Introduction to Management Science (Part 1)

I hope you still remember what your high school teacher told you about Science.
Probably all of them said that Science is a body of knowledge. They must have also said
that this body of knowledge keeps expanding. How does knowledge expand? That is
because we constantly add to this already vast body of knowledge. What do we know
about COVID-19? Maybe a lot. Do we know about these things in the year 2016? No.
How come, "COVID-19 is caused by the SARS-CoV-2" is now generally accepted
knowledge? Simply because we added that information to the body of knowledge about
Science. Will we know more about COVID-19 in the future? We have to! Or else, we
might not be able to come up with a vaccine to immunize us from this disease.
How exactly is information added to a body of knowledge? Do we just dump pieces of
information into that body of knowledge? No. One feature of Science as a body of
knowledge is that its contents are subject to years of study, analysis, experimentation,
verification, and validation. Why is there a need for all of these? It is because we don't
want our body of knowledge to be contaminated with lies. You can pause right now and
think of what could happen if Science contained false claims.
Do we follow a system for preparing information to be added as scientific knowledge?
Yes. I'm sure your high school teacher has also mentioned the scientific method. The
scientific method usually contains steps like the following:
This scientific method is foundation of management science. You might have picked up
the idea in the course description that a manager will have to make a lot of decisions
for the organization he is tasked to manage. This course will be full of simulations what
will greatly enhance your decision making skills. Anyway, to define manage science: it
is an approach to decision making based on the scientific method . As you may have
also picked up in the course description, management science extensively uses
quantitative analysis. Management science is often referred to as operations
research or decision science. 
Decisions are made by managers as a solution to management problems. If there is a
looming management problem, it creates a certain situation and a desired state. Let's
take a non-business example for easy understanding. Your jowa doesn't want to hold
your hand (situation created by the problem). Of course, as a clingy jowa, you don't
want that problem to drag on. You want the problem fixed as soon as possible so that
you and your jowa will hold hands (desired state). It turns out, your palms are
profusely sweating (problem). Every time your jowa holds your hands, he feels like he
is holding a wet rug that can be wrung. You know that the problem is solved if the
desired state is achieved. If you are able to stop your hands from sweating profusely,
your jowa and you can now hold hands. Problem solving therefore can be defined
as the process of identifying a difference between the actual and the desired state of
affairs and then taking action to resolve the difference .
Problem (or research question) identification is one of the first steps in the scientific
method. In the version depicted above, it is the second step. In our study of problem
solving in the context of management, identification of the problem is the first one. The
rest of the steps in problem solving are as follows:
2. Determine the set of alternative solutions.
3. Determine the criterion or criteria that will be used to evaluate the alternatives.
4. Evaluate the alternatives.
5. Choose an alternative.
6. Implement the selected alternative.
7. Evaluate the results to determine whether a satisfactory solution has been obtained.
The similarity between the problem solving process in management science and that of
the scientific method is a manifestation that some aspects of management can be
scientific. Results gathered from the problem-solving process contributes to the
management “body of knowledge”, which contain actions proven to have solved a
certain management problem.
Introduction to Management Science (Part 2)
In this lesson, we try to look at decision making at a shallow level first. We will go back
to and have a deeper understanding of decisions and its financial implications at a later
time, in the final term, particularly under Lesson #8.
Decisions are needed in business, just like in our ordinary lives. A major decision you
had to make recently was whether to proceed or not with your college education despite
this COVID-19 situation we are having. What were the the factors affecting your
decision? I'm sure there is a lot. In the context of our lesson, let's call
them criteria (singular: criterion). But for purposes of illustration, let's just say you are
born of a rich family where money and other resources was never an issue. For sure,
factors like school fees, gadgets for online learning, funds for internet connectivity will
not affect the decision, which will now only boil down to, let's say, safety. This is an
example of a single-criterion decision problem. The term is quite easy to understand. It is
a problem that is affected only by a single decision factor. Going back to the illustration,
the decision to be made will be easy -- if the threat of the pandemic is still strong, the
decision to be made is to not enroll. If it is now safe to go back to the classroom, the
decision to be made is to enroll. However, remember that most problems a manager
face will be multi-criteria decision problems. Going back to the illustration, let's assume
that safety is not the only concern. Internet connectivity, costs of enrollment, gadgets to
use are also criteria to be considered. The alternative courses of action must be
evaluated against these criteria. After these alternatives are evaluated, the best
alternative is chosen. That best alternative is called decision.
The decision making process can be divided into two major steps: Structuring the
problem and Analyzing the problem. Let us relate this to your actual accounting problem
solving. Imagine you are taking a departmental quiz. What is the first thing you do? You
read the problem, you look at some details, you look at the requirements of the problem.
What that actually does is providing a structure of the problem so that in evaluating the
alternatives, you will know what answer you're looking for. As soon as you come to the
part where you evaluate alternatives, that is the part where you turn on your calculator
and start solving. This illustration will help you understand the decision making process
and its two major steps:
In the "evaluate the alternatives" step, this is where quantitative techniques come in.
Like I said previously, in this step is where you usually turn on your calculator and start
solving. Before going deeper to quantitative analysis, let us compare it with qualitative
analysis:
Qualitative Analysis
 is based primarily on the manager’s judgment and experience
 used if the manager has experience dealing with the problem
 it includes the manager’s intuitive “feel” for the problem
 more an art than a science.
Quantitative Analysis
 is based on mathematical relationships established by using quantitative facts and data
 used if the manager has little or no experience dealing with the problem, or if the
problem is complex
 the manager’s intuition is not taken into consideration
 more a science than an art
Why will a quantitative approach be used in the decision-making process? The following
are some reasons:
1. The problem is complex, and the manager cannot develop a good solution without the
aid of quantitative analysis.
2. The problem is especially important (e.g., a great deal of money is involved), and the
manager desires a thorough analysis before attempting to make a decision.
3. The problem might be new, and the manager has no previous experience from which to
draw.
4. The problem is repetitive, and the manager saves time and effort by relying on
quantitative procedures to make routine decision recommendations.
Quantitative analysis begins once the problem has been structured, but before
quantitative analysis can be done, the situation must first be converted into a
representation. These representations of real objects or situations are called models.
These models can be presented in various forms.
The first form of models used in quantitative analysis is called the iconic model. The
iconic model is a physical replica of the real object. This is used to have a feel of how
something would look like, and in some models, how it would function.
Example of an iconic model:

