Management Science 

· It is an established discipline and a part of the fundamental curriculum of most

programs in business. 

· It is the application of a scientific approach to solving management problems in order

to help managers make better decisions which can improve efficiency and productivity. 

· It also encompasses a number of mathematically oriented techniques that have either
been developed within the field of management science or been adapted from other
disciplines (natural science, mathematics, statistics, and engineering). However, it is
more than just a collection of techniques. It also involves the philosophy of approaching
a problem in a logical manner. 

History of Management Science

· Key Management Theory: An Overview

- The scientific management revolution during the early 1900s provided the foundation
for the use of quantitative methods in management. This was initiated by Frederic W.
Taylor.

- Frederic Taylor rested his philosophy on four (4) basic principles:

1. The development of a true science of management so that the best method for
performing each task could be determined
2. The scientific selection of workers so that each worker would be given
responsibility for the task for which the worker was best suited
3. The scientific education and development of workers
4. Intimate friendly cooperation between management and labor
- Taylor contended that the success of the principles required a complete mental
revolution on both the part of the management and labor

- Rather than the issues over profits, both sides should increase production. It was
believed that profits would rise to such an extent that labor have to fight over it.

- In summary, Taylor believed that management and labor had common interest in
increasing productivity.

- However, modern management science research is generally considered to have

originated during the World War 2 period (1939-1945) when teams were formed to deal
with strategic and tactical problems faced by the military

- Two developments that occurred during the post-World War 2 period led to the growth
and use of management science:

1. Continued research resulted in numerous methodological developments

o Most significant development was the discovery by George Dantzig (1947)
of the simplex method for solving linear programming problems 
2. Digital computers prompted a virtual explosion in computing power
o Computers enabled practitioners to use the methodological advances to
solve a large variety of problems

Management Science Approach 

As indicated previously, management science encompasses a logical and systematic

approach to problem solving. This is closely parallel to scientific method for attacking
problems.

One of the many approaches in this field is the use of Problem Solving. 

o Problem Solving
 It can be defined as the process of identifying a difference
between the actual and the desired state of affairs and then
taking action to resolve the difference

 There are seven steps to the problem-solving process:

1. Identify and define the problem
2. Determine the set of alternative solutions
3. Determine the criterion/criteria that will be used to
evaluate the alternatives
4. Evaluate the alternatives
5. Choose an alternative (Act of making the decisions)
6. Implement the selected alternative
7. Evaluate the results to determine whether a
satisfactory solution has been obtained
  Decision making is the term generally associated with first
five steps of the problem-solving process.

Problem Solving 

For example:

You just graduated senior high school and you are about to enter college. You prefer
taking up a business course. Thus, you took several university entrance exams from
different universities in the country and got accepted in the following universities:
University 1, University 2, University 3, and University 4. The alternative for your
decision-problem can be stated as follows:

 Accept offer in University 1

 Accept offer in University 2
 Accept offer in University 3
 Accept offer in University 4

The next step involves determining the criteria that will be used to evaluate the said
alternatives. One factor that is mostly considered is that of the tuition fee. 

If tuition fee was the only criterion of importance, the alternative selected as "best"
would then (practically speaking) be the one with the lowest tuition fee or would depend
on one’s capacity. Problems in which the objective is to find the best solution with
respect to one criterion are referred to as single-criterion decision problems.

However, tuition fee is not the only consideration when it comes to choosing a
university. Other factors considered are the quality of education and location of the
university. Thus, these three criteria in the decision problem are tuition fee, quality of
education, and location. Problems involving more than one criterion are referred to
as multicriteria decision problems.

Problem Solving 
The next step is to evaluate each of the alternatives with respect to each criterion. A
table is presented below to better illustrate.

Alternative Tuition Fee (per semester) Quality of Education Location

University 1 P48,000.00 Average Average
University 2 P35,000.00 Good Excellent
University 3 P52,000.00 Good Fair
University 4 P67,000.00 Excellent Good
Evaluating each alternative relative to the tuition fee is done simply by recording the
tuition fees to be paid to each university. As to the quality of education and location of
the university, it is difficult to quantify it for decision making. Thus, it could be measured
by rating them as fair, average, good, or excellent.
You are now ready to make a choice from the available alternatives!

