MBA 8 Year 2 Management Science January 2020

MANAGEMENT SCIENCE
STUDY GUIDE
PROGRAMME : MBA Final Year
CREDIT POINTS : 20 points
NOTIONAL LEARNING : 200 hours over 1 semester
Copyright © 2018
MANAGEMENT COLLEGE OF SOUTHERN AFRICA
All rights reserved; no part of this book may be reproduced in any form or by any means, including photocopying
machines, without the written permission of the publisher.
Please report all errors and omissions to the following email address: [email protected]
Management Science
MODULE INDEX – MANAGEMENT SCIENCE
Chapter Title Page
1 Introduction To Management Science 2
2 Assignment Model 9
3 Markov Analysis 19
4 Simulation 29
5 Linear Programming 40
6 Decision Theory 54
7 Inventory Control Models 61
8 Project Planning 77
9 Waiting Line Models 87
10 Soft Systems Method 97
Case Studies 116
Bibliography 122
Annexures 123
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MANCOSA – MBA FINAL YEAR 1
Management Science
CHAPTER 1
INTRODUCTION TO MANAGEMENT SCIENCE
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 LEARNING OUTCOMES
After reading this section you should be able to:
 Describe the characteristics of Management Science
 Differentiate between Scientific Management and Management Science
 Define the term ‘model’
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CONTENTS
Introduction
Characteristics of Management Science
Self Assessment Questions
References
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CHAPTER ONE
INTRODUCTION TO MANAGEMENT SCIENCE
1. Introduction
Management is characterised by planning, organising, directing, and controlling as basic

principles. Each one of the management principles as just mentioned is facilitated by a set of
catalysts, namely, decision-making, negotiating, co-ordinating and communicating. Management
Science is concerned about how managers make decisions and where upon do they base their
decisions.
Management Science can therefore be defined as a discipline that attempts to aid decision
making by applying a scientific approach to managerial problems that involve quantitative
factors (Hillier & Lieberman, 2000:4). According to Render et. al.(12th Ed: 20), Quantitative
Analysis is the scientific approach to managerial decision-making where whims, emotions, and
guesswork are not part of the quantitative analysis approach. Furthermore, it must be noted that
various names for quantitative analysis: operations research, Management Science and so on
connote more or less the same general meaning.
It is common to find that business schools are more and more using the name, Management
Science and to find that in other institutions like military operations and aerospace centres the
name operations research is used.
It must however be noted that Management Science as a discipline has evolved over the years.
Initially, it was focussed only on one dimension of quantitative analysis. That dimension fits the
definitions given above. The evolution of the discipline has introduced another dimension called
soft systems methodology.
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This method is the ‘soft’ Management Science method whilst the quantitative analysis deals with
the ‘hard’ methods.
2. Characteristics of Management Science
Management Science is characterised by scientific models designed to represent the system or

problem that is being investigated or studied. According to Vohra (2001:6), a model is a
theoretical abstraction of a real-life problem or situation. A model can be physical or symbolic in
nature. In this context, we shall always refer to symbolic or mathematical models. Pidd (1996),
as cited in Buckinghamshire Chilterns University College study guide (1999), goes further by
emphasising that models are designed by people and may be erroneous and/or incomplete.
According to this author, a model is a representation of part of reality as seen by people.
It must be noted that Management Science is not the same as Scientific Management. Scientific
Management on the one hand as advocated by Frederick Winslow Taylor towards the end of the
nineteenth century, deals with methods of improving production efficiency through work-study
or time and motion study. On the other hand, Management Science is a discipline aimed at
dealing with all managerial aspects whereby decisions are made on either maximisation of
returns or minimisation of costs is concerned, except in the case of soft systems method.
In order to be able to compare and contrast Management Science and scientific management, the
student must read the chapter in Pycraft as indicated in the reading directive below.
 READING
Read Chapter 9, pp 310-313 of Pycraft, Singh and Phihlela (2000) Operations

Management. SA Edition. Pearson Education South Africa.
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 PRESCRIBED READING
 Render, B., Stair, R.M. Jr., Hanna, M.E. and Hale, T.S.: Quantitative Analysis
for Management, 12th Edition, Pearson.
 SELF ASSESSMENT QUESTIONS
Answer the following:
 What is Management Science and how does it relate to Operations Research?

 Define the term model.
 Differentiate between Scientific Management and Management Science.
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 REFERENCES AND SUGGESTED READINGS
 Hillier, F.S., Hillier, M.S., and Lieberman, G.J.(2000) Introduction to

Management Science. New York: McGraw-Hill.
 Vohra, N.D.(2001) Quantitative Techniques in Management. New Delhi:
McGraw-Hill.
 Buckinghamshire Chilterns University College (1999) Management Science.
Study Guide.
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CHAPTER 2
ASSIGNMENT MODEL
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 Give a few examples of assignment models of business problems
 Explain the steps followed in solving an assignment problem as discussed in this study guide
 Solve an assignment problem using the Hungarian Method
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CONTENTS
Introduction
Application of the model
Activity
References
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CHAPTER TWO
ASSIGNMENT MODEL
1. Introduction
Assignment model is a special LP algorithm, which is one of much needed management tools to
solve problems objectively and with least cost possible. This model helps managers to assign
projects or tasks scientifically to people (one project to one person) so that the total costs are
minimised. The estimated costs involved are based on background, qualification, experience,
talent, and personality of each of the persons to be assigned. This model is much easier than the
Simplex Method or Simplex Algorithm. All that is required to apply it is some careful addition
and subtraction, and close attention to the three fundamental steps.
The situations in which this model can be applied are common in repair shops, production, police
departments, clinics, hospitals, schools, colleges, research companies, advertising agencies,
development institutions, local government, and other institutions that can find it useful.
The Assignment Model consists of sequential steps that lead to an optimum solution, the ultimate
objective of which could be either maximisation of pay-off or minimisation of costs.
Two methods are used in applying the Assignment Model. The one that is very simplistic is to
enumerate all possible outcomes by comparing their respective costs. This method works well
where very few workers need to be assigned to projects.
It is, however, not suitable for assigning many workers because its application becomes
cumbersome. The other method, which can handle any number of workers or objects, is the
Hungarian Method, also called Flood’s Technique.
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The good thing about this method is that it does not need a computer like the spreadsheet
method. Therefore, it can be applied even in camps or construction sites where there is no luxury
of a computer.
2. Application of the Assignment model
Let us take for example the owner of a repair shop called Fix-It Shop. Knowing the capabilities,
experience, qualification, and background of each of his workers, he estimates the cost of
assigning each of the workers to the three projects he has at hand as can be seen on Table 2.1
below.
Table 2.1
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Estimated Project Repair Costs for the Fix-It Assignment problem
PROJECT
PERSON 1 2 3
Adams R 11 R 14 R6
Brown 8 10 11
Cooper 9 12 7
According to the Hungarian Method, the assignment can be done following the three steps as
follows:
Step 1: Find opportunity cost

(a) Subtract the smallest number in each row from every number in that row, then
(b) Subtract the smallest number in each column from every number in that column.
Step 2: Test opportunity cost table to see if optimal assignments are possible by drawing the
minimum possible lines on columns and/or rows such that all zeros are covered. Optimal means
the number of lines equal the number rows or columns. If current outcome is not optimal,
proceed to Step 3.
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Step 3: Revise opportunity cost table in two steps:

(a) Subtract the smallest number not covered by a line from itself and every other uncovered
number.
(b) Add this number at every intersection of any two lines.
Optimal solution at zero locations: Systematically make final assignment by :

(a) Checking each row and column for a unique zero, and make the first assignment at that
inter-section.
(b) Eliminate that row and column and then search for another unique zero. Make that
assignment and proceed in a like manner until every worker has been assigned to a project
optimally.
If we apply the steps outlined above to Table 1.1, the changes are as follows:
Table 2.2: Table 2.3:
PROJECT PROJECT
PERSON 1 2 3 PERSON 1 2 3
Adam R5 R8 R0 Adam R5 R6 R0
Brown 0 2 3 Brown 0 0 3
Cooper 2 5 0 Cooper 2 3 0
To test for Optimal Solution to Fix-it Shop problem, let us look at the table shown below:
Table 2.4:
(Test for Optimal Solution)
PROJECT
PERSON 1 2 3
Adam R5 R6 R0
Brown 0 0 3
Cooper 2 3 0
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Table 2.4 illustrates that it is possible to cover all four zero entries in Table 2.3 with only two
lines. Because there are three rows, an optimal assignment may not yet be made. We, therefore,
need to revise the table in order to shift one or more of the zero costs from its present location
(covered by lines) to a new uncovered location in the table.
This is accomplished by subtracting the smallest number not covered by a line from all numbers
not covered by a straight line. This same smallest number is then added to every number
(including zeros) lying at the intersection of any two lines. After achieving the results shown in
Table 2.5, we then proceed by drawing lines that connect all zeros in any row or column as can
be seen in Table 2.6.
Table 2.5: Table 2.6:
PROJECT PROJECT
PERSON 1 2 3 PERSON 1 2 3__
Adams R3 R4 R0 Adams R3 R4 R 0
Brown 0 0 5 Brown 0 0 5
Cooper 0 1 0 Cooper 0 1 0
The number of lines that have been drawn equal the number of persons as well as the number of
projects, meaning that we have reached an optimum solution. This brings us to making the final
assignment. That is done by selecting a row or column that contains only one zero cell. In this
scenario the row with such a zero is Adam’s row under Project 3 column (See Table 2.7) An
assignment is made to that cell, and then lines are drawn through its row and column. From the
uncovered rows and columns, we again choose a row or column in which there is only one zero
cell. That zero is on Cooper’s row under Project 1. The second assignment is then made. At this
point only one zero containing cell is left under project 2, which is finally assigned to Brown.
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Table 2.7:
(Making the Final Fix-It Shop Assignment)

(A) FIRST (B) SECOND (C) THIRD
ASSIGNMENT ASSIGNMENT ASSIGNMENT
1 2 3 1 2 3 1 2 3
Adam 3 4 0 Adam 3 4 0 Adam 3 4 0

Brown 0 0 5 Brown 0 0 5 Brown 0 0 5
Cooper 0 1 0 Cooper 0 1 0 Cooper 0 1 0
Table 2.8:
ASSIGNMENT COST (R)

Adams to project 3 6
Brown to project 2 10
Cooper to project 1 9
Total cost 25
DUMMY ROWS AND DUMMY COLUMNS
What has been discussed thus far deals with situations where projects to be assigned equal the
number of workers available. It might happen that the number of persons available is more than
the number of projects to be assigned. In such a case we have more rows than columns. To cope
with that situation, we add a dummy column, which shall contain only zeros. To illustrate this,
Table 2.9 is an example of how to tackle an assignment task where numbers are not equal.
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Table 2.9:
(Estimated Project Repair Costs for Fix-it Shop with Davis included)
PROJECT
PROJECT 1 2 3 DUMMY
Adams R11 R14 R6 R0

Brown 8 10 11 0
Cooper 9 12 7 0
Davis 10 13 8 0
The project will only be assigned to three people on least cost basis thereby leaving one person
without a project. The same steps are followed as explained above.
 ACTIVITY
Problem 10.30 (Render & Stair, 2000:461)
The Burlington Police Department has five detective squads available for assignment to five
open crime cases. The Chief of Detectives wishes to assign the squads so that the total time to
conclude the cases is minimized. The average number of days, based on past experience, for each
squad to complete each case is as follows:
CASE
SQUAD A B C D E
1 14 7 3 7 27
2 20 7 12 6 30
3 10 3 4 5 21
4 8 12 7 12 21
5 13 25 24 26 8
Each squad is comprised of different types of specialists and, as noted, whereas one squad may
be very effective in certain types of cases, they may be useless in others. Solve the problem by
using the assignment method.
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Problem 9-26 (Render et. al. 12th Ed.: 369)
Roscoe Davis, chairman of a college’s business department, has decided to apply the Hungarian
method in assigning professors to courses next semester. As a criterion for judging who should
teach each course, Professor Davis reviews the past two years’ teaching evaluations (which were
filled out by students). Since each of the four professors taught each of the four courses at one
time or another during the two-year period. Davis is able to record a course rating for each of
instructor. These ratings are shown in the following table. Find the best assignment of professors
to courses to maximize the overall teaching rating.
COURSE
PROFESSOR STATISTICS MANAGEMENT FINANCE ECONOMICS
Anderson 90 65 95 40
Sweeney 70 60 80 75
Williams 85 40 80 60
McKinney 55 80 65 55
 READING
Read: Render, Stair, Hanna and Hale: Quantitative Analysis for Management.
12th Ed., Chapter 9.
Render, B., Stair, R.M. Jr, Hanna, M.E. and Hale, T. S.: Quantitative Analysis for
Management, 12th Ed., Pearson.
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CHAPTER 3
MARKOV ANALYSIS
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 List the assumptions that are made in Markov analysis.
 Describe how we can use Markov analysis to make future predictions.
 Set up a matrix of transition probabilities.
 Solve a given problem of future predictions using Markov analysis.
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CONTENTS
Introduction
Assumptions
Example
Activity
References
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CHAPTER THREE
MARKOV ANALYSIS
1. Introduction
Markov Analysis is a technique that deals with the probabilities of future occurrences by
analysing presently known probabilities. It is used in business, including market share analysis,
bad debt prediction, university or college enrolment predictions, and determining whether a
machine will break down in the future.
Markov Analysis makes the assumption that the system starts in an initial state or condition. For
example, two competing management schools might have 40% and 60% of the student
enrolment share, respectively, as initial states. Perhaps in two years the enrolment shares will
change to 45% and 55% of the numbers, respectively, as first states. In another subsequent
period it might change again to second states, and so on.
For a particular problem, the probabilities can be collected and placed in a matrix or table. This
matrix of transition probabilities shows the likelihood that the system will change from one time
period to the next.
2. Assumptions of the Markov Analysis
For the level of this module, Markov Analysis processes are based on the following assumptions:
(1) There are a limited or finite number of possible states.