 
The second form is called the analog model. Analog models are also physical, like iconic
models, but do not have the same physical appearance as the object being modeled.
Here is an example of an analog model:
The speedometer, although physical, is not a replica of another physical thing, but
rather, it represents the speed of a car.
 
The last form is called the mathematical model. Mathematical models are
representations of a problem by a system of symbols and mathematical relationships or
expressions. The mathematical model must be so accurate that it captures a certain
situation. To help you better understand how mathematical models work, let us take a
simple situation. Assume that you are a seller of washable, non-surgical masks. You
want to know how much profit you are going to create when you sell different quantities
of your product. How is profit computed? We all know that profit is revenue minus all the
costs. Assume that you made 100 masks today, and it cost you Php 1,000 pesos to
make all the masks. You want to sell each mask for Php 30 each.
How are we going to represent the above situation mathematically? Let us start with the
revenue. The function R(x) = 30x captures the revenue situation very well. This
mathematical function just means that you are going to generate Php 30 for every mask
you sell. What if we sell:
 1 mask? Then R(1) = (30)(1) = 30
 2 masks? Then R(2) = (30)(2) = 60
 5 masks? Then R(5) = (30)(5) = 150
Now we have a revenue model that works for any number of masks you would want to
sell. If you want to sell 750 masks, then just substitute x with 750. R(750) = (30)(750) =
Php 22,500.
We now proceed with costs. The function C(x) = 10x captures the cost situation very
well. For your current production of 100 masks, you incurred a total of Php 1,000. Let us
assume that all costs are variable for easier understanding. That would mean you
spend Php 10 per mask produced. Now, what if we sell:
 1 mask? Then C(1) = (10)(1) = 10
 2 masks? Then C(2) = (10)(2) = 20
 5 masks? Then C(5) = (10)(5) = 50
Now we have a cost model that works for any number of masks you would want to sell. If
you want to sell 750 masks, then just substitute x with 750. C(750) = (10)(750) = Php
7,500.
Lastly, the profit model. Remember that Profit = Revenue - Costs. We already have our
Revenue and Cost models, so we just substitute. After substituting, we have an initial
profit model: P(x) = R(x) - C(x). Let us try different values of x:
 1 mask: P(1) = R(1) - C(1) = 30 - 10 = 20
 2 masks: P(2) = R(2) - C(2) = 60 - 20 = 40
 5 masks: P(5) = R(5) - C(5) = 150 - 50 = 100
 750 masks: P(750) = R(750) - C(750) = 22,500 - 7,500 = 15,000
You might already start noticing a pattern here. Let us go back to our initial profit model:
P(x) = R(x) - C(x). Let us incorporate the revenue and cost models into the profit model
by substituting R(x) and C(x) with 30x and 10x, respectively. We obtain P(x) = 30x - 10x.
We have like terms here (both terms, 30x and 10x, have the variable x) meaning it is
safe to perform subtraction. We then arrive at the function P(x) = 20x. This is a simpler
model. Let us test this function with the values of x we previously used:
 1 mask: P(1) = 20(1) = 20
 2 masks: P(2) = 20(2) = 40
 5 masks: P(5) = 20(5) = 100
 750 masks: P(750) = 20(750) = 15,000
Quantitative Analysis is done by:
1. Model development
2. Data preparation
3. Model solution
4. Report generation