT
➢ MANAGEMENT is a process which is used to
achieve certain goals through the utilization of
resources (people, money, energy, materials,
space, time). These RESOURCES are considered
as the INPUTS, and the attainment of goals is
viewed as the OUTPUT of the process.
➢ MANAGEMENT consists of the interlocking
functions of creating corporate policy and
planning, organizing, directing, and controlling
an organization’s resources to achieve the
organization’s objectives.
FUNCTIONS OF MANAGEMENT
▪ Planning
– To decide beforehand what is to be done
in the future
▪ Organizing
– Establishment of effective authority
relationships among selected work,
persons and work places in order for the
group to work together effectively
▪ Staffing
– Recruiting the employees by evaluating
their skills and knowledge and then
offering them specific job roles
accordingly.
▪ Directing
– It is the task of the manager to guide,
supervise, lead, and motivate the
subordinates to achieve predetermined
goal
▪ Controlling
– A process of comparing the actual
performance with the set of standards of
the company to ensure that activities are
performed as planned, and if not, then
there is corrective action.
– BREAKEVEN ANALYSIS
MANAGEMENT SCIENCE/OPERATIONS RESEARCH
➢ any application of scientific methods,
techniques, and tools to problems involving the
operations of system so as to provide those in
control of the operations with optimum
solutions to the problem.
➢ It attempts to provide those who manage
organized systems with an objective and
quantitative basis for decision making.
Concerned with:
1. How managerial decisions are and should
be made.
information required to make decisions
effectively
3. How to monitor decisions once they are
implemented.
4. How to organize the decision making and
decision implementation process
Generally, entails:
1. Discovering, developing, defining, and
evaluating the goals of the org and the
alternative policies that will lead toward the
goal.
2. Getting the organization to adapt the policy.
3. Scrutinizing the effectiveness of the policies
that are adapted.
4. Initiating steps to change policies that are
ineffective or inadequately effective.
Characteristics of Management Science
1. The primary focus on managerial decision-
making
2. The application of scientific approach and
decision-making
3. The examination of the decision situation from a
broad perspective
4. The use of methods and knowledge from several
disciplines
5. A reliance on mathematical models
6. The extensive use of computers
THE TOOLS OF MANAGEMENT SCIENCE
PROGRAM EVALUATION AND REVIEW TECHNIQUE.
(PERT )
➢ planning and control technique that allows
managers to decompose a project into specific
activities and to plan far in advance when it is to
be completed. The main function PERT is to
determine the time required to complete a
project.
➢ helps managers determine how many units must
be sold before a product is profitable.
➢ a calculation of the point at
which revenues equal expenses. In securities
trading, the break-even point is the point at
which gains equal losses.
Decision Tree
➢ A decision support tool that uses a tree – like
model decisions and their possible
consequences, including chance event
outcomes, resource costs, and utility
NODES 2. The scientific selection and progressive teaching
➢ represent the and development of employees. (Emphasize
possible attributes weakness and strength of workers)
associated with an 3. The bringing together of scientifically selected
event employees and scientifically developed methods
1. Root for designing jobs. (Everybody is aware of
➢ The first node improvement)
➢ represents the 4. A division of work resulting in interdependence
attribute with between managers and works. (cooperation)
largest
BRANCH and BOUND
information
➢ a step by step procedure when a very large
gain
number of alternatives exist for certain
2. Branches managerial problems.
➢ represent the attributes values
NETWORK MODELS
3. Leaves ➢ a family of tools designed for the purpose of
➢ represent the classes planning and controlling complex projects.
DECISION TABLES MARKOV CHAINS
➢ A tabular form where allocation and investment ➢ used for predicting the outcome of processes
problems involving a relatively small number of where systems or units change their condition
possible solutions are presented. over time.

GAME THEORY
➢ provides a systematic approach to decision
making in competitive environments and a
framework for the study of conflict.

INVENTORY MODELS
➢ For certain types of inventory control problems,
special model that attempt to minimize the cost
associated with ordering and carrying
inventories have been developed.