What makes this choice phase difficult is that the criteria are probably not all equally
important and no one alternative is best with regard to all criteria. Let us suppose that
for this example, University 1 is selected and is now referred as the decision.

Problem Solving

The decision-making process is complete with the following steps:

1. Define the problem

2. Identify the alternatives
3. Determine the criteria
4. Evaluate the criteria
5. Choose an alternative

The last two steps are not indicated above to emphasize the more limited scope of the
term decision-making as compared to the term problem-solving.

The figure below summarizes the relationship between problem solving and decision
making.

Quantitative Analysis and Decision Making

The analysis phase of the decision-making process takes two forms:

     A. Qualitative Analysis

 Based primarily on the person’s judgement and experience

which includes a person’s intuitive feel for the problem
 It is considered more of an art than a science
 Example is when a manger has had an experience with
similar problems or if the problem is relatively simple,
qualitative analysis is heavily emphasized on

But experience is relative. When a person has had little experience with similar
problems or if the problem is sufficiently complex, then quantitative analysis of the
problem can be especially important in the final decision.

     B. Quantitative Analysis

Quantitative facts and data associated with the problem and development of
mathematical expressions that describe the objectives, constraints, and other factors of
a problem are the highlights when using quantitative analysis.
Although skills in the qualitative approach are inherent in the manager and usually
increase with experience, the skills of the quantitative approach can be learned only by
studying the assumptions and methods of management science.

Quantitative Approach might be used in the decision-making process because of the

following reasons:

1. The problem is complex and the manager cannot develop a good solution
without the aid of quantitative analysis;
2. The problem is especially important and the manager desires a thorough
analysis before attempting to make a decision
3. The problem is new and the manager has no previous experience from which to
draw or base the decision on
4. The problem is repetitive and the manager saves time and effort by relying on
quantitative procedures to make routine decision recommendations

Quantitative Analysis

It usually takes imagination, teamwork, and considerable effort to transform a rather

general problem description into a well-defined problem that can be approached via
quantitative analysis.

To successfully apply quantitative analysis to decision making, the management

scientist must work hand-in-hand with the manager or the user if the results. When both
the management scientist and the manager agree that the problem has been
adequately structured, work can begin on developing a model to represent the problem
mathematically.

Solution procedures can then be employed to find the best solution for the model. The
best solution for the model then becomes a recommendation to the decision market.
The process of developing and solving models is the essence of the quantitative
process.

Model Development
MODELS

o Representations of real objects or situations which can be presented in

various forms:
 Iconic Models are physical replicas of the object (Ex. Model of the
School, Model of an automobile)
 Analog Models are physical in form but do not have the same
physical appearance as the object being modeled (Ex.
Thermometer representing temperature, Speedometer of an
automobile)
 Mathematical Models are representations of a problem by a system
of symbols and mathematical relationships or expressions.
 o The purpose of any model is that it enables the user to make
interpretations about the real situation by studying and analyzing the
model. Experimenting with models require less time and is cost efficient
than experimenting with the real object.

o The models also have the advantage of reducing the risk associated with
experimenting with the real situation.

Quantitative Analysis: Model Development

Model Development 

o The value of the model-based conclusions and decisions is dependent on

how well the model represents the real situation.
o When initially considering a managerial problem, the problem definition
phase leads to a specific objective such as maximization of profit,
minimization of cost, or possibly, a set of restrictions or constraints, such
as production capacities.
o A mathematical expression that describes the problem’s objective is
referred to as the objective function.
 For example, the profit equation:

P = 15x 

wherein P = profit, 

15 as the profit per unit sold, and 

x as the quantity unit sold, 

              This equation would be an objective function for a firm attempting to maximize

profit.

