1 Management Science

Management Science
by
Remark M. Montalban
Department of Accountancy
1
Objectives
 The Management Science Approach to Problem Solving

 Management Science and Business Analytics
 Model Building : Break-Even Analysis
 Computer Solution
 Management Science Modeling Techniques
 Business Usage of Management Science Techniques
 Management Science Models in Decision Support
Systems
2
The Management Science Approach
 Management science uses a scientific approach to

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

The Management Science Process
4
Steps in the Management Science Process
Observation
 Identification of a problem that exists (or may occur soon)
in a system or organization.
 Problems are not always a result of crisis that must be
reacted upon but involve an anticipatory or planning
situation.
 Management scientist may be hired specifically to identify
problems and solve problems using management science
techniques.

Definition of the Problem

 Problem must be clearly and consistently defined, showing its
boundaries and interactions with the objectives of the
organization.
 Limits of the problem and the degree to which it pervades
other units in the organization must also be included in
problem definition.
 The objectives of the organization must also be defined
because it focuses attention to what the problem really is.

Model Construction
 Development of the functional mathematical relationships that
describe the decision variables, objective function and
constraints of the problem.
 A model is an abstract representation of an existing problem
situation (e.g. chart, graphs or mathematical relationships).
 The model is a functional relationships that includes variables;
parameters which are derived from data; and equations.

Example of Model Construction (1 of 3)
Information and Data:

Business firm makes and sells a steel product
Product costs Php5 to produce
Product sells for Php20
Product requires 4 pounds of steel to make
Firm has 100 pounds of steel
Business Problem:
Determine the number of units to produce to make the most
profit, given the limited amount of steel available.

Variables: X = number of units to produce (decision

variable)
P = total profit (in Php)
Model: P = 20X - 5X (objective function)
4X = 100 lb of steel (resource constraint)
Parameters: P20, P5, 4 lbs, 100 lbs (known values)
Formal Specification of Model:
maximize P = 20X - 5X
subject to 4X = 100

Model Solution
 Models are solved using management science techniques.
 A management science solution techniques usually applies to
a specific type of model.
 The value of the decision variable does not constitute an
actual decision, rather an information that serves as
recommendation or guideline only.
 Some may also not provide answer or recommendation,
instead they provide descriptive results.

Model Solution
Consider the constraint equation:
4x = 100
or x = 25 units
Substitute this value into the profit function:
P = 20x - 5x
= (20)(25) – (5)(25)
= 375
(Produce 25 units, to yield a profit of P375)

Model Implementation
 Actual use of the model or its solution.
 Frequently the person responsible for putting the solution to
use is not the same person who developed the solution found.
 Sometimes people are also hesitant to change the normal
way they do things or try new things.
12
Management Science and Business Analytics
Business Analytics
 Process of using large amounts of data combined with
information technology, statistics, management science
techniques and mathematical modeling to help managers
solve problems and make decisions.
 Analytics is said to be descriptive, predictive and prescriptive.
 A key component of business analytics is “big data.”
13
Model Building:
Break-Even Analysis (1 of 8)
 Used to determine the number of units of a product to sell
or produce (i.e. volume) that will equate total revenue with
total cost.
 The volume at which total revenue equals total cost is
called the break-even point.
 Profit at break-even point is zero.
 BEP is a function of volume, cost and profit.

Model Building:
Model Components
 Fixed Costs (FC) - costs that remain constant regardless
of number of units produced.
 Variable Cost (VC) - unit production cost of product.
 Total variable cost (TVC) - function of volume (v) and unit

variable cost.
 Total Cost (TC) - total fixed cost plus total variable cost.
 Profit (p) - difference between total revenue TR (SP = unit

price) and total cost, i.e.
P = TR - TVC - FC

Model Building:
Computing the Break-Even Point

 The break-even point is that volume at which total revenue
equals total cost and profit is zero:
TR - TVC – FC = 0

Model Building:
Example: Western Clothing Company
Fixed Costs: FC = P10,000

Variable Costs: VC = P8 per pair
Price : SP = P23 per pair
The Break-Even Point is:
x = (10,000)/(23 -8)
= 666.7 pairs

Model Building: Break-Even Analysis (5 of 8)
Graphical Solution
Figure 1.2 Break-Even Model

18
Figure 1.3
Sensitivity Analysis - Break-even Model with a Change in Price
19
Figure 1.4
Sensitivity Analysis - Break-Even Model with a Change in Variable Cost
Figure 1.5
Sensitivity Analysis - Break-Even Model with a Change in Fixed Cost
21
Break-Even Analysis: Excel Solution (1 of 5)
Exhibit 1.1
22
Classification of Management Science Techniques
Figure 1.6 Modeling Techniques

23
Characteristics of Modeling Techniques
 Linear Mathematical Programming - clear objective;

restrictions on resources and requirements; parameters
known with certainty.
 Probabilistic Techniques - results contain uncertainty.
 Network Techniques - model often formulated as diagram;
deterministic or probabilistic.
 Forecasting and Inventory Analysis Techniques -
probabilistic and deterministic methods in demand
forecasting and inventory control.
 Other Techniques - variety of deterministic and
probabilistic methods for specific types of problems.
24
Business Use of Management Science
 Some application areas:

- Project Planning
- Capital Budgeting
- Inventory Analysis
- Production Planning
- Scheduling
 Interfaces - Applications journal published by Institute
for Operations Research and Management Sciences
(INFORMS)
25
Management Science Models
Decision Support Systems (1 of 2)
 A decision support system (DSS) is a computer-based

system that helps decision makers address complex
problems that cut across different parts of an organization
and operations.
 A DSS is normally interactive, combining various
databases and different management science models and
solution techniques with a user interface that enables the
decision maker to ask questions and receive answers.
 Online analytical processing system (OLAP), the
analytical hierarchy process (AHP), and enterprise
resource planning (ERP) are types of decision support
systems.
 Decision support systems are most useful in answering
“what-if?” questions and performing sensitivity analysis.
26
Management Science Models
Decision Support Systems (2 of 2)
Figure 1.7 A Decision Support System

End of Chapter

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Management Science

 The Management Science Approach to Problem Solving

 Management science uses a scientific approach to

Chapter 1- Management Science 3

Chapter 1- Management Science 5

Definition of the Problem

Chapter 1- Management Science 6

Chapter 1- Management Science 7

Information and Data:

Chapter 1- Management Science 8

Variables: X = number of units to produce (decision

Chapter 1- Management Science 9

Chapter 1- Management Science 10

Substitute this value into the profit function:

(Produce 25 units, to yield a profit of P375)

Chapter 1- Management Science 11

Chapter 1- Management Science 14

 Total variable cost (TVC) - function of volume (v) and unit

 Profit (p) - difference between total revenue TR (SP = unit

Chapter 1- Management Science 15

Computing the Break-Even Point

Chapter 1- Management Science 16

Example: Western Clothing Company

Fixed Costs: FC = P10,000

The Break-Even Point is:

Chapter 1- Management Science 17

Figure 1.2 Break-Even Model

Figure 1.6 Modeling Techniques

 Linear Mathematical Programming - clear objective;

 Some application areas:

 A decision support system (DSS) is a computer-based

Figure 1.7 A Decision Support System

Chapter 1- Management Science 28

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