WAITING LINE (QUEUEING) MODELS

Mathematical Programming
➢ Attempts to maximize the attainment level of
one goal subject to a set of requirements and
limitations. The following models are covered in
these text:
▪ Linear Programming
➢ used to determine the best way to
allocate resources to achieve some
desired objectives.
▪ Transportation and assignment models
▪ Integer and goal programming
➢ For certain types of problems involving waiting
lines, special descriptive models have been
developed to predict the performance of service
systems.
SIMULATION MODELS
➢ For the analysis of complex systems when all
other models fail, management science uses
descriptive – type simulation models (i.e.,
artificial intelligence, heuristic programming,
management games, systems simulation, and
Monte Carlo simulation)

Dynamic Programming FORECASTING

➢ An approach to decisions that are basically ➢ To predict the outcome of managerial decisions,
sequential in nature or can be reformulated so as various forecasting approaches are employed.
to be considered sequential. Many of these are based on Statistics.

Frederick Winslow Taylor THE TOOLS OF MANAGEMENT SCIENCE: THE

➢ Father of Management Science
➢ Conduction Time and Motion Study
4 Principles of Management Science
1. The development of a scientific method of
designing jobs to replace rule of thumb methods.
(There is always an improvement and
development of new technique.)
PROTOTYPE MANAGERIAL PROBLEMS
ALLOCATION PROBLEMS
These problems arise when:
1. There are a number of activities to be
performed
2. There exist two or more different ways to
perform these activities
3. Resources or facilities are scarce
DISTRIBUTION PROBLEMS
➢ Moving a commodity from several sources to
several destinations at minimum costs
constitutes a transportation problem. Several
types of problems can be viewed and solved as
transportation problems. A related topic is the
assignment problem, in which certain items,
such as a person or an activity, are to be
assigned, on a one – to – one basis, to other
items such as facilities and services.
NETWORK PROBLEMS
➢ Describe flows of commodities, activities,
information, or other resources between
locations.
COMPETITIVE SITUATIONS
➢ When the results of a decision are determined
not only by one’s own course of action but also
by that of a decision maker, a competitive
situation exists. This situation may be viewed as
a game which each party attempts to win.
INVENTORY CONTROL
➢ Inventories can result in a large savings by
preventing shortages, providing discounts on
large quantities purchased or produced,
eliminating changes in the level of production,
and reducing ordering and setup costs. The
problem is to find the proper level of inventory
which is determined by the decisions “when”
and “how much” to order, that will minimize the
total cost.
WAITING LINE PROBLEMS
➢ The problem is to find the appropriate size of the
facility as well as to determine its operating
procedures in such a way as to minimize the sum
of the relevant costs.
PREDICTING THE BEHAVIOR OF A SYSTEM
➢ Management is frequently interested in
predicting the behavior of a system under
different conditions. While this is not classified
as a prototype problem by itself, it can be use in
constructing prototype procedures and/or
evaluating solutions.
SENSITIVITY ANALYSIS
• This model is also referred to as what-if or
simulation analysis.
• Sensitivity analysis is a financial model that
determines how different values for a set of
independent variables affect a dependent
variable.
• It is done within defined boundaries that are
determined by the set of independent (input)
variables.
• Is most commonly used by financial analysts to
predict the outcome of a specific action when
performed under certain conditions.
• For example, sensitivity analysis can be used to
study the effect of a change in interest rates on
bond prices if the interest rates increased by
1%. The “what-if” question would be:
“what would happen to the price of a
bond if interest rates went up by 1%?” This
question is answered with sensitivity analysis.
• The analysis is performed in excel under the data
section of the ribbon and the “what-if analysis”
button, which contains goal seek and data table.
Breakeven
➢ the price at which a security position can be
closed out with no profit or loss.
Breakeven point
➢ the production level at which total revenues equal
total expenses.
Contribution Margin
➢ the excess between the selling price of the
product and total variable costs.
Fixed cost
➢ the cost which remains constant at different
levels of output produced by an enterprise.
