RIFT VALLEY UNIVERSITY

MBA Masters Program

Course title: Quantitative Analysis for

Management Decisions
Credit hours: 3

Name of the instructor: Terefe Zeleke (PhD)

Chapter One
 Chapter One: Introduction to Scientific Method
and Management Science

1.1. Overview of Management Science

 The scientific management revolution of the early 1900s,
initiated by Frederic W. Taylor.
o Taylor provided the foundation for the use of quantitative methods in
management.
 Modern management science research is generally considered to
have originated during the World War II.
o At this period, teams were formed to deal with strategic and tactical
problems faced by the military.
o Teams, which often consisted of people with diverse specialties (e.g.,
mathematicians, engineers, and behavioral scientists), were joined
together to solve a common problem by utilizing the scientific method.
• Developments that occurred during the post–World War II period
led to the growth and use of management science in non-military
applications.

• During the post World War II, researches conducted using

numerous methodological developments.

• The most significant development was the discovery by George

Dantzig, in 1947 of the simplex method for solving linear
programming problems.
 1.2. Problem Solving and Decision Making
Problem solving: 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.
 For justification and careful analysis of problem, the problem
solving process involves the following seven steps:
1. Identify and define the problem
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, and
7. Evaluate the results to determine whether a satisfactory solution has
been obtained
 Decision making: is the process of identifying, analyzing and
choosing the best alternative from many analyzed alternatives to
implement it.

 If there is no alternative, then there is no need to worry about

decision-making.

 It is the term generally associated with the first five steps of the
problem solving process.

 Thus, the first step of decision making is to identify and define

the problem.
 Decision making ends with the choosing of an alternative, which
is the act of making the decision.
 Quantitative management approach is a scientific method to
solve management problems in order to help managers to make
better decision.

 It encompasses a number of mathematically oriented

techniques that have either been developed within the field of
management science.

 Quantitative management approach can be applied to some

problems in a variety of different types of organizations
including government, military, business and health care
institutions, etc.
1.2. Quantitative Approach to Problem Solving
 The management science approach follows a generally
recognized ordered set of steps of the following:

Observation

Problem definition

Model
Construction
Feedback
Solution

Information
Implementation
1. Observation
 The first step in the application of quantitative management
approach is the identification of problem that exists in the
system of the organization.

 Thus, the system must be continuously and closely observed

so that problems can be identified as soon as they occur or are
anticipated.

 The problems are most of the time identified by a management

scientist, a person skilled in the techniques of management
approach and trained to identify problems.
2. Definition of the Problem
 Once the problem has been identified, it must be clearly and
concisely defined.
 Since the existence of a problem implies that the objectives of
the firm are not being met in some way, the goals or objectives
of the organization must be also clearly defined.
 The problem is an observed gap between what happened and
what ought to happen.
3. Model Construction 
 A management model is an abstract representation of an
existing problem situation.
 It can be in the form of a graph or a chart, but most frequently
it consists of a set of mathematical relationships that are made
up of numbers and symbols.
 Mathematical Models Cont’d

 Relate decision variables (controllable inputs) with

fixed or variable parameters (uncontrollable inputs).

 Frequently seek to maximize or minimize some

objective function subject to constraints.

 The values of the decision variables that provide the

mathematically-best output are referred to as the
optimal solution for the model.
07/09/21 11
 Mathematical Model Cont’d
 Models generally contain variables (controllable and
uncontrollable) and parameters. Controllable
variables are generally the decision variables and are
generally unknown.

 Parameters are known quantities that are a part of the

problem.

07/09/21 12
 The problem definition phase leads to a specific
objective, such as maximization of profit or
minimization of cost, and possibly a set of restrictions
or constraints, such as production capacities.

 The success of the mathematical model and quantitative

approach will depend heavily on how accurately the
objective and constraints can be expressed in terms of
mathematical equations or relationships.
 A mathematical expression that describes the problem’s
objective is referred to as the objective function.

