Chapter 1- Management Science

Chapter Topics

The Management Science Approach to Problem Solving

Model Building: Break-Even Analysis Computer Solution Management Science Modeling Techniques Business Use of Management Science Techniques
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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.

Chapter 1- Management Science

The Management Science Process

Figure 1.1 The Management Science Process Chapter 1- Management Science 3

Steps in the Management Science Process Observation - Identification of a problem that exists in the system or organization. Definition of the Problem - problem must be clearly and consistently defined showing its boundaries and interaction 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.
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Example of Model Construction (1 of 2) Problem Definition

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.
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Example of Model Construction (2 of 2) Mathematical Model

Variables: x = number of units (decision variable) Z = total profit 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

Model Building Break-Even Analysis (1 of 7)

Used to determine the number of units of a product to sell or produce (i.e. volume) that will equate total revenue with total cost. The volume at which total revenue equals total cost is called the break-even point. Profit at break-even point is zero.

Chapter 1- Management Science

Model Building Break-Even Analysis (2 of 7) Model Components

Fixed costs (cf) - costs that remain constant regardless of number of units produced Variable cost (cv) - unit cost of product Total variable cost (vcv) - function of volume (v) and variable per-unit cost Total cost (TC) - total fixed cost plus total variable cost Profit(Z) - difference between total revenue vp (p=price) and total cost: Z = vp - cf - vcv
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Model Building Break-Even Analysis (3 of 7) Computing the Break-Even Point The break-even point is that volume at which total revenue equals total cost and profit is zero:

V = cf/(p-cv)
Example: Western Clothing Company cf = $10000 cv = $8 per pair p = $23 per pair

v = 666.7 pairs, break-even point

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Model Building Break-Even Analysis (4 of 7)

Graphical Solution

Figure 1.2 Break-even model Chapter 1- Management Science 10

Model Building Break-Even Analysis (5 of 7) Sensitivity Analysis

Figure 1.3 Break-even model with a change in price Chapter 1- Management Science 11

Model Building Break-Even Analysis (6 of 7) Sensitivity Analysis (variable cost)

Figure 1.4 Break-even model with a change in variable cost Chapter 1- Management Science 12

Model Building Break-Even Analysis (7 of 7) Sensitivity Analysis (fixed cost)

Figure 1.5 Break-even model with a change in fixed cost Chapter 1- Management Science 13

Computer Solution (1 of 5)

Excel Spreadsheets

Exhibit 1.1

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Computer Solution (2 of 5) Excel QM

Exhibit 1.2 Chapter 1- Management Science 15

Computer Solution (3 of 5) Excel QM (continued)

Exhibit 1.3

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Computer Solution (4 of 5) QM for Windows

Exhibit 1.4 Chapter 1- Management Science 17

Computer Solution (5 of 5) QM for Windows (continued)

Exhibit 1.5 Chapter 1- Management Science

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Management Science Modeling Techniques

Figure 1.6

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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.
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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
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