MANAGEMENT SCIENCE

Chapter I – Introduction
Part 1- What is management science?
The management science approach to problem solving

Values Integrated:
Decisiveness
Consistency in Decision-making
 Management science is the application of a
scientific approach to solving management
problems in order to help managers make
better decisions.
 encompasses a number of mathematically

oriented techniques developed within the

field of management science or been adapted
from other disciplines like natural sciences,
mathematics, statistics, and engineering.
 provides an introduction to techniques and
applications to management problems.
 recognized and established discipline in

business.
 applications of management science

techniques are widespread

 credited with increasing the efficiency and

productivity of business firms.

 In surveys – many indicate that they use
management science techniques, and rate the
results as very good.
 Management science (operations research,

quantitative methods, quantitative analysis,

and decision sciences) is part of the
fundamental curriculum of most programs in
business.
The Management Science Approach to
Problem Solving
 Management science encompasses a logical,
systematic approach to problem solving
which closely parallels to the scientific
method for attacking problems.
 Steps:

◦ observation
◦ definition of the problem
◦ model construction
◦ model solution
◦ implementation of solution results
 Observation
 identification of a problem that exists in the

system (organization).
 The system must be continuously and closely

observed so that problems can be identified

as soon as they occur or are anticipated.
 Problems are not always the result of a crisis

that must be reacted to but, instead,

frequently involve an anticipatory or planning
situation.
 The person who normally identifies a problem
is the manager because managers work in
places where problems might occur.
 Yet, problems can often be identified by

management scientist, a person skilled in the

techniques of management science and
trained to identify problems, who has been
hired specifically to solve problems using
management science techniques.
 Definition of the Problem
 must be clearly and concisely defined.
 improperly defining a problem can easily

result in no solution or an inappropriate

solution.
 So, the limits of the problem and the degree

to which it pervades other units of the

organization must be included in the problem
definition.
 Because 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 also be clearly defined.
 A stated objective helps to focus attention on

what the problem actually is.

 Model Construction
 A management science model is an abstract

representation of an existing problem

situation.
 can be in the form of a graph or chart but

most models consist of a set of mathematical

relationships.
 These mathematical relationships are made
up of numbers and symbols.
 Example: The product costs $5 to produce

and sells for $20. A model that computes the

total profit that will accrue from the items
sold is
 Z = 20x - 5x
 x represents the number of units of the product
that are sold
 Z represents the total profit that results from

the sale of the product.

 The symbols x and Z are variables.
 The term variable is used because no set

numeric value has been specified for these

items.
 The number of units sold, x, and the profit, Z,

can be any amount (within limits); they can vary.

 Z is a dependent variable because its value is
dependent on the number of units sold.
 x is an independent variable because the

number of units sold is not dependent on

anything else (in this equation).
 The numbers $20 and $5 in the equation are

referred to as parameters.
 Parameters – constant values - coefficients of

the variables (symbols) in an equation.

 Parameters usually remain constant during
the process of solving a specific problem.
 The parameter values are derived from data

from the problem environment.

 Sometimes the data are readily available and

quite accurate.
 For example, presumably the selling price of

$20 and product cost of $5 could be obtained

from the firm’s accounting department and
would be very accurate.
 However, sometimes data are not as readily
available to the manager or firm, and the
parameters must be either estimated or
based on a combination of the available data
and estimates.
 In such cases, the model is only as accurate

as the data used in constructing the model.

 The equation as a whole is known as a
functional relationship (also called function
and relationship).
 The term is derived from the fact that profit,

Z, is a function of the number of units sold,

x, and the equation relates profit to units
sold.
 Because only one functional relationship
exists in this example, it is also the model.
 In this case, the relationship is a model of the

determination of profit for the firm.

 However, this model does not really replicate

a problem.
 Let us assume that the product is made from
steel and that the business firm has 100 kilos
of steel available.
 If it takes 4 kilos of steel to make each unit of

the product, we can develop an additional

mathematical relationship to represent steel
usage:
◦ 4x = 100 kl. of steel
 This equation indicates that for every unit
produced, 4 kilos of the available 100 kilos of
steel will be used.
 The model consists of two relationships:
 Z = 20x - 5x
 4 x = 100
 The profit equation in this new model is an
objective function.
 The resource equation is a constraint.
 Meaning, 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 this model, let us add the
following notations:

◦ maximize Z = 20x - 5x
◦ subject to 4x = 100
 This model now represents the manager’s
problem of determining the number of units
to produce.
 Recall that we defined 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.
 The next step in the management science

process is to solve the model to determine

the value of the decision variable.
 Model Solution
 Once models have been constructed in

management science, they are solved using

the management science techniques.
 A management science solution technique

usually applies to a specific type of model.

