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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

The Management Science Approach to Problem Solving


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Model Building : Break-Even Analysis
Computer Solution Management Science Modeling Techniques


Business Usage of Management Science Techniques
Management Science Models in Decision Support Systems

Chapter 1- Management Science

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.Management Science 3 . involves a philosophy of problem solving in a logical manner. etc. It is used in a variety of organizations to solve many different types of problems. also known as Operations Research.The Management Science Approach  Management science uses a scientific approach to solving management problems. Management Science.    Chapter 1. It encompasses a logical mathematical approach to problem solving. Decision Sciences.

Management Science 4 .1 The Management Science Process Chapter 1.The Management Science Process Figure 1.

Management Science 5 . Definition of the Problem .Identification of a problem that exists (or may occur soon) in a system or organization. Model Solution . objective function and constraints of the problem. Model Construction .Development of the functional mathematical relationships that describe the decision variables. Model Implementation .Steps in the Management Science Process Observation .problem must be clearly and consistently defined.Actual use of the model or its solution.Models solved using management science techniques. showing its boundaries and interactions with the objectives of the organization. Chapter 1.

given the limited amount of steel available. Chapter 1.Management Science 6 .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.

100 lbs (known values) Formal Specification of Model: maximize Z = $20X . 4 lbs. $5.$5X (objective function) 4X = 100 lb of steel (resource constraint) Parameters: $20.Management Science 7 .Example of Model Construction (2 of 3) Variables: X = number of units to produce (decision variable) Z = total profit (in $) Model: Z = $20X .$5X subject to 4X = 100 Chapter 1.

Management Science 8 .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 . to yield a profit of $375) Chapter 1.$5x = (20)(25) – (5)(25) = $375 (Produce 25 units.

volume) that will equate total revenue with total cost.e.Management Science 9 . Chapter 1. The volume at which total revenue equals total cost is called the break-even point.Model Building: Break-Even Analysis (1 of 8) Used to determine the number of units of a product to sell or produce (i. Profit at break-even point is zero.

e.Management Science 10 .function of volume (v) and unit variable cost.vcv Chapter 1.costs that remain constant regardless of number of units produced.total fixed cost plus total variable cost.difference between total revenue vp (p = unit price) and total cost.Model Building: Break-Even Analysis (2 of 8) Model Components  Fixed Costs (cf) .cf .  Variable Cost (cv) .  Profit (Z) .  Total Cost (TC) . Z = vp . i.unit production cost of product.  Total variable cost (vcv) .

Management Science 11 .Model Building: Break-Even Analysis (3 of 8) Computing the Break-Even Point The break-even point is that volume at which total revenue equals total cost and profit is zero: vp .cf – vcv = 0 or v = cf/(p .cv) (Break-Even Point) Chapter 1.

Management Science 12 .000)/(23 -8) = 666.7 pairs Chapter 1.Model Building: Break-Even Analysis (4 of 8) 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.

2 Break-Even Model Chapter 1.Model Building: Break-Even Analysis (5 of 8) Graphical Solution Figure 1.Management Science 13 .

Break-even Model with a Change in Price Chapter 1.Model Building: Break-Even Analysis (6 of 8) Figure 1.Management Science 14 .3 Sensitivity Analysis .

4 Sensitivity Analysis .Management Science 15 .Model Building: Break-Even Analysis (7 of 8) Figure 1.Break-Even Model with a Change in Variable Cost Chapter 1.

Model Building: Break-Even Analysis (8 of 8) Figure 1.5 Sensitivity Analysis .Management Science 16 .Break-Even Model with a Change in Fixed Cost Chapter 1.

Management Science 17 .Break-Even Analysis: Excel Solution (1 of 5) Exhibit 1.1 Chapter 1.

Break-Even Analysis: Excel QM Solution (2 of 5) Exhibit 1.Management Science 18 .2 Chapter 1.

Break-Even Analysis: Excel QM Solution (3 of 5) Exhibit 1.Management Science 19 .3 Chapter 1.

Management Science 20 .Break-Even Analysis: QM Solution (4 of 5) Exhibit 1.4 Chapter 1.

Break-Even Analysis: QM Solution (5 of 5) Exhibit 1.5 Chapter 1.Management Science 21 .

6 Modeling Techniques 22 Chapter 1.Classification of Management Science Techniques Figure 1.Management Science .

results contain uncertainty. Other Techniques . restrictions on resources and requirements.clear objective. Forecasting and Inventory Analysis Techniques probabilistic and deterministic methods in demand forecasting and inventory control. parameters known with certainty.Characteristics of Modeling Techniques      Linear Mathematical Programming . Network Techniques .model often formulated as diagram. Chapter 1. deterministic or probabilistic.Management Science 23 . Probabilistic Techniques .variety of deterministic and probabilistic methods for specific types of problems.

Capital Budgeting .Applications journal published by Institute for Operations Research and Management Sciences (INFORMS)  Chapter 1.Scheduling Interfaces .Inventory Analysis .Production Planning .Business Use of Management Science  Some application areas: .Project Planning .Management Science 24 .

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. Chapter 1. A DSS is normally interactive.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. Decision support systems are most useful in answering “what-if?” questions and performing sensitivity analysis. Online analytical processing system (OLAP). the analytical hierarchy process (AHP). and enterprise resource planning (ERP) are types of decision support systems.Management Science 25 .

Management Science Models Decision Support Systems (2 of 2) Figure 1.Management Science 26 .7 A Decision Support System Chapter 1.

Management Science 27 .End of Chapter Chapter 1.