Variable cost
➢ the cost which changes with the changes in the
quantity of output produced.
Mixed cost
➢ cost that contains both a fixed cost component
and a variable cost component. It is important
to understand the mix of these elements of a
cost, so that one can predict how costs will
change with different levels of activity.
Sales mix
➢ calculation that determines the proportion of
each product a business sells relative to total
sales. The sales mix is significant because some
products or services may be more profitable than
others, and if a company's sales mix changes, its
profits also change. Managing sales mix is a tool
to maximize company profit.
Sales Price
➢ the price of a good or a service that is being
offered a discount.
Selling Price
➢ is the price at which something offered for
sale.
❖ Sensitivity analysis conduct “what if” analysis
➢ What if the sale price changes?
➢ What if costs change?
➢ What if the sales mix changes?
What if the sale price changes?
-Contribution margin change
-Breakeven point will change
Mixed Cost
✓ If the selling price increase, selling prices
per unit will go up, breakeven point went
down. So you have to sell much less unit to
breakeven.
✓ Conversely, if the selling price have
decrease, breakeven will increase. So you
have to sell more units to breakeven.
What if the variable cost change?
-Contribution margin change
-Breakeven point will change
ADVANTAGES OF FINANCIAL SENSITIVITY ANALYSIS
There are many important reasons to perform
sensitivity analysis:
✓ If the variable cost per unit increases,
breakeven point will increase too. So you
have to sell more units in order to
breakeven
✓ If variable cost per unit decrease, you would
have less unit to sell in order to breakeven.
What if fixed cost change?
-It will not affect contribution margin
-It will change breakeven point
✓ If fixed cost increase, it is going to move up
and stay parallel. Breakeven will increase
too.
SENSITIVITY ANALYSIS EXAMPLE:
• John is in charge of sales for HOLIDAY CO that
sells Christmas decorations at a shopping mall.
John knows that the holiday season is
approaching and that the mall will be crowded.
He wants to find out whether an increase in
customer traffic at the mall will raise the
total sales revenue of HOLIDAY CO and if so, by
how much.
• The average price of a packet of Christmas
decorations is $20 and during the previous year’s
holiday season, holiday co sold 500 packs of
Christmas decorations, resulting in total sales
worth $10,000.
• After carrying out a financial sensitivity analysis,
john determines that a 10% increase in customer
traffic at the mall results in a 7% increase in the
number of sales.
• Using this information, john can predict how
much money company xyz will generate if
customer traffic increases by 20%, 40%, or 100%.
• Based on john’s financial sensitivity analysis,
these will result in an increase in revenue by
14%, 28%, and 70%, respectively.
• Sensitivity analysis adds credibility to any type of
financial model by testing the model across a
wide set of possibilities.
• Financial sensitivity analysis allows the analyst to
be flexible with the boundaries within which to
test the sensitivity of the dependent variables to
the independent variables. For example, the
model to study the effect of a 5-point change in
interest rates on bond prices would be different
from the financial model that would be used to
study the effect of a 20-point change in interest
rates on bond prices.
• Sensitivity analysis helps one make informed
choices. Decision-makers use the model to
understand how responsive the output is to
changes in certain variables. This relationship
can help an analyst in deriving tangible
conclusions and be instrumental in making
optimal decisions.
MARKOV’S CHAIN
➢ a mathematical system that experiences
transitions from one state to another according to
certain probabilistic rules.
➢ The defining characteristic of a Markov’s chain is
that no matter how the process arrived at its
present state, the possible future states are fixed.
In other words, the probability of transitioning to
any particular state is dependent solely on the
current state and time elapsed.
➢ The state space, or set of all possible states, can
be anything: letters, numbers, weather
conditions, baseball scores, or stock
performances.
FINANCIAL APPLICATION
➢ a software program that facilitates the
management of business processes that deal with
money.
EXAMPLES OF FINANCIAL APPLICATION:
1. Accounts Payable Software
➢ allows a business to stay on top of
outstanding payments and make sure all
payments are made correctly and on time.