 A production capacity constraint would be necessary if 5 hours are

required to produce each unit and only 40 hours of production time
are available for a 5-day work week. This would be represented as
follows:

5x ≤ 40 

wherein x indicates the quantity of units produced each week; therefore, 5x is the total
time required to produce x units and should be less than or equal to the 40 hours
available.

 The decision problem/question of the example: How many unites of

the product should be scheduled each week to maximize profit?
 The complete mathematical model is:
                                     Maximize                  P = 15x                  objective function

                                     Subject to (s.t.)       5x ≤ 40                  constraints

                                                                         x ≥ 0

 The x ≥ 0 constraint requires the production quantity x to be greater

than or equal to zero, which simply recognizes the fact that it is not
possible to manufacture a negative number of units.
 In the example above, the profit per unit (15), the production time
per unit (5 hours), and the production capacity (40 hours) are
environmental factors that are not under the control of the user or
decision maker.
 Uncontrollable Inputs to the model are the environmental factors
which can affect both the objective function and the constraints.
 Controllable Inputs to the model are the inputs that are controlled
or determined by the users. In the previous example, variable x or
the number of units is the controllable input to the model.
 Controllable inputs are the decision alternatives specified by the
manager and thus are also referred to as the decision variables of
the model.

Model Development

Flowchart of the Process of Transforming Model Inputs into Output

As stated earlier, the uncontrollable inputs are those the users cannot influence. The
specific controllable and uncontrollable inputs of a model depend on the particular
problem or decision-making situation.

In the production problem, the production time available (40) is an uncontrollable input.
However, if it were possible to hire more employees or use overtime, the number of
hours of production time would become a controllable input and therefore a decision
variable in the model.

Uncontrollable inputs can either be known exactly or be uncertain and subject to

variation. If all uncontrollable inputs to a model are known and cannot vary, the model is
referred to as a deterministic model. The distinguishing feature of a deterministic
model is that the uncontrollable input values are known in advance.

If any of the uncontrollable inputs are uncertain and subject to variation, the model is
referred to as a stochastic or probabilistic model.
Quantitative Analysis: Data Preparation
Data Preparation 

o This is another step in the quantitative analysis of a problem

o Data here is referred to as the values of the uncontrollable inputs to the
model
o All uncontrollable inputs or data must be specified before we can analyze
the model and recommend a decision or solution for the problem
o In many mathematical modeling situations, the data or uncontrollable input
values are not readily available unlike in the example above. In situations
like this, rather than attempting to collect the required data as the model is
being developed, the analyst will usually adopt a general notation for the
model development step and then a separate data preparation step will be
performed to obtain the uncontrollable input values.
o For example, a general notation model will look like this:

                                                      c = profit per unit

                                                      a = production time in hours per unit

                                                      b = production capacity in hours

 and the general model:

                                               Max                 cx              objective function

                                               Subject to:    ax ≤ b        constraints

                                                                       x ≥ 0

Quantitative Analysis: Model Solution

Model Solution 

o In this step, the analyst will attempt to identify the values of the decision
variables that provide the best output for the model
o The specific decision-variable value or values providing the best output
will be referred to as the optimal solution for the model
o Trial and error is one approach that can be used in the model solution step
in which the model is used to test and evaluate various decision
alternatives.
o If a particular decision alternative does not satisfy one or more of the
model constraints, the decision alternative is rejected as being infeasible,
regardless of the objective function value.
o If all constraints are satisfied, the decision alternative is feasible and a
candidate for the best solution or recommended decision.
 o Although the trial and error process is often acceptable and can provide
valuable information for the manager, it has the draw backs of not
necessarily providing the best solution and of being inefficient in terms of
requiring numerous calculations if many decision alternatives are tried.
o Quantitative analysts have developed special solution procedures for
many models that are much more efficient than the trial and error
approach

Basic Quantitative Models 

Some of the most basic quantitative models arising in business and economic
applications are those involving the relationship between a volume variable and cost,
revenue, and profit.