(2) The probability of changing states remains the same over time.
(3) We can predict any future state from the previous state and the matrix of transition
probabilities.
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(4) The size and makeup of the system (for example, the total number of management schools
and number of students) do not change during the analysis.
(5) The states are both collectively exhaustive and mutually exclusive.
With reference to our example of two management schools mentioned above, mutually exclusive
means that a system can be in only one state at any point in time. A student can be in only one of
the two management schools and not in two of them at the same time for the same direction of
study.
3. Example
Suppose there are three grocery shops in town and there are 100 000 people that buy from these
shops at any given time. Forty thousand may be shopping at Mars Food Stores, which will be
called state 1. Thirty thousand may be shopping at Neptune Grocers, which will be called state 2,
and thirty thousand may be shopping at Jupiter Mart, which will be called state 3. The
probability that a person will be shopping at one of these stores is as follows:
State 1 – Mars Food Stores: 40 000/100 000 = 40% = 0.40

State 2 – Neptune Grocers: 30 000/100 000 = 30% = 0.30
State 3 – Jupiter Mart: 30 000/100 000 = 30% = 0.30
These probabilities can be placed in the vector of state probabilities shown below:
(1) = (0.4, 0.3, 0.3)
where
(1) = vector of state probabilities for the three grocery stores for period 1.
= 0.4 = probability that a person will shop at Mars Food Stores, state 1
= 0.3 = probability that a person will shop at Neptune Grocers, state2
= 0.3 = probability that a person will shop at Jupiter Mart, state 3
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The vector of state probabilities represents market shares for the three shops as mentioned above.
Once the initial states and state probabilities have been determined, the next step is to find the
matrix of transition probabilities. This matrix is used along with the state probabilities in
predicting the future. One of the ways of determining the matrix of transition probabilities is
using historical data. Let us say the analysis results in the following matrix:
0.5 0.3 0.2

P = 0.2 0.6 0.2
0.2 0.1 0.7
where, P represents (0.4 0.3 0.3) which is the current period. Therefore, computation will be
done from the following matrix:
0.5 0.3 0.2
= (0.4 0.3 0.3) 0.2 0.6 0.2
0.2 0.1 0.7
= [(0.4)(0.5) + (0.3)(0.2) + (0.3)(0.2)] [(0.4)(0.3) +(0.3)(0.6) + (0.3)(0.1)] [(0.4)(0.2) +

+ (0.3)(0.2) + (0.3)(0.7)]
= (0.32, 0.33, 0.35)

What we can deduce from these new probabilities is that the prediction is that Mars Food Stores
will have a decreased market share whilst Neptune Grocers and Jupiter Mart will have increased
market shares respectively.
Now, let us look at the application of this analysis in machine operations. The bakery owner,
Doug Bakewell, has recorded the operation of his big dough mixer for several years. Over the
past two years, 80% of the time the dough mixer functioned correctly during the current month it
had functioned correctly in the preceding month. This also means that only 20% of the time did
the mixer not function correctly for a given month when it was functioning correctly during the
preceding month. In addition, it has been observed that 90% of the time the mixer remained
incorrectly adjusted for any given month if it was incorrectly adjusted the preceding month. Only
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10% of the time did the mixer operate correctly in a given month, when it did not operate
correctly during the preceding month. In other words, this machine can correct itself when it has
not been functioning correctly in the past, and this happens10% of the time.
These values can now be used to construct the matrix of transition probabilities. Since state 1 is a
situation where the machine is functioning well, and state 2 is a situation where the machine is
not functioning well, the matrix of transition probabilities is:
0.8, 0.2
P = 0.1, 0.9
Where, p is (1, 0), which is the initial state.

Computing the figures in the matrix gives us the following result:
0.8, 0.2
= (1, 0) 0.1, 0.9
= [(1)(0.8)+(0)(0.1)] [(1)(0.2)+(0)(0.9)]
= (0.8, 0.2)
This means that the probability that the mixer will be functioning correctly one moth from now,
given that it is functioning well, is 0.80. The probability that it will not be functioning well one
month from now is 0.20. From these results we can now determine the probability that the mixer
will be functioning correctly two months from now. The analysis is as follows:
0.8, 0.2
= (0.8, 0.2) 0.1, 0.9
= [(0.8)(0.8)+(0.2)(0.1)] [(0.8)(0.2)+(0.2)(0.9)]
= (0.66, 0.34)
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This means that in the third period, or month, it is a probable that 66% of the time the mixer will
be functioning correctly. It is also true that in the third period, or month, it is probable that 34%
of the time the mixer will not be functioning correctly. This analysis can be continued as many
times as needed in computing state probabilities for future months. It must, however, be noted
that at a particular point the state probabilities will not change after a large number of periods.
This means that an equilibrium condition will have been reached.
 READING
Read: Render et. al.: Quantitative Analysis for Management, 12th Ed., Chapter 14.
4. ACTIVITY
Solve the following problems, using the Markov Analysis:
9.1 Rose Stander owns a 1980 sports car. On any given day, Rose never knows
whether or not her car will start. Ninety percent of the time it will start if it started the
previous morning, and seventy percent of the time it will not start if it did not start the
previous morning.
(a) Construct the matrix of transition probabilities.

(b) What is the probability that it will start tomorrow if it started today?
(c) What is the probability that it will start tomorrow if it did not start today?
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9.2 The University of Study-more has had steady enrolments over the past five years. The
school has its own bookstore, called University Book Store, but there are also three
private bookstores in town: Bill’s Book Store, College Book Store, and Battle’s Book
Store. The university is concerned about the large number of students who leave the
campus to buy from one of the private stores. As a result, the Rector of Study-more has
decided to give a student three hours of university credit to look into the problem. The
following matrix of transition probabilities was obtained:
UNIVERSITY BILL’S COLLEGE BATTLE’S

University 0.6 0.2 0.1 0.1
Bill’s 0 0.7 0.2 0.1
College 0.1 0.1 0.8 0
Battle’s 0.05 0.05 0.1 0.8
At the present time, each of the four bookstores has an equal share of the market. What will the
market share be for the next period?
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RENDER, B, STAIR, R.M. Jr., HANNA, M.E., HALE, T.S.: Quantitative Analysis for
Management. 12th Ed., Pearson.
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CHAPTER 4
SIMULATION
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 Define what simulation is
 Give examples of situations where simulation can be applied
 Develop a simulation model given a particular situation
 Conduct a simulation exercise
 Interpret results of simulation vis-a vis set standards
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CONTENTS
Introduction
Procedure in developing a simulation model
Advantages and disadvantages of simulation
Types of simulation models
Steps of simulation
Results and conclusion
References
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CHAPTER FOUR
SIMULATION
1. Introduction
Simulation is one of management quantitative techniques that are widely used to solve problems
where other optimal solution techniques cannot be applied. There are various definitions of
simulation in literature.
According to Levin et al (1982:540), simulation is a quantitative procedure which describes a

process by developing a model of that process and then conducting a series of organised trial and
error experiments to predict the behaviour of the process over time. Observing the experiments is
very much like observing the process in operation. Render et. al. (12th Ed: 488) go on to say that
to simulate is to try to duplicate the features, appearance, and characteristics of a real situation. A
business or management system is simulated by building a mathematical model that comes as
close as possible to representing the reality of the system. According to Vohra (2000:743), to
simulate is to imitate. In general terms, simulation involves developing a model of some real
phenomenon and then performing experiments on the model evolved. It appears that there is
consensus among these different authors regarding the nature of simulation.
2. Procedure in developing a Simulation model
As indicated in the definitions cited above, simulation as a process normally follows the steps
outlines hereunder:
(1) Define the problem and state the objectives. Whoever is analysing a problem or
situation must decide on the scope of the investigation and the level of details required to
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simulate the real situation. The degree of complexity of the situation is derived from the
scope of the analysis.
(2) Construct an appropriate model. This means that the analyst must first gather all data relevant
to the problem to be simulated in order that the model constructed is appropriate for
simulation.
(3) Testing the model that has been developed is essential to ensure that a few simulation runs
that are conducted compare closely with the historical data of the situation under
investigation. In the absence of historical data, information obtained by interviewing all
people who work with the system and are well clued up with all types of variations of the
system can be used as a basis for validating the model that has been constructed.
(4) Model evaluation is then effected by conducting one or more experiments to establish the
system behaviour and to do the ‘what if’ analysis of the situation.
(5) Having validated the model, the actual simulation can then be conducted using the model and
the results evaluated. Some authors go further to say that a single run is ample if all
parameters are known. In such a situation, the model can be deemed to be deterministic. If
not deterministic, it means that the parameters are subject to variations and therefore quite a
few runs are necessary to balance the probabilistic nature of the model.
(6) The last step is to analyse the results. If the initial analysis cast some doubt the model ca be
re-validated and new simulation runs conducted until the results are fairly close to the real
situation. This means repeating steps 4 and 5 and re-analysing the results.
Simulation as a man-made model is bound to have pros and cons that need to be taken into
consideration when applying the model to problem solving. Although different authors do point
out the pros and cons, the advantages and disadvantages of simulation are best outlined in
Render et. al. (12th Ed: 489-490) as follows:
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3. Advantages and disadvantages of Simulation
ADVANTAGES
(1) It is relatively straightforward and flexible.

(2) It can be used to analyse large and complex real-world situations that cannot be solved by
conventional quantitative analysis models.
(3) Simulation allows for what-if types of questions.
(4) Simulations do not interfere with the real-world system.
(5) Simulation allows us to study the interactive effect of individual components or variables to
determine which ones are important.
(6) “Time compression” is possible with simulation
(7) Simulation allows for the inclusion or real-world complications that most quantitative
analysis models cannot permit.
DISADVANTAGES
(1) Good simulation models can be very expensive.

(2) Simulation does not generate optimal solutions to problems like other quantitative
techniques.
(3) Managers must generate all of the conditions and constraints for solutions that they want to
examine.
(4) Each simulation model is unique.
It must be noted by students that the advantages and disadvantages outlines above have been
presented in ‘bone’ form and the student has to read the text from where they are extracted to be
able to discuss them i.e. add ‘meat’ to them for examination purposes.
Note: Merely rewriting them as they appear in this study guide will result in reduction of marks
as a penalty.
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The usefulness of the simulation model differs from business to business and it depends on the
nature of the problems that cannot be analysed by using the other quantitative techniques. The
students are encouraged to read the prescribed book and other recommended books in order to be
able to identify the uses of this particular model to different scenarios.
4. Different types of simulation models
The well-known simulation models are Monte Carlo, Operational Gaming, and Systems
Simulation models. The one chosen for the purposes of this module is the Monte Carlo
simulation because it is suitable for systems that contain elements, which exhibit chance in their
behaviour. The basis of the Monte Carlo simulation is experimentation of chance (or
probabilistic) elements through random sampling [Render et. al., 12th Ed: 490].
5. Steps in applying a simulation model
According to Render et. al. (12th Ed: 490), there are five steps in the application of the Monte
Carlo simulation model. The steps are applied as follows:
(1) Setting up a probability distribution for important variables. Let us consider the
example of a scenario adapted from Vohra (2000: 744-745). A bakery keeps a record of the
sale of the number of cakes of a certain type. The information relating to 200 days’ sales is,
Demand (No. of cakes): 5 6 7 8 9 10 11 12 Total

Number of days : 4 10 16 50 62 38 12 8 200
In order to set up a probability distribution of demand for this type of cake, we can divide
each one of the values by 200, which is the total frequency. This results in the following
distribution:
Demand (No. of cakes): 5 6 7 8 9 10 11 12
Probability (1.00) : 0.02 0.05 0.08 0.25 0.31 0.19 0.06 0.04
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(2) Building a Cumulative Probability Distribution for Each Variable. This we do by

representing the variables and their respective probabilities in a table as follows:
Table 5.1
Demand (No. of cakes) Probability Cumulative Probability

5 0.02 0.02
6 0.05 0.07
7 0.08 0.15
8 0.25 0.40
9 0.31 0.71
10 0.19 0.90
11 0.06 0.96
12 0.04 1.00
(3) Setting Random Number Intervals. This we can do by extending the table presented in (2)
above by adding a fourth column:
Table 5.2
Demand (No.of Probability Cumulative Probability Random No. Interval

cakes)
5 0.02 0.02 00 - 02
6 0.05 0.07 03 - 07
7 0.08 0.15 08 - 15
8 0.25 0.40 16 - 40
9 0.31 0.71 41 - 71
10 0.19 0.90 72 - 90
11 0.06 0.96 91 - 96
12 0.04 1.00 97 - 100
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(4) Generating Random Numbers