2. Accounts Receivable Software
➢ allows a business to efficiently manage
customer activity and automate invoice
processing to ensure timely revenue
collection.
3. Budget Management Software
➢ provides forecasting and planning tools to
help business make informed decisions
during the budgeting process.
4. Fixed Assets Software
➢ simplifies the process of registering assets,
managing assets, locating ghost assets and
depreciating assets.
5. Project Accounting Software
➢ allows a businesses to manage the people,
processes and costs for individual projects.
Provides project managers with the ability
to store all project related information in
one place.
6. General Ledger Software
7. Payroll Software
OPERATION MANAGEMENT APPLICATIONS
➢ the administration of business practices to
create the highest level of efficiency possible
within an organization.
It is chiefly concerned with:
• Planning
• Organizing and
• Supervising
FUNCTIONS OF MANAGEMENT APPLICATIONS
➢ To ensure that an organization successfully turns
inputs to outputs in an efficient manner. It
attempts to balance cost with revenue to achieve
the highest net operating profit possible by
converting materials and labor into goods and
services.
Operation management application software is a
broad term as it can help a business with anything from
business process management to manufacturing
automation. Ultimately, it makes sure that business
operations, whether delivering services or products, are
effective and efficient.
1. Travelperk
➢ the next-generation business travel platform
pioneering the future of business travel.
➢ Travelperk’s all-in-one platform gives travelers
the freedom they want whilst providing
companies with the control they need. The
result is saved time, money, and hassle for
everyone. Travelperk has the world’s largest
travel inventory alongside powerful
management features, 24/7 customer support,
state-of-the-art technology and consumer-
grade design, all of which is enabling
companies worldwide to get the most out of
their travel.
2. Icertis
➢ is the leading provider of contract lifecycle
management in the cloud. Icertis contract
management (ICM) is an innovative, easy-to-
use platform that is highly configurable and
continually adapts to complex business needs.
3. Gatekeeper
➢ a cloud-based vendor and contact management
solution. Key features include automated alerts,
customization and collaboration tools and
integrations with other software. Users can
manage contracts and vendor information, track
workloads, monitor risk and store documents
using gatekeeper.
COMMON OPERATIONAL MANAGEMENT ISSUES:
1. Managing overheads
• Overheads can easily mount up, whether they’re
coming in the form of admin expenses,
insurance, rent or utility charges. Excessive
overheads can be particularly damaging if they
aren’t managed in a timely fashion, so they’re a
fairly big problem for small businesses to
contend with.
• Solution: take a look at your spending and see
what can be cut back. Any service that’s surplus
to your team or your customers’ requirements
should be scaled down. Quick fixes like cloud
computing, free video call services,
 telecommuting where possible, and renting 1. Accounts Receivable Turnover Ratio
rather than buying office equipment, can all be ➢ also known as the debtor’s turnover ratio, is an
useful here. efficiency ratio that measures how efficiently a
company is collecting revenue – and by
2. Monitoring performance
extension, how efficiently it is using its assets.
• How do you measure performance? And, how do
➢ measures the number of times over a given
potential indicators illustrate that your team is
period that a company collects its average
performing to its fullest? If certain members of
accounts receivable.
your team aren’t working as well as they should,
your business could suffer as a result. Net Credit Sales
AR Turnover Ratio =
Average Accounts Receivable
• Solution: detail a set of performance indicators
2. Inventory Turnover Ratio
that show how well your team and your business
➢ the number of times a business sells and replaces
is performing. Rather than using simplistic
its stock of goods during a given period.
finance indicators, it can be highly beneficial to
➢ considers the cost of goods sold, relative to its
identify, clarify and agree upon the expectations
average inventory for a year or in any a set
of respective teams. Identify how the results will
period of time.
be measured, monitor the progress made and
evaluate performances at the end of the Cost of Goods Sold
Inventory Turnover Ratio =
management cycle. Average Invetories