07/09/21 TADESSE TIKO(PhD) 13

 Mathematical Models Cont’d
 Objective Function: – a mathematical expression that
describes the problem’s objective, such as maximizing
profit or minimizing cost.
 Constraints: – a set of restrictions or limitations, such
as production capacities.
 Uncontrollable Inputs:– environmental factors that are
not under the control of the decision maker.
 Decision Variables: – controllable inputs; decision
alternatives specified by the decision maker, such as
the number of units of Product X to produce.

07/09/21 14
 For example:
 A business firm that sells product costs of $5 to produce and
sells for $20. A model that computes the total profit that will
accrue from the item sold is:
Z = $20x - $5x
 ‘x’ represents the number of units of the products that are produced and
sold.
 ‘z’ represents the total profit that results from the sale of the
product.
 The symbols ‘z’ and ‘x’ are variables.
 In addition, ‘z’ is a dependent variable because its value is
dependent on the number of units sold.
 ‘x’ is an independent variable since the number of units sold is
not dependent on anything else ( in this equation).
 The numbers $20 and $5 are called parameters.
 Parameters are constant values that are generally coefficients of
variables (symbols) in the equation.
 Parameters usually remain constant during the process of solving
a specific problem.
 The parameter values are derived from data (piece of
information) from the problem environment.

 For example: The selling price of $20 and product cost of $5 could
be obtained from the firm’s accounting department and would be
very accurate.
 The equation as whole is known as a functional relationship.
 Profit, ‘z’ is a function of the number of units sold, ‘x’ and the
equation relates profit to units sold.
 In this case, the relationship is a model of the determination of profit
for the firm.

 The model construction also indicates the objective function

constraints.
 To understand the objective function constraints, let’s see the
following example:
 The product is made from steel and that the business firm has 100
pounds of steel available. If it takes 4 pounds of steel to make each
unit of the product, we can develop the following mathematical
relationship.

4x= 100b of steel

 This equation indicates that for every unit produced, 4 of the
available 100 pounds of steel will be used. Now our model
consists of two relationships.
 
Z= $20x-$5x
4x=100
 We can say that the profit equation in this new model is
called an objective function, and the resource equation is a
constraint.
 In other words, the objective of the firm is to achieve as
much profit, Z, as possible, but the firm is constrained from
achieving an infinite profit by the limited amount of steel
available.
 To signify this distinction between the two relationships in the
model, we will add the following notations:

Maximize Z = $20-$5x
Subject to 4x=100
 
 This model now represents the manager’s problem of
determining the number of units to be produced as ‘x’.

 Thus, when we determine the value of ‘x’, it represents a

potential or recommended decision for the manager. Therefore,
‘x’ is also known as a decision variable.
4. Model solution
 Once models have been constructed in management science,
they are solved using the management science techniques.
 When we refer to model solution, we also mean problem
solution.
 For the model developed above and presented as below;
Z= $20x-$5x
Subjected to 4x=100
 
 The solution technique is a simple algebra. Solving the
constraint equation for ‘x’, we have:

4x=100
x = 100/4
x = 25 units
 Substituting the value of 25 for x in to the profit function results
in the total profit as follows:

Z =$20x-$5x
Z= $ 20(25) - $5 (25)
Z= $375
 Thus, if the manager decides to produce 25 units of the product,
the business firm will receive $375 as profit.
 5. Implementation of the Decision 
 The quantitative approach provides information that can aid
the management in decision making.

 In making the ultimate decision, the manager must combine

the information obtained with his/ her own expertise and
experiences.

 If the manager does not use the information derived from the
management technique, the result are not implemented.

 If the results are not implemented, the effort and resources that
went in to problem definition, model construction and solution
are unnecessarily wasted.
1.4. Quantitative Analysis Techniques  
 The management science deals with many techniques that can
help managers to make decision under certainty and uncertainty
conditions.
 The decisions that can be made on certainty conditions depend
on experience and past data of the organization.
 Under certainty conditions, different types of mathematical
programming techniques can be used for making decision when
the existing data become difficult to manually compute.
 The programming used to identify this technique does not refer
to computer programming, but rather to a predetermined set of
mathematical steps used to solve a problem.
 The mathematical programming techniques assume that all parameters
in the model are known with certainty.