1. Cost and Volume Models

 The cost of manufacturing/producing a product is a function of the

volume produced.
 Can be defined as a sum of two (2) costs:
 Fixed Costs: Portion of the total cost that does not
depend on the production volume; remains the same
no matter how many is produced
 Variable Costs: Portion of the total cost that is
dependent on and varies with the production volume
 A production volume model can be illustrated as follows:

                         C(x) = 3000 + 2x

                          where                   x = production volume in units

                                                        C(x) = total cost of producing x units

Assuming that 3000 is the fixed costs and 2(x) is the computation for the variable costs.

Furthermore, if the managers decide to produce 1000 units; therefore, x = 1000. This
would then result to a total cost of C(1000) = 3000 + 2(1000) = 5000

 Marginal cost is defined as the rate of change of the total cost with
respect to production volume or the increase in cost linked to a unit
increase in the production volume
 In the example, if x is increased by 1-unit, total cost will increase by
2, thus the marginal cost is 2.

2. Revenue and Volume Models

 The model of the relationship between revenue and volume is also

needed by a business and can be illustrated as:
                             R(x) = 5x

                             where                   x = sales volume in units

                                                           R(x) = total revenue associated with selling x units

 Marginal revenue is defined as the rate of change of total revenue

with respect to sales volume or the increase in total revenue
resulting from a 1-unit increase in sales volume

3. Profit and Volume Models

 Profit is one of the most important criteria for decision-making

 Profit-volume model can be derived from the revenue-volume and
cost-volume models

                               P(x) = R(x) – C(x)

                                        = 5x – (3000 + 2x)

                                        = -3000 + 3x

4. Breakeven Analysis

 The volume that results in total revenue equaling total cost is called
the breakeven point. This is where zero profit is provided.
 If the breakeven point is known, a manager can quickly infer that a
volume above the breakeven point with result in a profit, whereas a
volume below the breakeven point will result in a loss.
 The breakeven point for a product provides valuable information for
a manager who must make a decision concerning production of a
product.

Management Science Techniques

Linear Programming is a problem-solving approach developed for situations involving
maximizing or minimizing a linear function subject to linear constraints that limit the
degree to which the objective can be pursued. 

Integer Linear Programming is an approach used for problems that can be set up as
linear programs, with the additional requirement that some or all of the decision
variables be integer values. 

Distribution and Network Models. A network is a graphical description of a problem

consisting of circles called nodes that are interconnected by lines called arcs.
Specialized solution procedures exist for these types of problems, enabling us to quickly
solve problems in such areas as transportation system design, information system
design, and project scheduling. 

Nonlinear Programming. Many business processes behave in a nonlinear manner.

For example, the price of a bond is a nonlinear function of interest rates; the quantity
demanded for a product is usually a nonlinear function of the price. Nonlinear
programming is a technique that allows for maximizing or minimizing a nonlinear
function subject to nonlinear constraints.

Project Scheduling: PERT/CPM. In many situations, managers are responsible for

planning, scheduling, and controlling projects that consist of numerous separate jobs or
tasks performed by a variety of departments, individuals, and so forth. The PERT
(Program Evaluation and Review Technique) and CPM (Critical Path Method)
techniques help managers carry out their project scheduling responsibilities.

Inventory Models are used by managers faced with the dual problems of maintaining
sufficient inventories to meet demand for goods and, at the same time, incurring the
lowest possible inventory holding costs.

Waiting-Line or Queueing Models have been developed to help managers

understand and make better decisions concerning the operation of systems involving
waiting lines.

Simulation is a technique used to model the operation of a system. This technique

employs a computer program to model the operation and perform simulation
computations.

Decision Analysis can be used to determine optimal strategies in situations involving

several decision alternatives and an uncertain or risk-filled pattern of events.

Goal Programming is a technique for solving multicriteria decision problems, usually

within the framework of linear programming.

Analytic Hierarchy Process. This multicriteria decision-making technique permits the

inclusion of subjective factors in arriving at a recommended decision.

Forecasting methods are techniques that can be used to predict future aspects of a

business operation.

Markov Process Models are useful in studying the evolution of certain systems over
repeated trials. For example, Markov processes have been used to describe the
probability that a machine, functioning in one period, will function or break down in
another period.