Management

Science
Prof. Yonardo A. Gabuyo
Course Outcomes
 At the end of the course, the students will be able to:
 Explain the management science approach to
identification, analysis, decision, and implementation of
problem solving.
 Discuss management problems that can be analyzed by
linear programming.
 Demonstrate the transportation method to solve problems
manually and with the northwest corner method.
Course Outcomes
 At the end of the course, the students will be able to:
 Explain the importance of forecasting in organizations.
 Describe the EOQ model and its variations or expansions.
 Construct models for a variety of PERT/CPM.
 Illustrate the decision tree method of analysis for decision
making under risk and under certainty and expected value.
Module 1 (Introduction)
Problem Solving and Decision Making
Quantitative Analysis and Decision Making
Quantitative Analysis
Model of Cost, Revenue, and Profit
Management Science Techniques
 What is Management Science?

can be defined as a concept that is

“concerned with developing and applying
models and concepts that help to illuminate
issues and solve managerial problems”
Lancaster University.
 What is Management Science?
Management Science is a mathematical approach to
solving problems, the application of it requires the
examination of different fields.
Management Science uses analytical data, statistics
and methods for increasing efficiency of management
systems and it finds the tools from fields like:
 Economics, Business Administration, Psychology,
Sociology
Management Science makes a few General
Assumptions of Management.
The assumptions are:
 Management is a problem-solving mechanism, which can be
boosted by mathematical tools and techniques.
 Problems in management can be quantified and described in
mathematical terms.
 Managerial problems can best be resolved through
mathematical tools, simulations and models.
 Some Benefits of Management Science
 ability to design measures that can be used to identify
and evaluate the effectiveness of the processes
currently in use.
 looks at the current situation and compares it with
other possibilities, creating measurable predictions.
 Some Benefits of Management Science
 analysis of processes and decision-making can help
the organization identify the problem areas, as well as
the systems that are already working efficiently.
 using processes and decision-making approaches that
provide the best results in terms of the achieving the
organization’s objectives.
 Problem Solving and Decision Making

Problem Solving is a process of

identifying a difference between the
actual and the desired state of affairs
and then taking action to resolve the
difference.
Problem solving is an analytical process
used to identify the possible solutions to
the situation at hand.
Making decisions is a part of problem
solving.
Problem solving is a complex process, and
judgement calls – or decisions – will have
to be made on the way.
 Problem Solving and Decision Making

Decision Making is a term generally

associated with the first five steps of the
problem-solving process.
Hence, the first steps of decision making
is to identify and define the problem and
ends with the choosing of alternative
which is an act of making the decision.
Decision making is a choice made by using one’s
judgement. The art of making sound decisions is a
particularly important skill for leaders and
managers.
 You may need to make numerous decisions as
part of the problem-solving process.
Leaders and managers will need to use their
decision-making skills to determine which solution
to pursue.
Steps in Decision Making
1. Use problem solving to identify potential solutions –
this may involve decision making, such as deciding to
hold meetings with stakeholders or assigning team
members to tackle particular areas of the problem
2. Determine which solution is the best fit for the
problem at hand
3. Make a decision on next steps to action the chosen
solution
Steps of Problem Solving Process
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 alternatives
6. Implement the selected alternative
7. Evaluate the results to determine whether a
satisfactory solution has been attained
 Define the
Problem

Identify the
Alternatives

Decision
Determine
the Criteria Making

Problem Evaluate the

Alternatives
Solving
Choose an
Alternative

Implement Decision
the Decision

Evaluate the
Results

Figure 1. The relationship between problem solving and decision making

 Structuring the Problem Analyzing the Problem

Define Determine
Identify the Evaluate the Choose an
the Alternatives the Alternatives Alternative
Problem Criteria

Figure 1.2 An alternate classification of the decision-making process

 Analyzing the Problem

Qualitative
Structuring the Problem Analysis

Define Determine
Identify the Summary
the the Make the
Alternatives and
Problem Criteria Decision
Evaluation