3. Accounts Payable Turnover

3. Responding to competition
➢ A liquidity ratio that shows a company’s ability to
• In this day and age, starting a business is more pay off its accounts payable by comparing net
realistic and achievable than ever. But, with so credit purchases to the average accounts
much easily-accessible information and guidance payable during a period.
out there, it does mean that there can
Total Purchases
theoretically be more competition in the same AP Turnover Ratio =
Average Accounts Payable
market. And whether your competition focuses
on a single service or a broader market, how do
you stand out from the rest? 4. Working Capital Turnover
➢ a ratio that measures how efficiently a company
• Solution: keeping an eye on competitor activity
is using its working capital to support a given
can give you an inside track on how to get ahead.
level of sales.
Monitoring their processes and practices can
help you anticipate their next moves – and adapt Net sales
Working Capital Turnover Ratio =
your strategy accordingly. Working Capital

5. Fixed Asset Turnover

DATA ENVELOPMENT ➢ an efficiency ratio that indicates how well or
➢ A linear programming based technique for efficiently the business uses fixed assets to
measuring the performance efficiency of generate sales.
organizational units which are termed as
Net sales
Decision Making Units (DMUs). This technique Fixed Asset Turnover Ratio =
Average Fixed Assets
aims to measure how efficiently a DMU uses the
resources available to generate a set of outputs 6. Asset Turnover
➢ Measures the efficiency with which a company
➢ The analysis compares the relative efficiency of
uses its assets to produce sales.
organizational “units” such as bank branches,
hospitals, vehicles, shops and other instances Net sales
Fixed Asset Turnover Ratio =
where units perform similar tasks. These units Average Fixed Assets
utilise similar resources, referred to as inputs, to
generate similar outputs.

EFFICIENCY RATIO
➢ metrics that are used in analyzing a firm’s ability
to effectively employ its resources, such as
capital and assets, to produce income.
GRAPHICAL ANALYSIS REVENUE MANAGEMENT
➢ Is the art and science of predicting real-time
customer demand at the micromarket level and
optimizing the price and availability of products.
➢ “Selling the right product to the right client at the
right moment at the right price via the right
distribution channel with the best cost efficiency”

In order for a business to employ a revenue management

strategy effectively, a number of conditions must be in
place:

✓ Different customers must be willing to pay

different prices for the same service or
commodity

✓ The business must be some ability to predict the

changing levels of demand ahead of time

✓ Only a fixed amount of resources are available to

be sold at any given time

USERS:
✓ Hotels
✓ Airlines
✓ Cinema
✓ Restaurants

IMPORTANCE OF REVENUE MANAGEMENT

1. Customer Expectations
➢ Revenue management provides companies
with a better understanding of what their
customers expect in the company’s product.
2. Competitive Pricing
➢ Revenue management enables the company
to create a competitive pricing strategy that
will draw in customers and give the company
an edge over its competitors.
3. Market Segments
➢ Revenue management seeks to show the
company the full extent of its market
segment and to introduce the company to
new market segments that are available.
4. Company Divisions
➢ Revenue management creates a strong
awareness between the activities of
different company divisions, and particularly
the activities of those working on sales and
marketing, and those on the front line of
service.

PORTFOLIO ANALYSIS MODELS

➢ Is the process of reviewing and assessing
elements of the entire portfolio of securities and
products in a business.