Although random numbers can be generated manually, selecting numbers by the spin of a
roulette wheel that has 100 digits, by blindly grabbing numbered chips out of a hat, or by any
other method, we now normally have random number tables for computer generated digits.
Let us assume that we want to simulate demand for cakes for the next 10 days. We randomly
choose the following numbers from a table:
61 74 24 03 59 16 84 92 52 07
Random number 61 falls within the interval 41 to 71 which corresponds with the demand of
9 cakes. Random number 74 falls within the interval 72 to 90 which corresponds with the
demand of 10 cakes, etc. Following the same method we select appropriate demand figures
according to the remainder of the random numbers. This brings us to the last step.
(5) Simulating the experiment

The selection of demand figures by random numbers is then represented in another table as
shown below:
Table 5.3
Day Random Number Simulated Daily Demand
1 61 9
2 74 10
3 24 8
4 03 6
5 59 9
6 16 8
7 84 10
8 92 11
9 52 9
10 07 7
Total = 87
The simulated total demand for the next ten days is 87 cakes and the mean daily demand is
therefore 87/10 = 8.7 cakes. This can be rounded up to 9 cakes.
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6. Results and conclusion
What can be noted here is that simulating for ten days gives us a mean of 8.7 cakes which can
easily be rounded up to 9 cakes. If we simulate for twenty or thirty days, the mean reduces to 8.3
cakes and 8.36 cakes respectively with rounding down to 8 in each case. This gives us an idea
that simulation over a longer period does smooth out the mean. Put in another manner, it means
that it is advisable to draw conclusions from large samples than from small samples.
 ACTIVITY
Problem 13-15 (Render et. al., 12th Ed:517)

The number of cars arriving at Lundsberg’s Car Wash during the past 200 hours of operation is
observed to be the following:
NUMBER OF CARS ARRIVING FREQUENCY
3 or less 0
4 20
5 30
6 50
7 60
8 40
9 or more 0
Total 200
(a) Set up a probability and cumulative probability distribution for the variable of car arrivals.
(b) Establish random number intervals for the variable.
(c) Simulate 15 hours of car arrivals and compute the average number of arrivals per hour. Use
the following random numbers in your simulation:
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Management Science
52 37 82 69 98 96 33 50 88 90 50
27 45 81 66.
 READING
Read: Render et. Al.: Quantitative Analysis for Management. 12th Edition. Chapter 15.
LEVIN et al (1982). Quantitative Approaches to Management. McGraw-Hill
VOHRA, N.D. (2001). Quantitative Techniques in Management. Tata McGraw-Hill
RENDER, B.,STAIR, R.M. Jr., HANNA, M.E, HALE, TS: Quantitative Analysis for
Management, 12th Ed., Pearson.
REDEDLINGHUIS, A., JULYAN, F.W., STEYN, B.L., & BENADE, F.C.J. (1989)
Quantitative Methods for Managerial Decision Making. BUTTERWORTHS, DURBAN
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CHAPTER 5
LINEAR PROGRAMMING
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 Know and understand the basic requirements for a linear programming problem.
 Formulate a model for solving an LP problem.
 Solve an LP problem by graphical method and simplex method.
 Characteristics of an LP problem.
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CONTENTS
Introduction
Basic properties of an LP problem
Graphical Method
Simplex Method
References
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CHAPTER FIVE
LINEAR PROGRAMMING
1. Introduction
More often than not, managers are faced with situations where they have to allocate resources to
various activities such that profit, units produced, or returns are maximised or costs to achieve a
certain objective are minimised.
One of the techniques available to management to enable them to choose the best alternative or
to achieve the optimal solution is linear programming. According to Render et. al. (12th Ed
:258), Linear programming (LP) is a widely used mathematical modelling technique designed to
help mangers in planning and decision making relative to resource allocation. Despite its name,
and the more general category of techniques called “mathematical” programming, have very
little to do with computer programming. According to Vohra (2001:15), mathematical
programming involves optimisation of a certain function, called objective function, subject to
certain constraints. Therefore, in the context of Management Science, programming refers to
modelling and solving a problem mathematically [Render et. al., (12th Ed: 258)].
In this module we shall adopt the definition of linear programming as advocated by the authors
already cited above. Linear programming has been applied to a wide variety of situations ranging
from agriculture, industry, military operations, financial decisions, marketing projects,
accounting, and many others.
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2. Basic Properties of an LP problem
In order for an LP problem to be successfully solved mathematically, it has to possess the four
basic properties as outlined hereunder:
(1) All LP problems seek to either maximise or minimise an objective. The objective or goal to
be attained must be easily identifiable in the mathematical representation of the problem.
This is what we call the objective function of the model.
(2) In the world of scarce resources it is not strange that we are always confronted by limiting
factors. The limiting factors in a mathematical model are called constraints or restrictions of
the model. Such constraints limit the degree to which we can pursue our objective.
(3) In addition to limiting factors, management has to decide among two or a few alternatives in
pursuing the desired objective. Such alternatives are normally called decision variables
around which management has to consider a number of permutations within the confines of
the constraints at play.
(4) Linearity of both the objective function and constraints is a prerequisite in an LP problem.
This, in essence, means that the mathematical relationships of all terms must be of the first
degree and not be squared, cubed, etc. They must also not appear twice in one equation or
inequality, and as a product of one another.
An LP problem that lacks one or more of these requirements would be of no use for the objective
to attain an optimum solution. Further than the basic properties mentioned above, the following
assumptions are a feature of an LP problem and they can also be deemed as additional properties:
(5) Certainty of the objective function coefficients, coefficients of the inequality/equality

constraints, values of the functional constraints is assumed to be present. Such certainty is
also assumed not to change during the period of the study.
(6) Another assumption is that of finite choices. This means that only a limited number of
alternatives are available to a decision-maker and that such decision variables do not assume
negative values.
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(7) Only non-negative values of output are feasible because we cannot have a situation whereby
production output can be reversed to raw materials or else you cannot undo concrete to a
state of non-concrete where the original ingredients can assume their original state.
(8) The additivity assumption is also of utmost importance in the sense that the total of all
activities must equal the sum total of individual activities.
(9) The parameters present in the objective function are divisible and that division thereof could
change whole numbers into any fractional value.
(10) All answers/variables of the mathematical model are non-negative because nobody can
produce negative cars, pairs of shoes, etc.
Having discussed the basic properties and assumptions of a linear programming problem, I
believe we have laid an important foundation that we can further build upon. Solving an LP
problem can be approached by either the graphical method or the simplex method also called the
simplex algorithm.
3. Graphical Method
Let us begin with the graphical method using a maximisation example that has been adapted
from Lucey (1996:252):
A manufacturer produces two types of pet food Pussy-D-Lite and Rex-D-Lite, under one
roof, i.e. within the same production facility. Pussy-D-Lite has a contribution of R3 per
unit and Rex-D-Lite R4 per unit. The manufacturer wishes to establish the weekly
production plan, which maximises profit.
Production data are as follows:
Machine (Hours) Per unit Labour (Hours) Materials (kgs)

Pussy-D-Lite 4 4 1
Rex-D-Lite 2 6 1
Total available 100 180 40
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Because of a trade agreement, sales of Pussy-D-Lite are limited to a weekly maximum of 20

units and to honour an agreement with an old established customer at least 10 units of Rex-D-
Lite must be sold per week.
The formulation of an LP model in this regard can thus be done as follows:
Maximise Profit: 3x1 + 4x2
Subject to constraint A 4x1 + 2x2 < 100 (Machine hours constraint)

B 4x1 + 6x2 < 180 (Labour hours constraint)
C x1 + x2 < 40 (Materials constraint)
D x1 < 20 (Pussy-D-Lite sales constraint)
E x2 > 10 (Rex-D-Lite sales constraint)
x1, x2 > 0 (Non-negativity constraint)
where x1 = number of units of Pussy-D-Lite

x2 = number of units of Rex-D-Lite
Since this problem has only two unknowns i.e. x1 and x2 , it can be solved graphically as
indicated below:
Drawing the axes of the graph and the sales constraints
(See Annexure 1)
The vertical line parallel to x1 axis represents the constraint on Rex-D-Lite sales. This means that
all x2 values must be 10 units and more. The horizontal line parallel to x2 axis represents the
constraint on Pussy-D-Lite sales, which means that all x1 values will not be more than 20 units.
Now we must determine the intercepts for the lines representing production and materials
constraints. The machine constraint i.e. 4x1 + 2x2 < 100, drawn on the graph as 4x1 + 2x2 = 100,
ha the following intercepts:
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When x1 = 0, x2 = 100 = 50
2
When x2 = 0, x1 = 100 = 25
4
The intercepts for the labour constraint, 4x1 + 6x2 < 180, drawn as 4x1 + 6x2 = 180, are found as
follows:
When x1 = 0, x2 = 180 =30

6
When x2 = 0, x1 = 180 = 45
4
For the materials constraint, x1 + x2 < 40, drawn as x1 + x2 = 40, are determined as follows:
When x1 = 0, x2 = 40
When x2 = 0, x1 = 40
All the constraints (sales, labour, materials and production) can now be presented on a single
graph and the resulting feasible region defined:
(See Annexure 2)
What is meant by the term, feasible region? The feasible region is the area, which does not
contravene any of the restrictions and is therefore the area containing all possible production
plans (Lucey, 1996:256). It must be noted that the non-negativity restrictions are automatically
included in the graph since the graph only shows positive values.
Since this is a maximisation problem, the feasible region is the quandrant that is bordered by
lines A, B, and E. If the problem was that of cost minimisation, the feasible region would have
been the area to the right of line C, above the Line D, and to the right of line E, i.e. the area E-C-
D.
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What must be noted also is that the material constraint C (line 40, 40) does not touch the feasible
region. This shows us that this is a redundant constraint i.e. it is not binding.
Using the corner-point method, the feasible combinations at various points are derived. Point X
is at the intersection of lines A, D, and E. Point Y is aat the intersection of lines A and B. Point Z
is at the horizontal intercept of line B.
At point X, the co-ordinates are: x1 =20; x2 =10
Therefore, the profit yield of the combination is: R3(20) + R4(10) = R100
At point Y, the co-ordinates are: x1 = 15; x2 = 20
At point Z, the co-ordinates are: x1 = 0; x2 =30
The solution is at point Y, where 15 units of Pussy-D-Lite and 20 units of Rex-D-Lite are
produced. This is the point where optimum profit is achieved.
Now let us look at the manner in which an LP problem can be solved by simplex method or
simplex algorithm. It would be best to know the procedure followed in solving by the simplex
method. For an LP maximisation problem the following steps are applied:
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4. Steps in Simplex Method
(1) Formulate the LP problem’s objective function and constraints.

(2) Add slack variables to each less-than-or-equal-to constraint and to the problem’s objective
function.
(3) Develop an initial simplex tableau with slack variables in the basis and their variables (the
X,s) set equal to 0. Compute the Zj and Cj – Zj values for this tableau.
(4) Follow these five steps until am optimal solution has been reached:-
(a) Choose the variable with the greatest positive Cj – Zj to enter the solution. This is the
pivot column.
(b) Determine the row to be replaced by selecting the one with the smallest (non-negative)
quantity-to-pivot column ratio. This is the pivot row.
(c) Calculate the new values for the pivot row.
(d) Calculate the new values for the other row(s).
(e) Calculate the Zj and Cj – Zj values for this tableau. If there are any Cj – Zj numbers greater
than 0, return to step 1. If there are no Cj – Zj numbers that are greater than 0, an optimal
solution has been reached.
To illustrate the solution by using the simplex method we consider the following problem.
Maximise Profit: R20x1 + R10x2
Subject to 5x1 + 4x2 < 250

2x1 + 5x2 < 150
x1, x2 > 0
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The initial tableau is as follows:
Cj R20 R10 0 0
Solution mix X1 X2 S1 S2 Quantity
0 S1 5 4 1 0 250
0 S2 2 5 0 1 150
Zj 0 0 0 0 0
C j - Zj R20 R10 0 0
In order to generate the second table we need to follow the steps outlined above, beginning at
step 4 as follows:
Step 1: Pivot column is identified by the largest non-negative number in the Cj – Zj

(unit profit), which is 20 in this case. It means that the pivot column is X1, which
is therefore the variable to enter solution.
Step 2: To determine pivot row, we divide quantity by pivot coefficient.