 Therefore, the solution results are assumed to be known with the

certainty, with no probability
 A technique that assumes certainty in its solution is referred to
as deterministic.
 The decisions under uncertainty conditions are made with the
different degree of decision maker´s optimism.
 Decisions under risk conditions are made with the use of
probabilistic techniques with some possibility that alternative
solutions might exist.
1.5. Classification of Quantitative Analysis
Techniques
 1.6. Characteristics of Modeling Techniques

 Probabilistic Techniques - results contain uncertainty (Chap 4

& 5)
 Network Techniques - model often formulated as diagram;
deterministic or probabilistic (Chap 6).

 Linear Mathematical Programming - clear objective;

restrictions on resources and requirements; parameters known
with certainty (Chap 2& 3)
 Other Techniques - variety of deterministic and probabilistic
methods for specific types of problems including Queuing
(Waiting line) model analysis (Chap 7).
 1.7. Decision Making Under Condition of Certainty

 In this type of decision making environment, there is only one

type of event that can take place.
 The decision maker has full and needed information to make
decision.

 The manager knows exactly what the outcome will be as he/she

has enough clarity about the situation, knows the resources, time
available for decision making.

 The nature of the problem itself, possible alternatives to solve the

problem, and undoubtedly clarity of certain with the result of
alternatives.
 In most situations, the solutions are already available from the
past experience or incidents and appropriate for the problem at
hand.
 For example: The decision to restock food supply, when the stock falls
below a determined level.

 In decision making under certainty, the situation can be mapped as

a table with one payoff column (One state of nature).

 Therefore, in making a decision, all one has to do is to compare all

the entries in the payoff column and select the alternative with the
highest profit or lowest cost.
 In executing such a comparison, one distinguishes
between two cases:

 When the number of alternatives is small, an approach

known as complete enumeration is used.

 When the number of alternatives is large, or even

infinite, it is important to search for the best solutions
with the aid of mathematical models.
 I. Complete Enumeration:
 Complete enumeration means examining every payoff,
one at a time, comparing the payoffs to each other and
discarding inferior solutions.
 The process continues until all payoffs are examined.
 Decision making under certainty involves the
following steps:
i. Determine the alternative courses of action;
ii.Calculate (assess) the payoffs, one for each course of
action;
iii.Select the one with the best payoff (largest profit or
smallest cost) either by complete enumeration or by the use
of mathematical model.
 Example: Assignment of employees to machines: A maintenance crew of three
mechanists is to be assigned to the repair of three machines on one- to- one basis
in a manner that minimizes repair time. Based on historical data, the supervisor
knows the exact time, which varies with each person-machine match as shown
below in the table.

Machine
A B C
Machinist

4 Repair
Jack 3 7
Time
Gelu 4 6 6

Melat 3 8 5
 By comparing the total repair time for all possibilities, it is found
that alternative a6 is the best since the total repair time is the
smallest as shown below.

Alternatives Total payoff

(Total repair time)
a1: Jack-A, Gelu-B, Melat- C 3+6+5= 14
a2: Jack A, Gelu-C, Melat- B 3+6+8 = 17
a3: Jack-B, Gelu-A Melat-C 7 +4+5 =16
a3: Jack-B, Gelu-C, Melat-A 7+6+3 = 16
a5: Jack-C, Gelu-A, Melat-B 4+4+8 = 16
a6: Jack-C, Gelu-B, Melat-A 4+6+3 = 13
 II. Computation with Mathematical Model
 While complete enumeration is an effective approach in
many situations, there are two cases in which it does not
work at all or works very poorly due to the following
reasons:
i. When there is infinite number of alternatives for solving
managerial problems such as allocation of resources, or
blending liquid materials.
To cope with these problems, models such as linear
programming are to be used.
ii.Problems with finite but large number of alternatives.
 In these cases, it is possible to enumerate all the alternatives,
but it may take years to do so even with the aid of high speed
computers. Therefore, special mathematical models need to be
used.