Quantitative
Analysis

Figure 1.3 The role of qualitative and quantitative analysis

 Qualitative Analysis
is based primarily on the manager’s judgment
and experience; it includes the manager’s
intuitive ‘feel’ for the problem and it is more on
art than a science.
 Quantitative Analysis
analysis of a situation or event, especially a
financial market, by means of complex
mathematical and statistical modeling.
uses subjective judgment to analyze a
company's value or prospects based on non-
quantifiable information, such as management
expertise, industry cycles, strength of research
and development, and labor relations.
Quantitative Approach in Decision Making Process
The problem is complex, and the manager
can not develop a good solution without the
aid of quantitative analysis.
The problem is especially important and the
manager desires a thorough analysis before
attempting to make decision (great deal of
money)
Quantitative Approach in Decision Making Process
The problem is new, and the manager has no
previous experience from which to draw.
The problem is repetitive, and manager save
time and effort by relying on effort quantitative
procedures to make routine decision
recommendations.
Quantitative Analysis

Model Development
Models are representations of real objects or
situations and can be represented in various
forms.
Examples: a scale model of an airplane is a
representation of a real airplane.
A child’s toy truck is a model of real truck.
Model Development
a scale model of an airplane is a
representation of a real airplane.
a child’s toy truck is a model of real truck.
These are physical replicas of a real objects
and referred to as iconic models
Model Development
Analog models include models that are physical
in form but do not have the same physical
appearance as the object being modeled.
Examples: the speedometer of an automobile is
an analog model-the position of the needle on
the dial represents the speed of the mobile.
A thermometer is analog model representing
temperature.
Model Development
Mathematical models includes representations of
a problem by a system of symbols and
mathematical relationships or expressions.
Are critical part of any quantitative approach to
decision making.
Example: the total profit from the sale of a
product can be determined by multiplying the
profit per unit by quantity sold.
Model Development
If we let x represent the number of units sold
and P the total profit, then a profit per unit of
P10 per unit.
P = P10x be the mathematical model defines
the total profit earned by selling x units.
Model Development
If we let x represent the number of units sold
and P the total profit, then a profit per unit of
P10 per unit.
P = P10x be the mathematical model defines
the total profit earned by selling x units.
Model Development
Allows a quick identification of the profit without
actually requiring the manager to produce and
sell x units of product.
Models reducing the risk associated with
experimenting the real life situation.
The value of model-based conclusions and
decisions is dependent on how well the
represent real situation
Model Development
The success of mathematical model and quantitative
approach will depend heavily on how accurately the
objectives and constraints can be expressed in terms
of mathematical equations or relationships.
Objective function is a mathematical expression that
describe the problem’s objective. These are introduce
by the word “maximize” or “minimize”.
Model Development
Constraints are limitations and introduce by the phrase
”subject to”. These are expressed in equations or
inequalities.
Explicit constraints are conditions in the problem which are
expressed into a mathematical sentences.
Implicit constraints are those that are implied. The condition
that the variable representing in the problem that the quantity
is always positive. Such as time or raw materials must be
expressed as positive.
Model Development
Objective Function:

Maximize P = 10x
 Constraints:

Subject to:
1. 5x ≤ 40 – explicit constraint
2. x ≥ 0 – implied constraint
 Uncontrollable Inputs
(Environmental Factors)

Controllable Inputs Mathematical Output

(Decision Variables) Model (Projected Results)

Figure 1.4 flowchart of the process of transforming model inputs into output
Uncontrollable inputs such as environmental
factors can be affected both the objective
function and constraints. The profit per unit,
the production time per unit and the production
capacity are environmental factors that are not
controlled by the manager.
Controllable inputs are inputs that are
completely controlled by the manager. The
production quantity x is under the controllable
input.
Decision variables are the controlled inputs as
decision alternatives specified by the manager.
Once the Controllable and uncontrollable
inputs are specified, the objective function and
the constraints can be evaluated so that the
output of the model determined.
In this case the output of the model is simply
the projection of what would happen if those
particular environmental factors and decisions
occurred in real situation.
 Uncontrollable Inputs
10 Profits per Unit ($)
5 Production Time per Unit (Hours)
40 Production Capacity (Hours)

Value for the Max 10 (8) Profit = $80

s.t.
Production
5(8) ≤ 40 Time Used = 40
Quantity 8 ≥ 0 Hours
( x = 8) Mathematical
Controllable Inputs Model Output