Therefore, 250/5 = 50 and 150/2 = 75. The smallest non-negative number
indicates the pivot row i.e. 50. Therefore S1 is replaced by X1. As calculated, 50
units of X1 will be the basis for the next solution. In graphical terms this means
that the solution has moved from point (X1 = 0, X2 = 0) to (X1 = 50, X2 =0).
Step 3: The new pivot row is then computed by dividing every number in the pivot row
by the pivot number. Therefore, the new pivot row:-
5/5 = 1 ; 4/5 = 4/5; 1/5 = 1/5 ; 0/5 = 0/5 ; 250/5 = 50
Step 4: Computing the new values for the remaining rows is then done as follows:
Number in = Number in - Number below x Corresponding number

New S2 row in old S2 row pivot number in the new X1 row
0 = 2 - [ (2) x (1) ]
17/5 = 5 - [ (2) x (4/5) ]
-2/5 = 0 - [ (2) x (1/5) ]
1 = 1 - [ (2) x (0/5) ]
50 = 150 - [ (2) x (50) ]
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Management Science
Step 5: Then we calculate the Zj values as follows:
Zj (for X1 column) = (R20)(1) + (R0)(0) = R20

Zj (for X2 column) = (R20)(4/5) + (R0)(17/5) = 16
Zj (for S1 column) = (R20)(1/5) + (R0)(-2/5) =4
Zj (for S2 column) = (R20)(0) + (R0)(1) =0
Zj (for total profit) = (R20)(50) + (R0)(50) = 1000
Therefore the second tableau with new values is as follows:
Cj R20 R10 R0 R0
Solution mix X1 X2 S1 S2 QUANTITY
R20 X1 1 4/5 1/5 0 50
R0 S2 0 17/5 -2/5 1 50____
ZJ 20 16 4 0 1 000
CJ - ZJ 0 -6 -4 0
Since there are no numbers greater than zero in the Cj – Zj row, this is the optimal solution. A
profit of R1 000 and 50 units of X1 with 50 units of S2 as unused is the ultimate solution whereby
no further tableau is required.
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 ACTIVITY
Each coffee table produced by Meising Designers nets the firm a profit of R9 whilst each
bookcase yields a R12 profit. Meising’s firm is small, and its resources are limited. During any
given production period of one week, 10 gallons of varnish and 12 lengths of high quality
redwood are available. Each coffee table requires approximately 1 gallon of varnish and 1 length
of redwood. Each bookcase takes 1 gallon of varnish and 2 lengths of wood. Formulate
Meising’s production mix decision as an LP problem, and solve using the simplex method. How
many tables and bookcases should be produced each week? What will the maximum profit be?
The daily LP formulation for the Flair Furniture Company is as follows:
Maximize profit: R7x1 + R5x2
Subject to: 4x1 + 3x2  240 hours of carpentry time available

2x1 + 1x2  100 hours of painting time available
x1 ; x2  0
Using the graphical approach, find the optimum solution by applying the corner-point method.
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Management Science
Lucey, T. (1996) Quantitative Techniques. ELST with Continuum.
Render, B. & Stair, R.M. Jr. Quantitative Analysis for Management. Prentice-Hall.
Render, B. & Stair, R.M. Jr., Hanna, M.E. and Hale, T.S.: Quantitative Analysis for
Management. 12th Ed., Pearson
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CHAPTER 6
DECISION THEORY
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 Identify the relevant probabilities from a decision theory problem
 Draw a decision tree according to alternatives of the problem
 Calculate economic monetary values of all chance nodes
 Correctly answer questions pertaining to the decision node
 Give appropriate advice based on the decision node.
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CONTENTS
Introduction
Basic Steps in a Decision Process
Drawing a Decision Tree
Making a Decision
References
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Management Science
CHAPTER SIX
DECISION THEORY
1. Inroduction
As already known that Management Science comprises all tools, techniques, and models that
help managers in making objective decisions given different situations, we now look at a
specialised area which provides a formal analytical framework for decision making under
conditions of uncertainty. This area is called the decision analysis or decision theory.
The nature of the decision theory is such that it provides a technique used to determine optimal
strategies where a decision-maker is faced with several decision alternatives and an uncertain, or
risky, pattern of future events (Vohra, 2001:612).
2. Basic steps in the decision process
The optimal decision is approached, under the decision theory, by a process that is characterised
by the following basic steps according to Vohra (2001:612):
(a) Identification of the various possible outcomes, called states of nature or events of the
decision problem. The events are beyond the control of the decision-maker.
(b) Identification of all the courses of action that are available to the decision-maker. The
decision-maker has control over choice of these courses of action.
(c) Determination of the pay-off function which describes the consequences resulting from
the different combinations of the acts and events.
(d) Choosing from among the various alternatives on the basis of some criterion, which may
involve the information given in step (c) only or which may require and incorporate some
additional information.
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Management Science
There are additional steps according to Render & Stair (2000:118) which are also important and
are included here as complementary to four that have been outline above:
(e) Define the problem.

(f) Structure or draw the decision tree.
(g) Assign probabilities to the states of nature.
(h) Solve the problem by computing expected monetary values (EMV’s) for each state of
nature node. That is done by calculating EMV of each chance node, starting at the right
hand side of the tree and working backwards to the decision node on the extreme left
hand side.
It is important to note that all decision trees are similar in the sense that they all contain decision
points or nodes and state of nature points or nodes.
The size and shape of a decision tree depend upon the nature of the decision problem
characterised by the number of alternatives available for consideration and the number of
probability sets that have to be blended together before the decision tree is drawn.
For more information on this subject you must read sections 3.6 up to section 3.9 of Render et.
al. (12th Ed.).
3.Drawing a decision tree
This is illustrated by an example adapted from Anderson et al (2001:130).
Myrtle Air Express has decided to offer direct service from Cleveland to Myrtle Beach.
Management must decide between a full price service using the company’s new fleet of jet
aircraft and a discount service using smaller capacity commuter planes.
It is clear that the best choice depends on the market reaction to the service Myrtle Air offers.
Management has developed estimates of the contribution to profit for each type of service based
upon two possible levels of demand for service to Myrtle Beach: strong and weak. Management
believes that the probability for strong demand is 60%. The probability that customers will opt
for the discount flights is 0.70. The following table shows the quarterly profits in thousands of
rands.
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Management Science
Table 3.1: Demand for Service

Service Strong Weak
Full price R960 - R490
Discount R670 R320
The decision tree for this example is shown on Annexure 3.
4. Making a decision
It appears from the decision tree on Annexure 3 that the option that would yield better financial
results is the discount flights. This kind of approach to making a decision is called the Maximum
Likelihood Criterion (Hillier & Lieberman:2000).
The other two decision criteria found in most literature are the Equally Likely Criterion, and the
Baye’s Decision Rule.
 ACTIVITY
Problem 3.53 (Render et. al., 12th Ed:126)
Mary is considering opening a new grocery store in town. She is evaluating three sites:
downtown, the mall, and out at the busy traffic circle. Mary calculated the value of successful
stores at these locations to be: downtown, R250 000; the mall, R300 000; the circle, R400 000.
Mary calculated the losses if unsuccessful to be R100 000 at either downtown or the mall and
R200 000 at the circle. Mary figures her chance of success to be 50% downtown, 60% at the
mall, and 75% at the traffic circle. Draw a decision tree for Mary and select her best alternative.
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Hillier, S.F., Hillier, M.S., and Lieberman, G.J. (2000) Introduction to Management Science.

Irwin McGraw –Hill.
READING
Anderson, D.R.,
Read Chapter Sweeney,
4 of the 7th orD.J. and Williams, T.A. (2001) Quantitative Methods for Business.
8th Edition
Thomson South-Western.
Render, B. and Stair, R.M. Jr. (2000) Quantitative Analysis for Management. Prentice-Hall.
Render, B. and Stair, R.M. Jr., Hanna,M.E., Hale, T.S.: Quantitative Analysis for
Management, 12th Ed., Chapter 3.
Vohra, N.D. (2001) Quanntitative Techniques in Management. Tata McGraw-Hill.
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CHAPTER 7
INVENTORY CONTROL MODELS
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Management Science
 Understand the importance of inventory control
 Outline and briefly discuss functions of inventory
 Briefly discuss characteristics of inventory
 Understand ABC analysis
 Understand the use of safety stock with known and unknown stock-out costs
 Use the economic order quantity (EOQ) or optimal order quantity (Qopt) to determine how
much to order
 Compute the re-order point (ROP) to determine when to order inventory
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Management Science
CONTENTS
Importance of Inventory
Types of Inventory and their functions
Important Factors
Inventory System Characteristics
Safety Stock and Re-order Level
The use of ABC analysis
Optimum Order and Price Breaks
Finding the EOQ
Determining the Optimum Production Quantity
EOQ and Quantity Discounts
References
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Management Science
CHAPTER SEVEN
INVENTORY CONTROL MODELS
1. Introduction
The term inventory means the same thing as the well-known term stock. Inventory refers to any
kind of stock that is needed by an organisation to carry on with its business or service. The
reason for inventory control to be included in Management Science is the fact that control
thereof requires managers to make decisions that are based on justifiable techniques and are
economic driven. In normal business organisations different types of inventory are found.
Common inventory/stock examples are:

(1) Inventory bought for re-sale in retail, wholesale, and distribution organisations.
(2) Stock of raw materials for manufacturing or processing of any kind as normally found in
factories, restaurants, hotels, boarding houses, refineries, etc.
(3) Stock of stationery for use in offices and tuition institutions.
(4) Stock of bank notes and coins usually found in banks and other financial institutions.
Considering the list of inventory types given above, it is clear that stock is one of those business
items that are crucial in continuous operations of many kinds of organisations. Depending on the
type of organisation, various stock quantities/levels are required to sustain the existence of an
organisation. As indicated above, stocks are kept for different purposes, which helps us to
classify inventories into different types.
2. TYPES OF INVENTORY AND THEIR FUNCTIONS
(1) Movement inventories. These are stock quantities found between the point of supply and the
point of delivery. They are also called pipeline or transit inventories.
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Management Science
Their nature is typified by the fact that it takes some length of time, depending on the distance,
between ordering stock and receiving the ordered stock i.e. supply lead time.
(2) Buffer inventories. This is also called safety stock. Buffer inventories are held to protect
against stock-outs which cause hick-ups in operations whilst waiting for ordered inventories.
Stock-outs frustrate customers and causes loss of such customers when they turn to other
suppliers for service or delivery of stock required.
(3) Anticipation inventories. These are inventories kept for future known demand to obviate lack
of supply when such demand becomes due. This is often done when it is known that there
would be a plant shut down or strike. It is also common for a state to stockpile oil reserves in
anticipation of war, economic sanctions, or unpredictable price fluctuations.
(4) De-coupling inventories. Inventories of unfinished goods are sometimes manufactured and
kept for the purpose of avoiding delays in the production line at some workstations, caused
by lack of supply from previous workstations. This is normally caused by the differences in
processing speed at different workstations. The idea here is to obviate a chain reaction of
delays that can be avoided without incurring additional unnecessary costs. De-coupling
inventories are kept at bare minima.
(5) Cycle inventories. For some types of inventories it is advisable and economical to order them
in lots or batches rather than in small amounts. The nature of ordering, in this regard, creates
cycles of ordering times.
(6) Seasonal inventories. Some commodities are only produced or supplied at certain seasons,
e.g. citrus fruit, honey, etc. Such a type of inventories needs to be kept in adequate quantities
to enable continuous supply during other seasons.
(7) Display/promotional inventories. Some stock is normally produced or purchased for the
purpose of display or enhancement of increased demand. If consumable, such stock is
written-off and disposed of at the end of its usable life. However, if it is not consumable, it is
normally sold out at a reduced price if its time of use comes to an end.
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3. IMPORTANT FACTORS IN INVENTORY CONTROL
Whenever decisions have to be made in inventory control, the following four basic questions
need to be answered:
(a) How much to order?

(b) When should the order be placed?
(c) How much buffer stock should be kept?
(d) How much to invest in each type of stock?
This brings us to the issue of inventory costs. Here, management decisions have to be made.
Inventory costs form part of inventory system characteristics.
4. INVENTORY SYSTEM CHARACTERISTICS
In order for students to read extensively in this regard, the characteristics shall only be listed.
Students must read prescribed text and other recommended literature in order to be able to
outline and discuss the aspects of an inventory system:
(1) Purchase costs

(2) Ordering/set-up costs
(3) Carrying costs
(4) Stock-out costs
(5) Supply lead time
(6) The nature of demand.
(7) Order cycle
(8) Number of items/order size
(9) Time Horizon
(10)Number of supply echelons
(11)Inventory replenishment
(12)How much to invest in stock
Other information in this regard can be obtained in almost all Operations Management literature.
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Management Science
5. SAFETY STOCK AND RE-ORDER LEVEL
Safety stock (SS) is additional stock that is kept on hand to obviate stock-out costs whenever the
supply lead-time becomes longer than normal due to unforeseen circumstances. Supply lead-time
is the period of time from the date the order is placed to the date the ordered goods are delivered.
Re-order level also called re-order point (ROP) refers to a point in time when the next order is
placed, before running out of stock.
There is a relationship between ROP and SS in the sense that both are aimed at preventing stock-
out situations. Determining the re-order point requires an in depth study of the trend of the
previous deliveries in order to determine the average lead time. Once the average lead-time is
known and the daily demand (also on average) is known, then the re-order level is calculated
according to Render et. al. (12th Ed: 215) as follows:
ROP = (demand per day) x (lead time for a new order in days)
=dxL
Safety stock is also determined on the basis of the desired service level (S) when the stock-out
costs are not known. In the case of known stock-out costs it is done by initially determining the
probability distribution of the daily demand lead time (DDLT) followed by determination of
optimal re-order level both of which lead to the determination of the optimal safety stock [Vohra
(2001:409)].
The resulting formulae are as follows:
(a) When stock-out costs are known:-

Service Level, S = number of units supplied without delay
Number of units demanded
(b) When stock-out costs are not known:-

Safety stock = reorder level – expected DDLT
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When all these have been determined, Render & Stair (2009:234) go on to say that on of the best
ways of maintaining a safety stock level is to use the reorder point. This is done by adding the
number of units of safety stock as a buffer to the reorder point. Therefore the revised reorder
point formula becomes:
ROP = d x L + SS
where
SS = safety stock
It must be noted, however, that determining stock-out costs may be difficult or impossible. This
actually means that it is a very intricate process to determine precisely the stock-out costs.
6. THE USE OF THE ABC ANALYSIS
The ABC analysis is sometimes called Pareto Analysis, as it was originally introduced by Pareto.
The nature of this type of analysis is that inventory is classified into three categories based on the
usage and their rand value in those categories.
This technique of inventory control is important in the sense that it takes into consideration the
amount of money invested in each category and the rate of usage. This has a bearing as to how
inventory levels should be controlled.
The control approach in this regard is that category A inventory has a high usage rate thus
rendering it crucial to the organisation in terms of levels. Normally the monetary value of this
class of inventory averages around 70% of the total inventory cost while it only constitute about
10% of the total units of inventory stored.
The next category classified as B, usually comprise about 20% of the total volume of inventory
and also comprising about 20% rand value of the total inventory cost. The third category i.e. C
category, normally constitute about 10% of the total inventory in rand value whilst constituting
about 70% of the total volume of inventory.
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In terms of control, A category requires rapid and careful monitoring because of their
importance. The B category is important for the operations but not critical. Lastly, the C category
is the least important in terms of the level of control required.
7. OPTIMUM ORDER AND PRICE BREAKS
As we all know that capital is one of the scarce resources, it is vital to make appropriate
decisions when it comes to quantities to be ordered when stocks are depleted. One popular
technique in this regard is the economic order quantity (EOQ) also called the Optimum Order
Quantity (Qopt). This model is also referred to as the Wilson formulation [Vohra(2001:389)].
When this model was developed with due consideration of inventory costs such as handling
costs, ordering costs, storage space available, and the availability of money intended for
investing in inventory. That is why this model also features when consideration is given to price
breaks (discounts) offered by suppliers.
The basic EOQ model comprises the following factors in its formula:
1. Annual demand symbolised by the letter D.