THE BOSTON CONSULTING GROUP SHARE-MATRIX

➢ The earliest, simplest and best known portfolio
model is concerned with the generation and use
of cash within a business and can be used to
analyze strategic business units.
IMPORTANCE OF PORTFOLIO ANALYSIS
✓ It helps in evaluating how your investment portfolio
is performing in terms of rate of return and risk.
✓ It provides guidance as to where changes to your
investment allocations should be made to keep you
on track to meet your investment objective.
LIMITATION:
✓ It cannot predict the future results-- past
performance is never a guarantee for future results.
ASSET ALLOCATIONS
✓ It refers to the strategy or dividing your investments
among different categories:
➢ Stock
✓ Ownership in a company
✓ Market capitalization
✓ Company location
➢ Bonds
✓ A loan to a company or government
✓ A contract between two parties.
Companies and government issue
bonds because they need to borrow
large amount of money.
➢ Alternative Cash
➢ Real Estate
✓ Property consisting of land and the
buildings on it, along with its natural
resources such as crops, minerals or
water
CONCEPT OF DIVERSIFICATION
✓ Process of allocating capital in a way that
reduces the exposure to anyone particular asset
or risk
✓ It reduces the vulnerability of market changes in
one investment categories.
Things to consider:
✓ What you’re saving for?
✓ How much time you have?
✓ How you feel about it? (Risk Tolerance Profile)
TRANSPORTATION MODELS
➢ Plays an important role in logistics and supply chain
management for reducing cost and improving
service.
➢ A product is to be transported from a number of
sources to a number of destinations at the minimum
possible cost.
➢ Each source is able to supply a fixed number of units
of the product, and each destination has a fixed
number of demands for the product.
Application of Transportation Model
➢ Minimize shipping costs
➢ Determine low cost location
➢ Find minimum cost production schedule
Transportation Problem
➢ a special type of LPP where the objective is to
minimize the cost of distributing a product from
a number of sources or origins to a number of
destinations.
Mathematical Model of Transportation Problem
Let F denote the factory where the goods are being
manufactured & W denote the warehouse where
finished products are stored by the company before
shipping to various destinations.
Further let X = quantity shipped from F to the W and
C= transportation cost per unit of
shipping from F to W
Objective function can be represented as:
Minimize Z (shipping cost) = C₁X₁ + C₂X₂ + C₃X₃ +
C₄X₄ + C₅X₅ + C₆X₆ +
C₇X₇ + C₈X₈ + C₉X₉
Supply constraints
✗ X₁ + X₂ + X₃ = S₁
✗ X₄ + X₅ + X₆ = S₂
✗ X₇ + X₈ + X₉ = S₃
Demand constraints
✗ X₁ + X₄ + X₇ = D₁
✗ X₂ + X₅ + X₈ = D₂
✗ X₃ + X₆ + X₉ = D₃
Balanced and Unbalanced TP
✘ The total supply available at the factories exactly
matches the total demand at the destinations.
Hence, there is neither excess supply nor excess
demand. Such type of problems where supply
and demand are exactly equal are known as
Balanced Transportation Problem.
✘ A transportation problem is said to be
unbalanced if the supply and demand are not
equal.
✗ If Supply < Demand, a dummy supply
variable is introduced in the equation to
make it equal to demand.
✗ If Demand < Supply a dummy demand
variable is also introduced to make it
equal to supply.
Phases of Solution of Transportation Problem
• Phase I- obtain the initial basic feasible solution
• Phase II- obtain the optimal basic solution
Phase I - Initial Basic Feasible Solution
✘ Northwest Corner Rule
✘ Least Cost Method
✘ Vogle’s Approximation Method
Northwest Corner Rule Phase II- Optimum Basic Solution
Requires that we start in the upper left-handed cell (or
Stepping Stone Method
the northwest corner) of the table and allocate units to
1. Select any unused square to evaluate
shipping routes as follows:
2. Beginning at this square, trace a closed path back
1. Exhaust the supply of each row before moving
to the original square via squares that are
down to the next row.
currently being used.
2. Exhaust the requirements of each column before
3. Beginning with a plus (+) sign at the unused
moving to the next column on the right
corner, place alternate minus and plus signs at
3. Check to ensure that all supplies and demands are
each corner of the path just traced.
met
4. Calculate an improvement index by first adding
Least Cost Method the unit-cost figures found in each square
The straightforward approach uses the following steps: containing a plus sign and subtracting the unit
1. Identify the cell with the lowest cost. Break any cost in each square containing minus sign.
ties for the lowest cost arbitrarily. 5. Repeat steps 1 to 4 until you have calculated an
2. Allocate as many units as possible to that cell improvement index for all unused squares. If all
without exceeding the supply or demand. Then indices are ≥ 0, you have reached an optimal
cross out that row or column (or both) that is solution.
exhausted by this assignment. ASSIGNMENT MODEL
3. Find the cell with the lowest from the remaining
(not crossed out) cells.
4. Repeat steps number 2 and 3 until all units have
been allocated.

Vogle’s Approximation Method

Applying the VAM requires the following steps:
1. Determine the penalty cost for each row (column)
by subtracting the lowest unit cell cost in the row
(column) from the next lowest unit cell cost in the
same row (column).
2. Identify the row or column with the greatest
penalty cost. Break the ties arbitrarily (if there are
any). Allocate as much as possible to the variable
with the lowest unit cost in the selected row or
column. Adjust the supply and demand and cross
out the row or column that is already satisfied. If
a row and column are satisfied simultaneously,
only cross out one of the two and allocate a
supply or demand of zero to the one that remains.
3. Continue with step 1.
4. Stop the process if all row and column
requirements are met. If not, go to the next step.
5. Recalculate the differences between the two
lowest cells remaining in all rows and columns.
Any row and column with zero supply or demand
should not be used in calculating further
differences. Then go to Step 2.
6. The Vogle’s approximation method (VAM) usually
produces an optimal or near – optimal starting
solution. One study found that VAM yields and
optimum solution in 80 percent of the sample
problems tested.