1.taylor Introms12 PPT 01

Management Science
Chapter 1
Copyright © 2016 Pearson Education, Ltd. 1-1

Chapter Topics
 The Management Science Approach to Problem Solving

 Management Science and Business Analytics
 Model Building: Break-Even Analysis
 Computer Solution
 Management Science Modeling Techniques
 Business Usage of Management Science Techniques
 Management Science Models in Decision Support
Systems

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.
The Management Science Process
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 decision variables, objective function
and constraints of the problem.
 Model Solution - Models 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:
Solve the constraint equation:
4x = 100
(4x)/4 = (100)/4
x = 25 units
Substitute this value into the profit function:

Z = $20x - $5x
= (20)(25) – (5)(25)
= $375
(Produce 25 units, to yield a profit of $375)
Management Science
and Business Analytics
 Business analytics uses large amounts of
data with management science techniques
to help managers make decisions
 Brings together information technology,
statistics, management science, and
mathematical modeling
 Big data

Model Building:
Break-Even Analysis (1 of 9)
■ Used to determine the number of units of a product to

sell or produce that will equate total revenue with total
cost.
■ The volume at which total revenue equals total cost is

called the break-even point.
■ Profit at break-even point is zero.

Model Building:
Model Components
 Fixed Cost (cf) - costs that remain constant regardless of
number of units produced.
 Variable Cost (cv) - unit production cost of product.
 Volume (v) – the number of units produced or sold
 Total variable cost (vcv) - function of volume (v) and

unit variable cost.
Model Building:
Model Components
 Total Cost (TC) - total fixed cost plus total variable cost.
TC  c f  vcv
 Profit (Z) - difference between total revenue vp (p = unit

price) and total cost, i.e.
Z  vp - c f - vcv

Model Building:
Computing the Break-Even Point
The break-even point is that volume at which total
revenue equals total cost and profit is zero:
vp  c f  vcv  0
v ( p  cv )  c f
The break-even point cf

v
p  cv
Model Building:
Example: Western Clothing Company
Fixed Costs: cf = $10000

Variable Costs: cv = $8 per pair
Price : p = $23 per pair
The Break-Even Point is:
v = (10,000)/(23 -8)
= 666.7 pairs of jeans

Model Building:
Figure 1.2 Break-even model

Model Building:
Figure 1.3 Break-even model with an increase in price

Model Building:
Figure 1.4 Break-even model with an increase in variable cost

Model Building:
Figure 1.5 Break-even model with a change in fixed cost

Break-Even Analysis: Excel Solution (1 of 4)
Formula for v,
break-even point,
=D4/(D8-D6)
Exhibit 1.1

Break-Even Analysis: Excel QM Solution (2 of 4)
Click on “Excel QM,” then on

Alphabetical” list of models
and select “Breakeven Analysis”
Enter model
parameters in
cells B10:B13
Exhibit 1.2
Break-Even Analysis: Excel QM Solution (3 of 4)
Exhibit 1.3 Western Clothing Company in QM

Break-Even Analysis: QM Solution (4 of 4)
Exhibit 1.4 QM break-even graph for Western Clothing Company

Classification of Management Science Techniques
Figure 1.6 Classification of management science techniques

Characteristics of Modeling Techniques
 Linear Mathematical Programming - clear objective;

restrictions on resources and requirements; parameters
known with certainty. (Chap 2-6, 9)
 Probabilistic Techniques - results contain uncertainty.
(Chap 11-13)
 Network Techniques - model often formulated as
diagram; deterministic or probabilistic. (Chap 7-8)
 Other Techniques - variety of deterministic and
probabilistic methods for specific types of problems
including forecasting, inventory, simulation, multicriteria,
AHP (analytic hierarchy process), etc. (Chap 9, 14-16)
Business Usage of Management Science
 Some application areas:

- Project Planning
- Capital Budgeting
- Inventory Analysis
- Production Planning
- Scheduling
 Interfaces - Applications journal published by Institute
for Operations Research and Management Sciences
(INFORMS)

Management Science Models in
Decision Support Systems (DSS)
A decision support system is a computer-based system that helps
decision makers address complex problems that cut across different
parts of an organization and operations.
Features of Decision Support Systems

 Interactive
 Uses databases & management science models
 Address “what if” questions
 Perform sensitivity analysis
Examples include:
ERP – Enterprise Resource Planning
OLAP – Online Analytical Processing

Management Science Models
Decision Support Systems (2 of 2)
Figure 1.7 A decision support system


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Management Science

Copyright © 2016 Pearson Education, Ltd. 1-1

 The Management Science Approach to Problem Solving

Copyright © 2016 Pearson Education, Ltd. 1-2

 Management science is a scientific approach to solving

Figure 1.1 The management science process

 Observation - Identification of a problem that exists (or may occur

Copyright © 2016 Pearson Education, Ltd. 1-5

Information and Data:

Variables: x = # units to produce (decision variable)

Substitute this value into the profit function:

Copyright © 2016 Pearson Education, Ltd. 1-9

■ Used to determine the number of units of a product to

■ The volume at which total revenue equals total cost is

■ Profit at break-even point is zero.

Copyright © 2016 Pearson Education, Ltd. 1-10

 Variable Cost (cv) - unit production cost of product.

 Volume (v) – the number of units produced or sold

 Total variable cost (vcv) - function of volume (v) and

 Profit (Z) - difference between total revenue vp (p = unit

Copyright © 2016 Pearson Education, Ltd. 1-12

The break-even point cf

Example: Western Clothing Company

Fixed Costs: cf = $10000

The Break-Even Point is:

Copyright © 2016 Pearson Education, Ltd. 1-14

Figure 1.2 Break-even model

Copyright © 2016 Pearson Education, Ltd. 1-15

Figure 1.3 Break-even model with an increase in price

Copyright © 2016 Pearson Education, Ltd. 1-16

Figure 1.4 Break-even model with an increase in variable cost

Copyright © 2016 Pearson Education, Ltd. 1-17

Figure 1.5 Break-even model with a change in fixed cost

Copyright © 2016 Pearson Education, Ltd. 1-18

Copyright © 2016 Pearson Education, Ltd. 1-19

Click on “Excel QM,” then on

Exhibit 1.3 Western Clothing Company in QM

Exhibit 1.4 QM break-even graph for Western Clothing Company

Copyright © 2016 Pearson Education, Ltd. 1-22

Figure 1.6 Classification of management science techniques

 Linear Mathematical Programming - clear objective;

 Some application areas:

Copyright © 2016 Pearson Education, Ltd. 1-25

Features of Decision Support Systems

Copyright © 2016 Pearson Education, Ltd. 1-26

Figure 1.7 A decision support system

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