2. Stock handling costs denoted by Ch.
3. Costs pertaining to placement of an order indicated by Co.
4. Number of units per order represented by the letter Q.
5. Optimum number of units per order indicated as Q*.
The model is based on the following assumptions:
1. Demand is known, continuous and constant over time.

2. The lead-time is known and fixed.
3. The inventory from an order arrives in one batch, at on point in time. This means that the
receipt of stock is instantaneous.
4. Quantity discounts are not possible i.e. the purchase price of the item is constant.
5. Within the range of any number of stock items to be ordered, the holding costs per unit and
the ordering costs per order are constant and thus independent of the quantity ordered.
6. If orders are placed at the right time, stock-outs or shortages can be completely avoided.
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8. FINDING THE ECONOMIC ORDER QUANTITY
Let us look at an example adapted from Vohra (2001:423):
A manufacturing company has determined from an analysis of its accounting and its production
data for a certain part that (a) its demand is 9000 units per annum and is uniformly distributed
over the year, (b) its cost price is R2 per unit, (c) its ordering cost is R40 per order, (d) the
inventory carrying charge is 9 percent of the inventory value.
Furthermore, it is known that the lead-time is uniform and equals 8 working days and that the
total working days in a year are 300. The number of safety stock units is not known.
Determine:-
(a) The economic order quantity, EOQ;
(b) The optimum number of orders per annum;
(c) The annual total ordering and holding costs associated with the policy of ordering an amount
equal to EOQ;
(d) The re-order level;
(e) The number of days’ stock at re-order level;
(f) The length of the inventory cycle;
(g) The amount of savings that would be possible by switching to the policy of ordering EOQ
determined in (a) from the present policy of ordering the requirements of this part thrice per
year.
Calculations:
__________
(a) EOQ, = Q* = \/ 2x9000x40 = 2000 units
0.09(2)
(b) Optimum number of orders per annum, N* = D/Q*

= 9000/2000
= 4.5 orders
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Management Science
(c) Total ordering and holding costs, TC = D Co + Q Ch

Q 2
= 9000/2000(40) + 2000/2(0.18)
= 180 + 180 = R360
(d) The re-order level = lead-time in days multiplied by demand per day
= 8 x 9000/300 = 240 units
(e) Number of days’ stock at re-order level (ROP) = 8 days = lead-time
(f) Length of inventory cycle, T* = Q*/D = 2000/9000

= 0.222 year or 0.222 x 300 = 66.7 days
Alternatively, T* (in days) = Q*/demand per day

= 2000/30 = 66.7 days
(g) For the present policy of an order (9000/3) = 3000 units
Ordering costs = R40 x 3 = R120

Holding costs = (3000/2) x 0.18 = R270
T(3000) = 120 + 270 = R390
Therefore, saving in cost = R390 – R360 = R30 per annum.
9. DETERMINING THE OPTIMUM PRODUCTION QUANTITY
In the case where inventory builds up over a period of time after an order has been placed or
when units are produced and sold simultaneously. In such situations the daily demand rate has to
be taken into consideration. A model like this suits a production environment and is called the
production run model.
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The differences between the EOQ for units procured from outside the organisation and the EOQ
for units produced within the organisation are that the latter has set-up cost instead of ordering
cost. The other difference is that the carrying cost pertaining to the production model is
determined differently from the EOQ model for external procurement. By set-up cost we mean
the cost of setting up the production facility to produce the required unit internally. The cost
includes salaries and wages of the personnel involved, engineering and design cost of making the
set-up, paperwork, supplies, utilities, etc.(Render &Stair, 2009:232).
The annual inventory carrying cost for the production model is determined by using the
following variables in the equation:
Q = number of units per production run

Ch = holding cost per unit per annum
p = daily production rate
d = daily demand rate
t = length of the production run in days
where
(1) Annual inventory holding cost = (average inventory level) x Ch

(2) Average inventory level = ½ (maximum inventory level)
(3) Maximum inventory level = (total produced during the production run)
minus
(total used during the production run)
= Q(1-d/p)
(4) Annual inventory carrying cost
= ½ X Q(1-d/p) X Ch
For production run purposes, where a product is being produced over time, the ordering cost is
replaced by set-up cost.
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Therefore Annual set-up cost = (number of set-ups per year) X (set-up cost per set-up)
= D. Cs
Qp
Where: D = annual demand in units

Qp = quantity produced in one batch
Cs = set-up cost per set-up
Finally, the equation for determining the Optimal Production Quantity is

__________
Qp = \/ 2DCs
Ch(1-d/p)
Showing how this model works, we take an example adapted from Vohra (2001:449). Company
A wants to know what production cost its major competitor, Company B, has assigned to
cylinder head gasket of a particular size. After a further investigation, Company A has collected
the following data about Company B’s production of this gasket:
Production-lot size: 2600 units

Set-up cost : R135
Annual demand : 30 000 units
Daily demand : 100
Production rate : 200 units per day
Holding cost : R10 per unit
What is the economic production quantity and the optimal number of production runs per year?
_______________
1.EOQP = \/ 2 x 30000 x R135
R10(1-100/200)
= 1 273 units(rounded up)
2. Optimal number of runs per year = 30 000/1273

= 23.56 or 23.5 runs
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10. EOQ AND QUANTITY DISCOUNTS (PRICE BREAKS)
The procedure followed in the case of price breaks is as follows:
(1) Substitute Ch with IC in the EOQ equation because it is common to express the
carrying cost (I) as a percentage of unit cost (C), instead of a constant Ch in such type
of calculation.
(2) Calculate Q* values for each discount quantity level.
(3) Adjust the successive Q* values to corresponding quantity discount values.
(4) Compute total cost of each discount quantity level and present in tabular form.
(5) Select the Q* value associated with the lowest total cost.
To illustrate the EOQ with consideration of price breaks, we look at one example adapted from
Render et. al. (12th Ed: 251):
Georgetown Products offers the following discount schedule for its 4-by 8- foot sheets of good-
quality plywood:-
ORDER UNIT COST ( R)_
9 sheets or less 18.00

10 to 50 sheets 17.50
More than 50 sheets 17.25
Longtill Homes orders plywood from Georgetown Products. Longtill Homes has an ordering
cost of R45, carrying cost is 20% of unit cost, and annual demand is 100 sheets. What do you
recommend? The calculations in sequence would be as follows:
____________
1. First Q* value Q = \/ 2 x 100 x 45
0.2(18)
= 50 units
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Management Science
____________
2. Second Q* value Q = \/ 2 x 100 x 45
0.2(17.50)
= 50.7 units(rounded off)
____________
3. Third Q* value Q = \/ 2 x 100 x 45
0.2(17.25)
= 51 units(rounded up)
According to Vohra (2001:399), the total cost in tabular form is:
Table 8.1
Calculation of Total Annual Cost: Price Break Model

Unit Order Annual Annual Annual Annual
Category Price Quantity Holding Ordering Purchase Total
(R) Q* Cost(R) Cost(R) Cost(R) Cost(R)
1 18.00 Irrelevant - - - -
2 17.50 50 175.00 90 750 2015.00
3 17.25 60 172.50 75 1725 1972.50
The quantity of 60 units is chosen because it is associated with the total cost.
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 ACTIVITY
Calculate answers for problems 6-24 and 6-25 of the 2003 edition (8th Edition)
 READING
Read Chapter 6 of Render and Stair,10th Edition
Vohra, N.D. (2001) Quantitative Techniques in Management. Tata McGraw-Hill
Render, B. and Stair, R.M. Jr. (2000) Quantitative Analysis for Management. Prentice-Hall
Render, B. and Stair, R.M. Jr., Hanna, E.M., Hale, T.S.: Quantitative Analysis for Management,
12th Ed., Pearson.
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CHAPTER 8
PROJECT PLANNING
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 Construct an activity schedule
 Determine the critical path
 Determine the length of the project
 Draw a project network on nodes
 Draw a detailed project network
 Use the Gantt chart for scheduling project activities
 Adjust cost after crashing some activities due to schedule constraints
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CONTENTS
Introduction
Project Management Techniques
PERT/CPM Network
Activity Schedule
Gantt Chart
References
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Management Science
CHAPTER EIGHT
PROJECT PLANNING
1. INTRODUCTION
Some tasks or assignments are best accomplished by approaching them as projects. Examples of
such tasks can be Research and Development (R&D), a marketing survey, military operations,
AIDS awareness campaign, etc. Projects like these require a careful and proper planning. Project
planning is a crucial part of project management.
2. PROJECT MANAGEMENT TECHNIQUES
There are two well-known types of project management techniques, viz. Project evaluation and
review technique (PERT), and the critical path method (CPM). With regards to project
networking, PERT and CPM are used interchangeably hence a project network can be called a
CPM/PERT network. PERT helps in computing optimistic, probable, and pessimistic timing
deriving from the expected duration of each activity. From such data it becomes easy to compute
project variance and project standard deviation which are of great assistance in managing the
project whilst it is running in order to finish it by the expected date. Another tool that is of
importance in scheduling activities in relation to the number of staff available for the project and
to make decisions as to which activities can be crashed, is the Gantt Chart sometimes referred to
as the Bar Chart.
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Management Science
3. THE PERT/CPM NETWORK
A project network can either show activities on arrow or show activities on nodes. For the
purpose of this module we prefer the activity on node.
The most important concepts in a project network are the critical path, slack time, and the length
of the project. The critical path is the longest duration of activities that are interconnected i.e.
which precede or follow one another whereby none of those activities have slack time. It is
therefore, the path represented by a series of activities that have no slack time. Slack time is a
free time of an activity. Free time is the total time an activity can be delayed without affecting
the latest start time of the immediate following activity. The length of the project is the total
duration of all activities on the critical path. In order to determine the length of the project and
the critical path easily, it is better to start off by constructing an activity schedule. To illustrate
this let us look at the example whose details appear in the table shown below:
Table 9.1:
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Immediate Normal Crash Normal Crash Staff
Activity Predecessor Time Time Cost Cost Needed
(Months) (Months) (R) (R)_______________
A - 2 1 10 000 14 000 4
B - 3 2 30 000 34 000 3
C A 1 1 3 000 3 000 1
D B 3 2 6 000 8 000 3
E B 2 1 20 000 28 000 5
F C, D 2 1 10 000 14 000 2
G E 1 1 8 000 8 000 1
The total number of staff available for this project is only 8 people.
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Management Science
First Step:
Table 9.2:
ACTIVITY SCHEDULE
ACTIVITY ES EF LS LF SLACK CRITICAL PATH

