Introduction to Management Science

9th Edition
by Bernard W. Taylor III

Chapter 1
Management Science

© 2007 Pearson Education

Chapter 1- Management Science 1

Chapter Topics

 Origin / History of OR
 What is OR: Many definitions
 The Management Science Approach to Problem Solving
 Model Building : Break-Even Analysis
 Computer Solution
 Management Science Modeling Techniques
 Business Usage of Management Science Techniques
 Management Science Models in Decision Support
Systems

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 Origin / History of Operations Research (OR)

 The first formal activities of OR were initiated in England

during World War II, when a team of British and
American scientists set out to make scientifically based
decisions regarding the best utilization of limited military
resources to the various military operations and the
activities within each operation.

 In effect, they were asked to do research on (military)

operations. These teams of scientists were the first OR
teams.

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 What is Operations Research (OR): Many
Definitions

• OR or MS is the application of a scientific approach to solving

different problems in order to help decision maker or managers
make better decisions.

• OR is the application of modern methods of mathematical science

to complex problems involving management of large systems of
human, machines, materials and money in industry, business,
government and defense. The distinct approach is to develop a
Scientific Model of the system incorporating measurement of
factors such as chance and risks to predict and compare the
outcomes of alternative decisions, strategies or controls.

• OR is concerned with optimal decision making in and modeling of

deterministic and probabilistic systems originate from real life.

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 What is Operations Research/MS: A
Comprehensive Definition
 Operations Research is the scientific approach
to execute decision making, which consists of:
 The art of mathematical modeling of complex
situations
 The science of the development of solution
techniques used to solve these models
 The ability to effectively communicate the
results to the decision maker

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 Success of OR: Post World War
II
• Immediately after World War II, success of military
teams attracted the attention of industrial managers, who
were seeking solutions to their problems. In U.K. OR
does the critical effect on it’s economy specially in
production efficiency and creation of new markets.

• Consequently OR soon spread from military to

government, industries and social and economical
planning in different countries.

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 Success of OR: Post World War
II (Contd…..)
• To increase the impact of OR, the OR Society of America
was formed in 1950. In 1953, the Institute of Management
Sciences (IMS) was established. In 1959 International
Federation of OR Societies was established and in many
countries International Journals on OR began to appear.
Some of them are in English and listed below:

 Operations Research
 Opsearch
 Operational Research Quarterly
 Management Science
 Transportation Science
 Mathematics of Operations Research

Chapter 1- Management Science 7

 Impact of OR
• Operations research has had an impressive impact on
improving the efficiency of numerous organizations around
the world. In the process, OR has made a significant
contribution to increasing the productivity of the economics
of various countries.

• To give you a better notion of the wide applicability of OR,

we list some actual award winning applications published in
International Federation of Operational Research Societies
(IFORS) as given below in Table 1.1. Note the diversity of
organizations and applications in the first two columns.

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 Impact of OR: (Contd…….)
 Some applications of OR.
Organization Nature of Application Year of Annual
Publication Savings
The Netherlands Develop national water management policy, 1985 $15
Rijkswaterstaat including mix of new facilities, operating million
procedures, and pricing.
AT&T Develop a PC-based system to guide 1993 $750
business customers in designing their call million
centers.
Digital Equipment Restructure the global supply chain of 1995 $800
Corp. suppliers, plants, distribution centers, million
potential sites, and market areas.
China Optimally select and schedule massive 1995 $425
projects for meeting the country’s future million
energy need.
 Ref . from book: Introduction to OR by Hillier / Lieberman, 7 / e p-29.
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 Scenario 1: Dynamic Vehicle

Routing
The Vehicle Routing Problem (VRP)
is a generalization of the TSP .
 VRP consists in determining m
vehicle routes, where a route is a
tour that begins at the depot, visits a
subset of the customers in a given
order & returns to the depot.
 All customers must be visited
exactly once and the total customer
demand of a route must not exceed
the vehicle capacity.
 OBJECTIVE of VRP is to minimize
the overall distribution costs.
 Constraints:
 Total route time
 The time to service begin.
Traveling Salesman Problem (TSP):
 Geographic location.
A salesman is to visit a set of cities and return to the
 Actual demand, may not be known
city he started in. The objective is to minimize the total
at the time of starting his service.
distance traveled by the salesman.
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 Scenario 2: Cost Decision
 You have a5-week business
commitment b/w Karachi (K) to Lahore
(L). You departs Karachi on Monday &
returns on Wednesday; same week.
 Regular round trip costs: Rs. 10,000 but
20% discount is granted if dates cover
weekend.
 One-way ticket in either direction: 75%
of regular price
Question:
How you should buy the ticket for 5-week
period?
 Three basic questions:
 Decision alternatives ??
 Constraints ??
 Objective criterion to evaluate
Answer: alternatives
You should ??choose Alternative 2.
Chapter 1- Management Science
 Three possible alternatives:
 5-regular K-L-K flights; Monday depart,
Wednesday return; same week.
 Buy 1-one way Monday depart (K-L), 4-
weekend one (L-K-L) & 1-one way
Wednesday arrive (L-K).
 Buy 1-one way (K-L), 4-weekend one (L-
K-L) & 1-one way arrive (L-K).
 Constraint:
 Same week Mon. depart, Wed. return to
Khi.
 Objective Criterion for Evaluation:
 The price of ticket
 Best alternative: Yields smallest cost.
 Solution:
 Cost 1: 5 * 10,000 = Rs. 50,000
 Cost 2: 5 * (0.8 * 10,000) = Rs. 40,000
 Cost 3: 0.75 * 10,000 + 4 * (0.8 *
10,000) + 0.75 * 10,000 = Rs. 47,000
11
 W1: arrival = Monday (k-l) --- T1 (one way)
 W1: depart = Wednesday (L-K-L) -- T2
 W2: arrival = Monday (L-K-L) ----- T2
 W2: depart = Wednesday (L-K-L) -- T3
 W3: arrival = Monday (L-K-L) ----- T3
 W3: depart = Wednesday (L-K-L) -- T4
 W4: arrival = Monday (L-K-L) ----- T4
 W4: depart = Wednesday (L-K-L) -- T5
 W5: arrival = Monday (L-K-L) ----- T5
 W5: depart = Wednesday (l-k) ---- T1 (one way)