Figure 1.5 Flowchart for the production model

Deterministic Model if all uncontrollable
inputs to model are known and cannot vary.
Example: Company’s tax rate are not the
influence of the manager and thus constitute
the uncontrollable input in many decision
models.
The distinguishing feature of a deterministic
model is that the uncontrollable input values
are known in advance.
ProbabilisticModel if any uncontrollable inputs
are uncertain to decision maker. An
uncontrollable input to many production
planning model is demand for the product.
The mathematical model that treats future
demand- which may be range of values-with
uncertainty called stochastic or probabilistic
model.
In the production model, the number of hours
required in the production time required per
unit, the total number of hours available, the
unit profit were all were all uncontrollable
inputs and known for fixed values then the
model is deterministic. But if the number of
production time will vary from 3 to 6 hours
depending of the quality of the raw material,
then the model is stochastic.
The distinguishing feature of a stochastic
model is that the value of the output can not
be determined even if the value of the
controllable input is known because specific
values of the uncontrollable inputs are
unknown. Stochastic model is more difficult to
analyze.
Data Preparation
 another step of quantitative analysis of
problem is to prepare the required data by
the model. Data refer to the values of
uncontrollable inputs to the models.
All uncontrollable data must be specified
before we can analyze the model and
recommend a decision or solution to a
problem.
Model Solution
After the model development and data
preparation steps are completed proceed to
the model solution step.
The analyst will attempt to identify the values
of the decision variables that provide the best
output for the model.
Model Solution
The specific decision variable value/s providing
the best output is known as optimal solution.
For production model, the model solution step
involves finding the value of the production
quantity decision variable x that maximize the
profit while not causing a violation the
production capacity constraints.
Model Solution
Infeasible if a particular decision alternative
does not satisfy one of the model constraints
then the decision alternative is being rejected
regardless of the value of the objective function.
If all constraints are satisfied, the decision
alternative is feasible and a candidate for best
solution or recommended solution.
 Uncontrollable Inputs
10 Profits per Unit ($)
5 Production Time per Unit (Hours)
40 Production Capacity (Hours)

Value for the Max 10 (8) Profit = $80

s.t.
Production
5(8) ≤ 40 Time Used = 40
Quantity 8 ≥ 0 Hours
( x = 8) Mathematical
Controllable Inputs Model Output

Figure 1.5 Flowchart for the production model

Report Generation
Decision Alternative Projected Total Hours of Feasible Solution?
(Production Quantity x) Profit Production (Hours used ≤ 40)

0 0 0 Yes
2 20 10 Yes
4 40 20 Yes
6 60 30 Yes
8 80 40 Yes
10 100 50 No
12 120 60 No
Report Generation
An important part of the quantitative analysis is the
preparation of managerial reports based on the
model’s solution.
The results of the model must appear in the
managerial report that can be easily understood by
the decision maker.
The report includes the recommended decision and
other pertinent information about the results that
may be helpful to decision maker.
Implementation
The manager must oversee the implementation
and follow-up evaluation of the decision.
Manager should continue to monitor the
contribution of the model during the
implementation and follow-up.
Models of Cost, Revenue, and Profit
The cost of manufacturing or producing a
product is a function of the volume produced.
This cost can be usually defined as the sum of
costs: fixed cost and variable cost.
Fixed cost is a portion of the total cost that
does not depend of the production volume; this
cost remains no matter how much is produced.
Models of Cost, Revenue, and Profit
Variable cost is the portion of the total cost that is
dependent on and varies with the production
volume.
TC = (VC)x + FC or
C(x) = (VC)x + FC
TC = total cost of producing x units
C(x) = total cost of producing x units
x= production volume in units
Models of Cost, Revenue, and Profit
Marginal cost is defined as the rate of change
of the total cost with respect to the production
volume.
Is the cost increase associated with a one-unit
increase in the production volume.
Models of Cost, Revenue, and Profit
Revenue is a function associated with the selling
price per unit and the number of unit sold.
TR = (SP)x or
R(x) = (SP)x
x = sales volume in units
R(x) = total revenue associated with selling x
units
Models of Cost, Revenue, and Profit
P = TR – TC or
P = R(x) – C(x)
P = total profit of producing and selling x units
Models of Cost, Revenue, and Profit
Models of Cost, Revenue, and Profit