A 1 2 4 5 3 No
B 1 3 1 3 0 Yes
C 3 3 6 6 3 No
D 4 6 4 6 0 Yes
E 4 5 6 7 2 No
F 7 8 7 8 0 Yes
G 6 6 8 8 2 No______
The critical path is on activities B-D-F since all those activities have no slack time, as can be
noticed on the activity schedule.
How was the activity schedule constructed? The first two columns i.e. ES (early start) and EF
(early finish) have been constructed by considering the information in the predecessor and
expected time columns of Table. After scheduling activities A and B, we proceeded with
scheduling activity C as a follower of activity A, then scheduled activities D and E as followers
of activity B. When scheduling F, we set the starting time shortly after D instead of after C
because D finishes later than C. Finally, G is scheduled as following E. This is often called the
forward pass.
It must be noted that for the first two activities i.e. A and B, that do not follow one another, we
start them at the beginning of month 1 and not at month 0 because practically there is no such
thing as period zero. The other important thing is that for any activity that follows another we do
not start it at the finishing month of its predecessor. It is always started at the beginning of the
following month.
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Regarding the LS (late start) and LF (late finish) columns the method used considers the
continuous sequences for the first two activities i.e. activities A and B. For activity A the
sequence is A-C-F. Working backwards, we can notice that activity F starts on month 7 and it
following activity C. This means that the finishing month of activity C can be delayed to month
6, which means that the late start of C can now be month 6 because its duration is one month
anyway. Working backwards again we notice that the finishing month of activity A can be
delayed to month 5 because the late start of its follower is month 6, thereby setting the late start
for a at month 4 because the duration is 2 months.
The sequence of activity B on the one path is B-D-F and on the other path it is B-E-G. On the B-
D-F path, working backwards, we notice that the sequence is on the critical path because the
finishing times of all those activities can not be delayed. On the B-E-G path, starting from G we
realise that the finishing time of G can be delayed by 2 months until that of activity F. Having
done that, then the finishing time for E can also be delayed until month 7, just before the late
start of G. Activity B is not affected by adjustments of this sequence because its timing cannot be
adjusted because that will affect the B-D-F path. This way of determining LS and LF is referred
to in most literature as the backward pass.
It must be stated that the duration of the critical path is also the length of the whole project in
terms of time. A lot of books approach the determination of the critical path differently, but the
one used in this study guide seems to be easiest because it results from the construction of the
activity schedule.
Referring to Table 9.2 above it is noticed that working this example might require crashing one
or more activities when scheduling according to the number of people available to perform the
tasks in each activity. It is stated that the number of people available is limited to 8 only. Let us
look at the effect this might have when we schedule the utilisation of staff available by using the
Gantt Chart. Crashing an activity is shortening the duration of the activity by either engaging
more people as casual workers thereby incurring additional expenditure.
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Because of the knowledge and expertise required to perform certain tasks it is sometimes not
advisable to engage casual people, but to utilise the staff available on overtime basis thereby also
incurring further expenses than doing that job under normal circumstances.
Let us schedule the utilisation of available staff through the Gantt Chart or Bar Chart as depicted
below. We shall begin by scheduling the critical activities first simply because the duration of
such activities are the ones that determine the entire length of the project.
The staff members available are identified by the following pay numbers:
11 22 33 44 55 66 77 88
The staff requirements for activities A; B; C; D; E; F; G are 4; 3; 1; 3; 2; 2; 1 respectively.
Table 9.3:
Gantt Chart
Months
Activity 1 2 3 4 5 6 7 8
A \ 44; 55/
\ 66; 77/
B \11; 22; 33; 44 /
C \88/
D \ 11; 22; 33 /
33
44
55
66
\77/
E
F \ 11; 22/
G \88/
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Management Science
Narration:
During month 1 to month 3, three people are allocated to activity B. The same three members of
staff are allocated again to activity D during months 4 to 6 after finishing activity B at the end of
month 3. When activity A begins on month 4, four staff members are allocated to that activity
until the end of month 5. At the beginning of month 6 activity C and activity E must be started
but only five staff members are available i.e. 44; 55; 66; 77; 88 whilst we need six people. This is
the point in time when we need to crash one activity in order to cope with the staff we have.
Obviously we can crash neither activity C nor activity G since each one of them has duration of
one month only. That leaves us with one option of crashing activity E by causing the staff to
work overtime during weekdays and on weekends to cover the expected number of hours to be
worked in two months. We then allocate staff member 88 to activity C at the beginning of month
6, staff members 33; 44; 55; 66; 77 to activity E at the beginning of month 7, and staff members
11; 22 to activity F at the beginning of month 7. When staff member 88 finishes activity C at the
end of month 6, she continues to do activity G at the beginning of month 8.
The financial effect of crashing activity E results in R87 000 (total normal cost for all) minus
R20 000 (normal cost for E) plus R28 000 (crash cost for E) equalling R95 000. It must be noted
that crashing activity E affects the slack time of this activity by increasing it to 3 months but
without affecting the length of the project because activities on the critical path were not
tampered with.
The detailed project network for this exercise is contained in Annexure 4.
 READING
Read Chapter 11 of Render et. al., 12th Ed.
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Render, B. Stair, R.M. Jr., Hanna, M.E and Hale, T.S., Quantitative Analysis for Management,
12th Ed., Pearson
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CHAPTER 9
WAITING LINE MODELS
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 Understand the Poisson distribution of arrivals
 Understand the exponential distribution of service
 Determine the mean arrival rate
 Determine the mean service rate
 Discuss the characteristics of queuing systems
 Identify different queuing systems
 Calculate all relevant values pertaining to queuing models
 Interpret results and make a decision.
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CONTENTS
Introduction
Characteristics of Waiting Line Models
The Nature of Waiting Lines
Different Types of Waiting Line Systems
Basic Assumption of Waiting Line Models
Symbols used in calculations
References
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Management Science
CHAPTER NINE
WAITING LINE MODELS
1. INTRODUCTION
It has become part of our daily life to find ourselves having to wait for service at a filling station,
take-away outlets, government offices, banks, and various other places where customers are
attended to on a first-come first served basis. To a customer, waiting for service is one of the
most dreadful experiences. For this reason managers of the type of businesses as already
indicated, are always faced with a situation of making a decision that will minimise customer
complaints without compromising the objectives of the business.
2. Characteristics of Waiting Line Models
Waiting line models consist of mathematical formulae and relationships that can be used to
determine the operating characteristics. Those characteristics also serve as performance
measures for a waiting line [Anderson et al (2001:592)]. The operating characteristics of interest
that have been commonly identified by many authors include the following:
(1) The probability that no units are in the system.

(2) The average number of units in the waiting line.
(3) The average number of units in the system (the number of units in the waiting plus
the number of units being served).
(4) The average time a unit spends in the waiting line.
(5) The average time a unit spends in the system (the waiting time plus the service time).
(6) The probability that an arriving unit has to wait for service.
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Management Science
The waiting line is more often referred to as a queue in the terminology of Management Science.
It is therefore not surprising to find that the body of knowledge dealing with waiting lines is
known as queuing theory (Anderson et al).
3. THE NATURE OF WAITING LINE MODELS
Waiting line models are often based on assumptions such as Poisson arrivals and exponential
service times. When applying any waiting line model, data should be collected on the actual
system to ensure that the assumptions of the model are reasonable [Anderson et al (2001:595)].
The Poisson probability function provides the likelihood of x arrivals of units in a system in a
specific time period. The said probability function is as follows:
P(x) = e -  x for X = 0, 1, 2, 3, 4, …..

X!
where
P(X) = probability of X arrivals
X = number of arrivals per unit of time
 = average arrival rate
e = 2.7183
It has also been found by quantitative analysts that if the probability for the service time can be
assumed to follow an exponential probability distribution, formulae are available for providing
useful information about the operation of the waiting line(Anderson et al:2001).
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Management Science
Using an exponential probability distribution that the service time will be less than or equal to a
time of length t is:
P(service time  t ) = 1 – e -
where
 = the mean number of units that can be served per time period
e = 2.7183
4. DIFFERENT TYPES OF WAITING LINE MODELS
The widely known types are the following:
 Single-channel single-server waiting line model

 Multi-server multi-queue single channel waiting line model
 Single-queue multi-server waiting line model
For more information on the structure and characteristics of each of these models, the student
must read the prescribed text and other recommended books.
5. BASIC ASSUMPTIONS OF QUEUING MODELS
(1) Customers or units arrive according to a Poisson distribution. In simple terms this means that
arrivals occur randomly. The probability of an arrival during a specified time interval
remains constant whilst independent of the number of previous arrivals and the length of the
waiting time.
(2) It is also assumed that when a unit/customer arrives at the system, the service rule is first
come, first served.
(3) It is further assumed that there is no balking or reneging i.e. no customer/unit will leave the
system before being served.
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Management Science
(4) The other most important factor is that service is assumed to follow a pattern of negative
exponential distribution. The explanation on the nature of this assumption has already been
given above.
(5) The fifth assumption would be determined by the characteristics of a particular model that is
being studied e.g. an assumption that there is one server, two servers, three servers, etc.
(6) The average service rate is greater than the average arrival rate.
(7) Service times also vary from one customer or unit to the next and are independent of one
another, but their average rate is known.
6. SYMBOLS USED IN CALCULATIONS
This can best be illustrated by way of an example. Let us tackle the example extracted from
Anderson et al (2001:621).
A fast food franchise is considering operating a drive-up window food-service operation.

Assume that customers’ arrivals follow a Poisson probability distribution, with a mean arrival
rate of 24 cars per hour, and that service times follow an exponential probability distribution.
Arriving customers place orders at an intercom station at the back of the parking lot and then
drive to the service window to pay for and receive their orders.
We are considering, for the purpose of this illustration, only a single-channel operation in which
one employee fills the order and takes the money from the customer. The average service time
for this alternative is 2 minutes.
We let
 = mean number of car arrivals per time period (hour)
 = mean number of cars served per time period (hour)
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Management Science
(a) What is the probability that no cars are in the system?
Po = 1 -  = 1 – 24 = 1 – 0.8 = 0.2 = probability that there 0 cars in the system.

 30
(b) What is the average number of cars waiting for service?
Lq = ___2_ = 242 _ = 576_ = 576 = 3.2 cars waiting in queue.

( -) 30(30-24) 30(6) 180
(c) What is the average number of cars in the system?
L= ____ = _24_ = 24 = 4 cars in the system on average.

- 30-24 6
(d) What is the average time a car waits for service?
Wq = ____ = __ 24___ = _24__ = 24_ = 0.133 of 60 min = 8 min waiting.

(-) 30(30-24) 30(6) 180
(e) What is the average time spent in the system?
W = _1_ = __1__ = 1 = 0.16 of 60 = 10 minutes in the system.

- 30-24 6
(f) What is the probability that an arriving car will have to wait for service?
Pw =  = 24 = 0.8 probability that an arriving car has to wait for service*.

 30
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Management Science
(g) What is the probability that there are more than 2 cars in the system?
Pn > k = ( ÷ µ) k + 1 = (24 ÷ 30) 2 + 1 = 0.512
*This means that there is an 80 percent chance that the arriving car will arrive whilst the system
is busy. This is the same as saying that the utilisation factor of the system is 0.8 meaning that the
system is 80 percent utilised on average. Therefore the same answer would be arrived at by using
the utilisation factor formula.
Utilisation factor formula:  =  .


For the other types of waiting line models, the basic formula is manipulated to suit that situation
as can be studied in the prescribed book and other books.
 READING
Read Chapter 12 of Render et. al., 12th Edition.
 ACTIVITY
Do calculations for problems 12.14 and 12.15 in the prescribed book.
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Management Science
Anderson, D.R., Sweeney, D.J., and Williams, T.A. (2001) Quantitative Methods for Business.
Thomson South-Western.
Render, B., Stair, R.M. Jr., Hanna, M.E. and Hale, T.S., 12th Ed., Quantitative Analysis for
Management, Pearson.
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Management Science
CHAPTER 10
SOFT SYSTEMS METHOD
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Management Science
Having read through this chapter, the student is expected to be able to:
 Describe a problem situation given any case study.
 Use the ‘rich pictures’ approach in analysing and describing a problem.
 Utilise the systems approach and understand the inherent ‘human activity system’ within
other systems.
 Understand and identify ‘root definitions’ of each system in a situation.
 Understand and apply conceptual models in relation to root definitions.
 Distinguish between Mode 1 and Mode 2 usage of SSM.
 Apply SSM to Information Systems.
 Apply SSM to Corporate Strategy, Organisational Change, and any other problem/case
study situations.
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Management Science
CONTENTS
Introduction
The nature of Soft Systems Methods
The gradual stages of SSM
- Exploring and Finding Out

- Conceptual Models
- Comparison Stage
- Desirable and Feasible Change
SSM and Information Systems
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CHAPTER TEN
SOFT SYSTEMS METHOD
INTRODUCTION
The advent of Soft Systems Methodology derives from the realisation of the fact that the external
environment affecting humans comprises various systems, some interacting with one another and
some not compatible with one another.
According to Checkland (1999:A10), experience in the development of the Soft Systems