Chapter 1- Management Science 12

 What is a Model ?
 Models:
 An approximation/abstraction of real world
including its essential elements, which is
constructed by establishing relationships among
various variables/components of the system.

Chapter 1- Management Science 13

 Types of Models
 Models by Structure:
 Iconic Model:
 A toy car for a real car
 Analogue Models:
 Set of properties for another set.
 Green color is used to represent grass on map.

 Warehousing and layout problems

 Symbolic or Mathematical Model:

 Variables by symbols and letters.
 Resource allocation and transportation models.

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 Types of Models
 Classification by Utility: (depending on use &
purpose)
 Descriptive Models: Explain & predict facts & r/ships among
the diff. activities of problem. Don’t have objective functions,
use to evaluate decision alternatives.
 Predictive Model: Based on data collected. Predicts possible
outcome of the situation. Like prediction of your exam results.
 Prescriptive Model: With a successful prediction from
predictive model, the courses of actions are prescribed to take.
Like, Action taken by manager to achieve the desire goals.

Chapter 1- Management Science 15

 Types of Models
 Classification by Nature of Environment:
 Deterministic:
 Used, when all parameter, values of variables, constants,
resources and its r/ship are complete or known with certainty
and expected not to be changed during planning.
 Linear Programming.

 Probabilistic /Stochastic:
 Used, when values of variables can’t be predicted accurately
due to the probability. Presence of risk.
 Degree of certainty varies from situation to situation.

 Sales of insurance policies by Ins. Comp.to its customers

Chapter 1- Management Science 16

 Types of Models
 Classification by behavior of problem variable:
 Static Model:
 Assumes, no changes occur in the values of variables during
planning horizon due to change in environment /conditions of
system.
 Values independent of time

 Dynamic Model:
 Values of the variables keep on changing with many factors
(including time, environment, conditions).
 There is a series of interdependent decisions during the
planning period.

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 Types of Models
 Classification depending on the methods of getting
solution:
 Analytical Model:
 Has well-defined mathematical structure & can be solved only by using some
mathematical techniques.
 Resource Allocation (Graphical & Simplex Method), Transportation,
Assignment, Sequencing models.
 Simulation Model:
 Simulation is done by duplicating the features of the problem in a working
model, then solved by OR techniques.
 Results are tested for sensitivity analysis, then applied to original problem.
Needs some experimental analysis.
 Do have some mathematical structure but can’t be solved by math. techniques.

Chapter 1- Management Science 18

The Management Science Approach

 Management science uses 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,

Decision Sciences, etc., involves a philosophy of problem solving in
a logical manner.

Chapter 1- Management Science 19

The Management Science Process

Figure 1.1
The Management Science Process

Chapter 1- Management Science 20

Steps in the Management Science Process

Observation - Identification of a problem that exists (or may

occur soon) in a system or organization.
Definition of the Problem - 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.

Chapter 1- Management Science 21

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.

Chapter 1- Management Science 22

Example of Model Construction (2 of 3)

Variables: X = number of 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

Chapter 1- Management Science 23

Example of Model Construction (3 of 3)

Model
Solution
Consider the constraint equation:

4x = 100
or 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)

Chapter 1- Management Science 24

Classification of Management Science Techniques

Figure 1.6 Modeling Techniques

Chapter 1- Management Science 25
 Characteristics of Modeling Techniques

 Linear Mathematical Programming - clear objective;

restrictions on resources and requirements; parameters
known with certainty.
 Probabilistic Techniques - results contain uncertainty.
 Network Techniques - model often formulated as diagram;
deterministic or probabilistic.
 Forecasting and Inventory Analysis Techniques -
probabilistic and deterministic methods in demand
forecasting and inventory control.
 Other Techniques - variety of deterministic and
probabilistic methods for specific types of problems.

Chapter 1- Management Science 26

 Business Use 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)

Chapter 1- Management Science 27

Management Science Models
Decision Support Systems (1 of 2)
 A decision support system (DSS) is a computer-based
system that helps decision makers address complex
problems that cut across different parts of an organization
and operations.
 A DSS is normally interactive, combining various
databases and different management science models and
solution techniques with a user interface that enables the
decision maker to ask questions and receive answers.
 Online analytical processing system (OLAP), the
analytical hierarchy process (AHP), and enterprise
resource planning (ERP) are types of decision support
systems.
 Decision support systems are most useful in answering
“what-if?” questions and performing sensitivity analysis.

Chapter 1- Management Science 28

Management Science Models
Decision Support Systems (2 of 2)

Figure 1.7 A Decision Support System

Chapter 1- Management Science 29
End of Chapter

Chapter 1- Management Science 30