 Thus, the model type and solution method
are both part of the management science
technique.
 A model is solved because the model

represents a problem.
 When we refer to model solution, we also

mean problem solution.

 For the example model developed,
 4x=100
 So, X=25 units
 the solution technique is simple algebra.
 Solving the constraint equation for x, we have
 Z=20x-5x
 So, Z=$375
 Substituting the value of 25 for x into the
profit function results in the total profit of
$375.
 Thus, if the manager decides to produce 25
units of the product and all 25 units are sold,
the business firm will receive $375 in profit.
 Note, however, that the value of the decision

variable does not constitute an actual

decision, rather, it is an information that
serves as a recommendation or guideline in
helping the manager make a decision.
 Some management science techniques do not
generate an answer or a recommended
decision.
 Instead, they provide descriptive results:

results that describe the system being

modeled.
 Example: Suppose the business firm desires to
know the average number of units sold each
month during a year.
 The monthly sales for the past year are as

follows:
◦ Month Sales Month Sales
◦ Jan 30 Jul 35
◦ Feb 40 Aug 50
◦ Mar 25 Sep 60
◦ Apr 60 Oct 40
◦ May 30 Nov 35
◦ Jun 25 Dec 50
◦ Total: 480 units
 Monthly sales average is 40 units .
 This result is not a decision; it is information
that describes what is happening in the
system.
 The results of the management science

techniques are examples of the two types

shown: (1) solutions/ decisions and (2)
descriptive results.
 Implementation
 Implementation is the actual use of the model

once it has been developed or the solution to

the problem the model was developed to
solve.
 This is a critical but often overlooked step in

the process.
 It is not always a given that once a model is

developed or a solution found, it is

automatically used.
 Frequently the person responsible for putting
the model or solution to use is not the same
person who developed the model, thus, the
user may not fully understand how the model
works or exactly what it is supposed to do.
 Individuals are also sometimes hesitant to

change the normal way they do things or to

try new things.
 In this situation the model and solution may
get pushed to the side or ignored altogether
if they are not carefully explained and their
benefit fully demonstrated.
 If the management science model and

solution are not implemented, then the effort

and resources used in their development have
been wasted.
Reading Assignment
 Break-even Analysis
 MANAGEMENT SCIENCE
Chapter I – Introduction
Part 2 – Break-even Analysis

Values Integrated:
 Break-Even Analysis
 Good way to expand discussions of model

building and solution because it is

straightforward, relatively familiar and not too
complex.
 Provides a means to demonstrate the different

ways management science models can be

solved (by hand), graphically and/or with a
computer.
 Break-Even Analysis
 Gives managers a point of reference in

determining how many units are needed to

ensure profits.
 Purpose: To determine the volume of a product

(quantity) to sell or produce that will equate

total revenue with total cost.
 The point where total revenue equals total cost

is called the break-even point where profit is

zero.
Components of Break-Even Analysis
 The three components of break-even analysis
are
◦ volume,
◦ cost, and
◦ profit.
 Volume is the level of sales or production by a
company. It can be expressed as the number of
units (quantity) produced and sold, as the peso
volume of sales, or as a percentage of total
capacity available.
Components of Break-Even Analysis
 Two type of costs are typically incurred in the
production of a product:
◦ fixed costs and
◦ variable costs.
Components of Break-Even Analysis
 Fixed costs are generally independent of the
volume of units produced and sold.
 That is, fixed costs remain constant, regardless

of how many units of product are produced

within a given range.
 Fixed costs can include such items as rent on

plant and equipment, taxes, staff and

management salaries, insurance, advertising,
depreciation, heat and light, and plant
maintenance.
 Taken together, these items result in total fixed

costs.
Components of Break-Even Analysis
 Variable costs are determined on a per-unit
basis.
 Thus, total variable costs depend on the

number of units produced.

 Variable costs include such items as raw

materials and resources, direct labor,

packaging, material handling, and freight.
 Total variable costs are a function of the

volume and the variable cost per unit.