Methodology brought about awareness that there are two ways in which humans try to deal with
the complexity of the environment i.e. the world. The initial approach is that of spying the
systems in the world with a view to engineer such systems for the benefit of humans. The
subsequent approach is that of spying complexities and confusion with a view to organising
exploration of such as a learning system. The systems, which can be engineered, are quantitative
in nature and are solved by quantitative techniques. The methods of solving problems through
quantitative techniques are referred to as ‘hard’ methods. The solution to the other systems that
are complex and confusing are approached using models that seek to analyse and formalise the
problem in order to bring about cohesion among different systems characterising the problem
under study. This approach is referred to as the ‘Soft’ Methods.
The Nature of Soft Systems Methodology
This approach of applying ‘soft’ methods to problem solving is characterised by seven distinct
stages. The first two stages entail entering the problem situation, finding out about it and
expressing its nature.
This exercise has to be very thorough and precise to enable some first choices to be made of
relevant activity systems. These stages are followed by a third stage whereby the first choices are
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expressed as root definitions. In stage four, the root definitions are modelled into objective
concepts. In stage five, the conceptual models are compared to the perceived real world.
Thereafter, definition of the changes which could improve the situation is sought whereby the
defined changes have to meet the ‘desirable in principle’ and ‘feasible to implement’ criteria.
Finally, stage seven then takes the action to improve the problem situation, so changing it and
enabling the cycle to begin again. (Checkland and Scholes,1999:A12).
1. The gradual stages of SSM
The SSM approach is a flexible process characterised by a seven-stage guideline as discussed in

the sub-sections hereunder. The process is said to be flexible because according to Checkland
(1999), it is not unusual to have to loop back to earlier stages in the process due to complexities
of a particular problem at hand.
1.1 Exploring and Finding out
The first stage here is studying the problem situation in fine details in order to appreciate what
the real problem/s are in a descriptive form. Once the problem situation is described in its
unstructured form, it has to be expressed in a form of a practical structure.
After expressing the problem in descriptive form, the next stage can be effected by a number of
possible approaches. For the purpose of this module we shall confine ourselves to only two
approaches namely ‘the rich pictures’ and ‘intervention/social/political analysis.
1.1.1 Rich pictures
Drawing pictures and connecting them with arrows where interaction is perceived, is a method
whereby a person conducting the study endeavours to visually express the problem as perceived.
The rich pictures commences with the drawing of the system boundary.
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The system boundary represents the stakeholders of the problem situation, but those that are
outside the system itself. The system boundary can be referred as the immediate environment to
the system. If, for example, the problem situation involves a state hospital, the system boundary
would include pictures representing the community, service providers, transport services,
politics, legislation, local government, etc. The inner picture, the system itself, would be
represented by pictures of the facility, doctors, nurses, security, administrative staff, labourers,
admission and discharge system, hospital equipment, communication and information system,
rule and regulations, hospital management, hospital organisation structure, etc.
Rich pictures can be termed as a process of scanning the system and its immediate environment
and reducing that information into pictures with concise descriptions thereof. For the purpose of
illustration, a rich picture for the state hospital hypothetical problem is presented at the end of
this chapter as Annexure 1.
The rich pictures help in drawing attention to the many people or groups, who could be seen as
the stakeholders in any human situation. This then warrants the use of the second approach to
finding out. The second approach is to use an Intervention/Social/Political Analysis. This
approach has three sub-stages/analyses.
Review Question 1
Read pages A16 to A19 of Checkland & Scholes (1999), particularly the section entitled
‘Finding out About a Problem Situation (see Annexure 4 at the end of this chapter).
Identify the following from the White Paper on the New NHS 1997 rich picture:
- Structural elements of the picture (within the systems boundary)
- Process elements of the picture (within the system boundary)
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3.1.2 Intervention Analysis
The first analysis is the Intervention Analysis whereby the client, the problem solver, and the
problem owner are identified deriving from the rich picture. For any situation where there is a
problem the people that are identified through this intervention are always present. In the
example about a hospital problem mentioned earlier on the identified people could be as follows:
- the Administration Department as the ‘client’

- the entity given the task to investigate and rectify the problem as the ‘problem solver’
- the Superintendent of the hospital as the ‘problem owner’
3.1.2 Social Analysis

The next sub-stage is the Social Analysis, which is Analysis Two. At this stage the framework of
the roles, norms of behaviour, and values by which performance is judged and the ongoing
analysis of entities, which embody power are expressed. With reference to the hinted hospital
problem the social analysis could reveal the following:
 Role: The Head of the Administration Department could be so bureaucratic, to such an

extent that the lives of critical patients are endangered, as long as the bureaucratic procedures are
satisfied to the letter before the patient receives medical attention. The administrative assistants
do as they are told even if they realise that the patient brought in by ambulance could die in front
of them as long as they take their procedural details.
 Norms: The Head of Administration is expected to maintain the policy of taking all details
of admissions taken at first instance; the administrative assistant is expected not to use his
discretion in cases of emergency.
 Values: The Head of Administration is judged by the accuracy of the admission records
whilst the Hospital Superintendent is judged by the smooth running of affairs of the hospital and
prompt provision of health care coupled with fewer patients dieing before receiving treatment.
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3.1.3 Political Analysis

The last sub-stage is Analysis Three, which is Political Analysis. The balance of power in this
situation analysis is between the Medical Superintendent and the Head of Administration. The
Medical Superintendent’s objective is immediate provision of health care once the patient enters
the hospital premises whereas the Head of Administration has the power to delay transference of
a patient’s record to the ward if deemed incomplete, thus delaying immediate treatment.
Activity 1
Choose a critical issue facing your own organisation. Draw a rich picture and undertake an
Intervention/Social/Political Analysis.
Emanating from the stage of exploring and finding out in 3.1 above, the issues that could emerge
from the hypothetical hospital problem are identified as follows:
a. Sluggishness of the admission process

b. Lack of quick communication between administration and health care
c. Lack of sensitivity by the Administration Department towards threatened life
These problematic issues draw attention to potential systems to overcome lack of fast
communication and lack of cohesion between administration and health care. The systems that
could be relevant in this scenario are:
a. Communication system to expedite health care.

b. Management information system (IT) for interdepartmental cohesion.
c. System to develop preparedness for attitude change.
For each of these systems, root definitions are derived in order to carve the way forward.
According to Buckinghamshire Chilterns University College (1999), root definitions are short
statements, which encapsulate what each system might do. Each short statement (root definition)
must contain reference to six components of the problem situation, namely:
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Customers
Actors
Transformation
Weltanschauung (‘world-view’ in German)
Owner
Environment.
With reference to the hospital example mentioned above CATWOE test yields the following
results:
Customers members of the public needing health care
Actors the local council, society, probably employee organisations, and
provincial department of health.
Transformation revision of rules, procedures, and processes
Weltanschauung community needs for prompt and effective health care
Owners Management Board of the hospital
society, other health institutions, local and national authorities,
local residents
It must be noted that customers include people within the hospital since they also benefit from
health care services provided by the hospital.
Activity 2
Read Case 11.1 found at the end of this chapter (extracted from Griffin, 2000) about the German
company, Continental Tire, at the end of this chapter and derive Root definitions of relevant
Systems. Conduct a CATWOE analysis of one root definition.
We have learnt that root definitions define what transformation occurs, by whom and for whom.
Therefore root definitions fall short in specifying how transformation takes place. This leads us
to the next stage.
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1.2 Conceptual Models
The shortcoming of the root definition is fulfilled by what is called a conceptual model.
According to Checkland (1999:313), a conceptual model is a systemic account of a human
activity system, built on the basis of that system’s root definition, usually in the form of a
structured set of verbs in the imperative mood. Such models should contain the minimum
necessary activities for the system to be the one named in the root definition. Only activities,
which could be directly carried out, should be included.
By way of an example, in the Boeing Co. (Case 11.2 found at the end of this chapter), inter alia,
three root definitions can be identified as revealed in the issues worthy of further investigation.
The three corresponding relevant systems are:
 Approval system
 Communication system
 Worker participation system
From these root definitions, a conceptual model must be derived in order to take the process of
investigation further. Deriving from the Boeing case study, a conceptual model is drawn as can
be seen on Annexure 2.
The conceptual model for the case study as already mentioned may be divided into two parts:
3.2.1 User Activities
On the right of the conceptual model attached as Annexure 3 at the end of this chapter, Three
user activities are defined:
 Define work content
 Define information relevant to work
 Define degree of satisfaction with system output.
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3.2.2 Monitoring and Control System

On primary basis, Circle Number 6 represents the monitoring activity for activities carried out in
circles 1 to 5. On secondary basis, Circle Number 9 represents the monitoring activity for
activities carried out in circles 7 and 8. Furthermore, Circle Number 9 feeds back to the primary
monitoring activity in Circle Number 6.
As already defined, the conceptual model depicts the minimum necessary activities of what the
system must do to be the one named in the root definition. This conceptual model proposes the
following:
(1) The Chairman of Boeing must see to it that activities in circles 1 to 5 are carried out by the
four top executives. His proposed activity is represented by Circle Number 6.
(2) The President and other three executives must ensure that the plan they commit themselves
to, in relation to the Chairman, is worked to fruition according to agreed strategy and feed
back quantifiable results to the Chairman. Their task is represented by Circle Number 9,
which feeds back to Circle Number 6.
Review Question 2
Determine and summarise the Weltanschaung for the worker participation system in relation to
the Boeing case.
1.3 Comparison Stage
It is now logical to proceed to Stage 5, which is a comparison stage, since a relevant conceptual
model has been drawn as the result of Stage 4. At this stage we shall compare the drawn
conceptual model with what is there already at Boeing.
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Checkland (1981), as cited in the Buckinghamshire Chilterns (1999) study guide, describes four
ways of conducting this comparison:
(1) Ordered questioning.

(2) Walking through the conceptual model.
(3) Conducting a general discussion.
(4) Model overlays.
Choosing the first of the four ways i.e. ordered questioning, we shall examine each activity in the
conceptual model by trying to answer the following questions:
 Does the activity exist or not in the real world?
 How is it done?
 How is it judged? (criteria and current judgement)
 How could it be done? (ideas for change)
Please note that activities referred to hereunder are represented by numbered circles in the
conceptual model diagram at the end of the chapter.
Activity 1
In circle number 1, the executive are expected to hold formal and recorded meetings in order to
keep proper actionable minutes. Referring to the case study, it appears that in their so-called
meetings that they do meet every Tuesday but there is no agenda, no reports, no audio-visual
equipment present, they just talk and disband.
According to the conceptual model, they must appoint someone to record proceedings of their
meetings or install equipment to record such. Their meeting should be guided by a logical agenda
building upon previous meetings. Each decision taken in the meeting must be actionable by one
of them by a stipulated date.
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Activity 2
There is no agreed clear strategy emanating from their so-called meetings such that each of the
executives is developing his own way of communicating with his own section of the company.
The perceived change could proceed to differing directions and cause chaos since there is no
common strategy. According to the conceptual model, the four executives have to formulate a
clear proposed strategy for discussion with all stakeholders. This would enable joint ownership
of the agreed strategy.
Activity 3
Whilst Boeing is introducing worker-participation teams at one of its division, the four
executives are still communicating with their respective departments according to a unique way
of each and every executive. This means that there is no uniform method of communicating with
staff in the company.
It therefore, becomes imperative according to this conceptual model activity for these executives
to first discuss a proposed strategy with the representatives of the worker participation teams.
This needs to be done on a scheduled action plan to be achieved at a specific stipulated due date.
Activities 4 & 5
Currently the four executives informally communicate with their respective parts of the
organisation apparently for the sake of finding out how people feel about the way things go in
the departments or divisions. There does not seem to have any clear objective in such informal
communication. Informal communication is essential as long as there is a procedure followed
when formal communication is effected.
The suggestion according to activity 4 of the conceptual model is that the discussions with
worker participation team representatives must result in agreement on final strategic objectives to
pursue for the whole company.
One of the specifics is to revise and shorten the approval system as part of the strategic change.
The agreed strategy must then be presented as a report to the Chairman of the company for his
attention and necessary action at his level.
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Activity 6
Having established what the joint strategy is, the Chairman’s function would be to monitor the
elements of all activities 1 to 5 on continuous basis.
Activities 7, 8, and 9
Assumption of his responsibilities in relation to the strategy, the Chairman must assign the
executive group members the task of setting measurable objectives for the performance of
worker participation teams in conjunction with their representatives. The set measurable goals
must be relevant to production and profit objectives derived from the joint strategy.
In addition to activities 7 and 8, the executive must be assigned the task of controlling the
performance of worker participation teams in relation to production and profit objectives and
provide continuous feedback to the Chairman as can be notice that the activity 9 reports back to
the Chairman’s activity 6. How will this change be effected? This brings us to the last two stages
of the SSM.
3.4 Desirable and Feasible Change

We have come to the final stages of the Soft Systems Method. We are now looking for a
desirable change, which is different from an optimal solution attained by ‘hard’ methods or
quantitative analysis. In this method we take factors into consideration namely:
 systemically desirable, and
 culturally desirable
Looking at the case study again, we initially explore if it is practical to bring about systemic
change. If due consideration is given to the fact that in one production facility of the company a
worker participation team approach has resulted in completion of a Boeing 777 transport jet
according to customer specification, it appears that a systemic intervention is attainable. The
systemic intervention would drive at tackling projects informally, that is, not via the bureaucracy
of hierarchical structures but through quick joint participation by use of worker participation.
Changing procedures can either be done through an external change consultant, which
Checkland (1999) refers to as Mode 1. In a situation where workers at all levels need to engage
themselves in practical strategic change, it is desirable to appoint and external consultant in order
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not to deprive other staff the experience of the mechanics of change whilst they service in
committee of bringing about change. An external intervention would independently change rules
and procedures according to strategy whilst effecting compliance to such changes amongst all
workers of the company including the executive. It would seem not practical to opt for Mode 2
having noticed that the executive are going about their own different ways trying to bring about
their so-called unstructured change.
Is the desired change culturally feasible? Partly yes, because the experiment at the Auburn
facility in Washington was successful as the culture of not so formal use of teams percolated
downward in the organisation. The questionable other part of answering this question is whether
the executive would be receptive to cultural change of the experimental plant to be standardised
throughout the whole Boeing Company. This leads us to ask ourselves as whether the cultural
change would get off the ground if internalised along the lines of Mode 2 (Checkland,
1999:A36). Since the executive had already seen ‘change’ in their own unstructured way, Mode
1 approach would be appropriate because everyone must subscribe to this desirable change
without being in a position to sabotage the process.
2. SSM and Information Systems

Since the famous 18th century industrial revolution, the world has seen a successive industrial
revolution brought about by the advent of such devices as the computer, the photocopier, the fax
machine, etc. (Checkland & Holwell, 1998:3-6). These authors name the recent industrial
revolution as the second industrial revolution after the first one of the 18th century. The second
industrial revolution is characterised by what is termed the ‘smart’ machines as compared to the
‘strong’ machines of the first revolution. The smart machines are smaller in size and controlled
by small smart devices, These machines have formed the basis of information technology which
facilitates the information systems of nowadays.
The information technology has improved the processing of information and the storage of
information such that the need for clerical staff has reduced compared to the previous manual
information processing. The advent of information systems has had a tremendous impact on
organisations and individuals working in such organisations such that whenever an information
system is introduced there, more often than not, is a need for an intervention for such a change.
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2.1 People problems related to Information Systems

Any information system that is put into place can never be set p in without due consideration of
all people that will use it and people that will be affected by its use. That is why Checkland &
Holwell (1998) express the information system as follows:
 The system which serves (Information System) by processing data to people taking
purposeful action, that is, providing support to people involved in the second system. This is
the first system.
 The second system, which is served, is referred to as the Action System. It is appropriately
referred to as such because it represents the people who need information for purposeful
action.
From the approach of these authors it can be noticed that there might be conflict between the two
sub-systems of information management. Furthermore, according to Marx et al, (1998:682), the
impact of information technology on executives may be such that it enable them to communicate
directly with workers thereby by-passing the middle managers. As a result the task of middle
management in this respect is largely eliminated.
This type of development brought about by information systems often causes resentment
amongst middle managers and sometimes resistance to initial installation of such systems to
organisations that did not have them before. Middle managers end-up feeling threatened by
retrenchment or re-deployment due to improved communication between top managers and
lower level employees. This may also cause confusion among lower level employees as to whom
do they report to. Soft systems methods are therefore essential in dealing with such problems
because of their nature. Such problems are people problems that cannot be tackled and solve by
‘hard’ methods or quantitative methods.
2.2 SSM application

The problems indicated in 4.1 above may be tackled by soft systems approach whereby an SSM
analysis of the Action System can influence the design and development of the Information
System.
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In Chapter Four of Checkland & Holwell (1998), the personal process, the social process, and the
organisational process are identified as the main processes which are supported by information
systems.
 READING
For more information on the processes supported by information systems, read Chapter Four of
Checkland & Holwell attached as Annexure 5.
In Checkland & Holwell(1998), four assumptions that underpin a core concept are identified.
The assumptions are as follows:
 Information is selected data, referred to as capta, to which meaning is attributed in a

context.
 Information Systems serve people taking purposeful actions, commonly in orgainsations
whereby is first focussed on people and thereafter on action.
 Organisations are complex and may be thought about in many ways, e.g. instrumentally and
culturally.
 The areas can be conceptualised using soft systems thinking.
The core concept is:

 IT-based information systems can be thought of as capta-processing systems, which serve
people taking action.
This concept then leads to four principles, also highlighted by the authors of the same text
(Checkland & Holwell) as indicated above. The principles deriving from the core concept are:
 Start by exploring, with the people concerned, the action that is to be supported.
 Express the purposeful action.
 Thereafter explore, with the people concerned, the information they feel is needed to carry
out the action and to monitor and control it.
 Then explore how Information Technology can provide the required capta-processing and
select a design method.
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Having identified assumptions, the core concept, and principles, it appears that SSM methods
may be used as appropriate to effect an intervention to change in a situation where the personal,
social, and organisational processes are affected by information technology. According to the
SSM stages for other type of problems, the purposeful action can be expressed as a ‘rich
pictures’ initially, and then, more formally, as a Root Definition. In the same manner, the
actions, monitors and control actions may be explored using the Conceptual Model. For the
purpose of this module, we are not going to concern ourselves with the fourth principle because
it is adopted where formal methods of information systems analysis are applied, which is beyond
the scope of this chapter.
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REFERENCES
 Checkland, P. (1999) Systems Thinking, Systems Practice. Wiley, Chichester.
 Checkland, P. and Scholes, J. (1999) Soft Systems Methodology in Action. Wiley,

Chichester.
 Checkland, P. and Holwell, S. (1998) Information, Systems and Information Systems.

Wiley, Chichester.
 Master of Business Administration. MANAGEMENT SCIENCE. Study Guide.

Buckinghamshire Chilterns University College.
 Griffin, R.W. (2000) Management. 5th Edition. Aits Publishers.
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Case 11.1 Worldwide Teams (Extracted from Griffin)

Teams are increasingly being used worldwide. The German Company, Continental Tire, which
purchased General Tire some years ago, had become the world’s fourth largest tyre-maker by the
early 1990’s. In addition, in 1993 it became the only profitable tyre-maker in Europe as
economic difficulties and extremely aggressive price competition befell the tyre industry.
Continental attributed that profitability to several different activities. It moved low-tech
production out of Europe, renegotiated union contracts to reduce overly generous benefits
programs, introduced total quality management, and adopted U.S. and Japanese management
techniques such as leaan production and the use of teams. Lean production is a technique that
uses teams of multiskilled personnel at all levels within an organisation to manage highly
flexible manufacturing processes.
Jose Ignacio Lopez de Arriortua, an executive at Volkswagen’s Spanish operations, believes in

using teams to solve problems. He organised teams and sent them to visit suppliers throughout
Germany and Europe to study the factories of those suppliers and show them how to reduce their
costs and, hence, cut prices to Volkswagen. At Volkswagen’s North American automobile plant
in Puebla, Mexico, management had to go to court and win the right to implement work teams to
improve the quality of its automobiles. Mexican unions had resisted the implementation of teams
because they feared that the use of teams would mean more work for the same money.
The Samsung Group of Korea is trying to move away from its strictly Confucian hierarchical
organisation and managerial arrangements. South Korea’s strong Confucian culture perpetuates
an authoritarian management style that can stifle innovation and creativity. Samsung, in an effort
dubbed the Second Foundation, is attempting to use some teams to reduce that extreme
autocracy.
A National Health Services Hospital in England set up quality teams in thirty-six wards and
departments during 1989 and 1990. Some of the teams were successful whereas others failed. An
analysis of those failures suggested that teams may fail because (1) they lack the resources they
need, (2) there is not sufficient management support, (3) they have difficulties arranging meeting
times, and (4) they are not provided with enough training.
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In creating a global or international team, special care must be taken as to who is in the group.
Like any team, an international team must possess the skills necessary to complete the task.
Unlike many other teams, however, a common working language and shared cultural goals are
among those skills. A geographically dispersed team must also be guided to develop a realistic
balance between joint team meeting and work done individually in between meeting. There must
be an overall manager to provide counsel and to help reduce obstacle, especially in the early
stages. The team leader must be acutely aware of cultural differences. When these factors are
taken into account, international teams working across countries can function just as effectively
as domestic ones working within only a single country.
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Case 11.2 Boeing is Trying (Extracted from Griffin)

Since The Boeing Co. was forced to focus exclusively on manufacturing when the government
ordered it to sell its airline operations, United Air Lines, it has come to dominate the manufacture
of commercial aircraft, In an effort to smooth out fluctuations in sales and earnings that
frequently occur in commercial aviation, Boeing moved dinto computer services in 1970,
artificial intelligence in aviation in 1984, and defence electronics in 1987.
In 1988, CEO Frank Shrontz became chairman of Boeing. He felt that the strong hierarchy and
the long complicated approval system that were traditional at Boeing needed to be changed.
Slowly, change is taking place. One manifestation of that change is weekly meeting of Boeing’s
four top executives. They meet every Tuesday at 07h00 to talk about the company’s future. They
have no agenda, make no reports, and have no audio-visual equipment present; they just talk.
The group is led by Phillip M. Condit, president, whose philosophy seems to be “working
together.” Under his quiet, soft-spoken guidance, the group has developed an informal
camaraderie that is gradually setting the stage for change in the corporate culture. Each member
of the group is acquiring a unique way of informally communicating with his part of the
organisation. One makes spontaneous visits to plants every week, another has potluck lunches
with employees, and yet another meets with randomly selected groups over coffee and
doughnuts.
Boeing has begun to experiment with other ways of worker participation. In 1989, at a highly
automated sheet metal facility in Aubum, Washington, it implemented a participant approach
between management and labour. An outside consultant co-ordinated team-building sessions for
six months. After that a steering committee composed of management, employees, and labour
leaders was formed to oversee the activities of twelve employee focus groups. These focus
groups made recommendations to the steering committee about how to set up and operate the
facility. The experiment at the Aubum Plant proved successful, and so Boeing is slowly using the
team approach elsewhere.
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The use of teams and informal approaches has percolated downward in the organisation.
Boeing’s newest transport jet, the 777, was developed in direct response to customer needs for a
plane with larger carrying capacity for long distances. More than two hundred “design and
build” teams worked to define every part of the 777. The overwhelming success of the 777 has
led Boeing to use the teamwork approach on the 737X, which is scheduled to begin production
in 1997, and the F-22 fighter for the Air Force, due in 2003.
Today Boeing’s teams include customers and suppliers, as well as all of the functional areas
within the company- finance, operations, engineering design, manufacturing, and customer
support. Historically Boeing has long had a customer focus, so including customers in its new
team efforts has been relatively easy. With the new emphasis on improved communication,
requests for changes in airplanes that used to take weeks to get answers are now done in three
days.
Clearly Boeing’s corporate culture is changing. Whether it can change enough to prevent
irreparable damage as the company is forced to undergo severe cutbacks in employment remains
to be seen. But Boeing is trying.
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BIBLIOGRAPHY
PRESCRIBED and RECOMMENDED LITERATURE
The prescribed text for this module is:
Render, B., Stair, R.M., Jr., Hanna, M.E., and Hale, T.S.: Quantitative Analysis for
Management, (12th Ed.), Pearson.
The recommended texts are as follows:
 Hillier, F.S., Hillier, M.S., and Lieberman, G.J.(2000) Introduction to Management

Science. New York: McGraw-Hill.
 Vohra, N.D.(2001) Quantitative Techniques in Management. New Delhi: McGraw-Hill.
 Anderson, D.R. et al (2001) Quantitative Methods for Business. Thomson South-
Western.
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ANNEXURES
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ANNEXURE 1
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ANNEXURE 2
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ANNEXURE 3
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ANNEXURE 4
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ANNEXURE 4 (a)
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ANNEXURE 5
CHAPTER FOUR EXTRACTED FROM CHECKLAND AND HOLWELL (1998)
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MANAGEMENT SCIENCE

PROGRAMME : MBA Final Year

CREDIT POINTS : 20 points

NOTIONAL LEARNING : 200 hours over 1 semester

MODULE INDEX – MANAGEMENT SCIENCE

Chapter Title Page

1 Introduction To Management Science 2

7 Inventory Control Models 61

9 Waiting Line Models 87

10 Soft Systems Method 97

Case Studies 116

INTRODUCTION TO MANAGEMENT SCIENCE

 Describe the characteristics of Management Science

 Differentiate between Scientific Management and Management Science

 Define the term ‘model’

Characteristics of Management Science

Self Assessment Questions

INTRODUCTION TO MANAGEMENT SCIENCE

Management is characterised by planning, organising, directing, and controlling as basic

2. Characteristics of Management Science

Management Science is characterised by scientific models designed to represent the system or

Read Chapter 9, pp 310-313 of Pycraft, Singh and Phihlela (2000) Operations

 SELF ASSESSMENT QUESTIONS

Answer the following:

 What is Management Science and how does it relate to Operations Research?

 REFERENCES AND SUGGESTED READINGS

 Hillier, F.S., Hillier, M.S., and Lieberman, G.J.(2000) Introduction to

 Give a few examples of assignment models of business problems

 Solve an assignment problem using the Hungarian Method

Application of the model

2. Application of the Assignment model

Step 1: Find opportunity cost

Step 3: Revise opportunity cost table in two steps:

Optimal solution at zero locations: Systematically make final assignment by :

Table 2.2: Table 2.3:

Table 2.5: Table 2.6:

(Making the Final Fix-It Shop Assignment)

Adam 3 4 0 Adam 3 4 0 Adam 3 4 0

ASSIGNMENT COST (R)

DUMMY ROWS AND DUMMY COLUMNS

Adams R11 R14 R6 R0

Problem 9-26 (Render et. al. 12th Ed.: 369)

 REFERENCES AND SUGGESTED READINGS

 List the assumptions that are made in Markov analysis.

 Describe how we can use Markov analysis to make future predictions.

 Set up a matrix of transition probabilities.

 Solve a given problem of future predictions using Markov analysis.

2. Assumptions of the Markov Analysis

(1) There are a limited or finite number of possible states.

State 1 – Mars Food Stores: 40 000/100 000 = 40% = 0.40

(1) = (0.4, 0.3, 0.3)

0.5 0.3 0.2

= [(0.4)(0.5) + (0.3)(0.2) + (0.3)(0.2)] [(0.4)(0.3) +(0.3)(0.6) + (0.3)(0.1)] [(0.4)(0.2) +

= (0.32, 0.33, 0.35)

Where, p is (1, 0), which is the initial state.

Solve the following problems, using the Markov Analysis:

(a) Construct the matrix of transition probabilities.

UNIVERSITY BILL’S COLLEGE BATTLE’S

 REFERENCES AND SUGGESTED READINGS

 Define what simulation is