Module 1: Overview of Management Science

Learning Outcomes

At the end of this module, you are expected to:

1. Define Management Science

2. Discuss the relationship of problem solving and decision making.
3. Construct models of cost, revenue and profit.
4. Identify the different techniques used in management science.
5. Discuss the different uses of management science.

1.1. Overview of Management Science

Management science is the application of a scientific approach to solving management

problems in order to help managers make better decisions. As implied by this definition,
management science encompasses a number of mathematically oriented techniques that have
either been developed within the field of management science or been adapted from other
disciplines, such as the natural sciences, mathematics, statistics, and engineering. This text
provides an introduction to the techniques that make up management science and demonstrates
their applications to management problems.

Management science is also referred to as:

• operations research
• quantitative methods
• quantitative analysis
• decision sciences

The scientific management revolution of the early

1900s, initiated by Frederic W. Taylor, provided the
foundation for the use of quantitative methods in management.
But modern management science research is generally
considered to have originated during the World War II period,
when teams were formed to deal with strategic and tactical
problems faced by the military. These teams, which often
consisted of people with diverse specialties (e.g.,
mathematicians, engineers, and behavioral scientists), were
joined together to solve a common problem by utilizing the
scientific method. After the war, many of these team members
continued their research in the field of management science.

Two developments that occurred during the post–World War II period led to the growth
and use of management science in nonmilitary applications.

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 1. Continued research resulted in numerous methodological developments. Probably
the most significant development was the discovery by George Dantzig, in 1947,
of the simplex method for solving linear programming problems.

2. Digital computers prompted a virtual explosion in computing power. Computers

enabled practitioners to use the methodological advances to solve a large variety of
problems. The computer technology explosion continues, and personal computers
can now be used to solve problems larger than those solved on mainframe
computers in the 1990s.

1.2. Problem Solving and Decision Making

Problem solving 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. For problems
important enough to justify the time and effort of careful analysis, the problem-solving process
involves the following seven steps:

1. Identify and define the problem.

2. Determine the set of alternative solutions.
3. Determine the criterion or criteria that will be used to evaluate the alternatives.
4. Evaluate the alternatives.
5. Choose an alternative.
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 the first five steps of the problem-
solving process. Thus, the first step of decision making is to identify and define the problem.
Decision making ends with the choosing of an alternative, which is the act of making the decision.

THE RELATIONSHIP BETWEEN PROBLEM SOLVING AND DECISION MAKING

• Define the Problem

• Identify the Alternatives
Decision
• Determine the Criteria Making
Problem • Evaluate the Alternatives
Solving
• Choose an Alternative
• Implement the Decision
• Evaluate the Results Decision

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 1.3. Quantitative Analysis and Decision Making

AN ALTERNATE CLASSIFICATION OF THE DECISION-MAKING PROCESS

Structuring the Problem Analyzing the Problem

Define Determine Evaluate

Identify the Choose an
the the the
Problem Alternatives Alternative
Criteria Alternatives

Qualitative analysis is based primarily on the manager’s judgment and experience; it

includes the manager’s intuitive “feel” for the problem and is more an art than a science. If the
manager has had experience with similar problems or if the problem is relatively simple, heavy
emphasis may be placed upon a qualitative analysis. However, if the manager has had little
experience with similar problems, or if the problem is sufficiently complex, then a quantitative
analysis of the problem can be an especially important consideration in the manager’s final
decision.
THE ROLE OF QUALITATIVE AND QUANTITATIVE ANALYSIS

Analyzing the Problem

Quantitative
Analysis
Structuring the Problem
Summary
Make a
Define Determine and
Identify the Decision
the the Evaluation
Problem
Alternatives
Criteria

Qualitative
Analysis

Reasons why a quantitative approach is used in the decision- making process:

1. The problem is complex, and the manager cannot develop a good solution without the aid
of quantitative analysis.

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 2. The problem is especially important (e.g., a great deal of money is involved), 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.

4. The problem is repetitive, and the manager saves time and effort by relying on quantitative
procedures to make routine decision recommendations.

1.4. Quantitative Analysis

To successfully apply quantitative analysis to decision making, the management scientist

must work closely with the manager or user of 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. This best solution for the model then becomes a
recommendation to the decision maker. The process of developing and solving models is the
essence of the quantitative analysis process.

Models are representations of real objects or situations and can be presented in various
forms. For example, a scale model of an airplane is a representation of a real airplane. Similarly, a
child’s toy truck is a model of a real truck. The model airplane and toy truck are examples of
models that are physical replicas of real objects.

• Iconic Models – physical replicas of real objects (e.g., toy airplane).

• Analog Models – models that are physical in form but do not have the same physical
appearance as the object being modelled (e.g., thermometer representing temperature).

• Mathematical Models - representations of a problem by a system of symbols and

mathematical relationships or expressions (e.g., Pythagorean Theorem).

FLOWCHART OF THE PROCESS OF TRANSFORMING MODEL INPUTS INTO OUTPUT

Uncontrollable Inputs
(Environmental Factors)

Controllable Inputs Mathematical Output

(Decision Variables) Model (Projected Results)

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 Environmental factors which can affect both the objective function and the constraints, are
referred to as uncontrollable inputs to the model. Inputs that are controlled or determined by the
decision maker are referred to as controllable inputs 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.

Once all controllable and uncontrollable inputs are specified, the objective function and
constraints can be evaluated and the output of the model determined. In this sense, the output of
the model is simply the projection of what would happen if those particular environmental factors
and decisions occurred in the real situation.

FLOWCHART FOR THE PRODUCTION MODEL

Uncontrollable Inputs

10 Profit per Unit (Peso)

5 Production Time per Unit (Hours)
40 Production Capacity (Hours)

Mathematical
Model
Controllable Inputs Output
Max 10x
Value for the
Subject to: Profit = 80
Production Quantity
Time Used = 40
(x=8)
5x≤40
x≥0

Another step in the quantitative analysis of a problem is the preparation of the data required
by the model. Data refer to the values of the uncontrollable inputs to the model. All uncontrollable
inputs or data must be specified before analyzing the model and recommend a decision or solution
for the problem.

Creating a general notion for uncontrollable or not readily available data

𝑐 = 𝑝𝑟𝑜𝑓𝑖𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Max: 𝑐𝑥
𝑎 = 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑡𝑖𝑚𝑒 𝑖𝑛 ℎ𝑜𝑢𝑟𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Subject to: 𝑎𝑥 ≤ 𝑏
𝑏 = 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑖𝑛 ℎ𝑜𝑢𝑟𝑠
𝑥≥0

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 Once the model development and data preparation steps are completed, we can proceed to
the model solution step. The analyst will attempt to identify the values of the decision variables
that provide the “best” output for the model. The specific decision-variable value or values
providing the “best” output will be referred to as the optimal solution for the model.

TRIAL-AND-ERROR SOLUTION FOR THE PRODUCTION MODEL

(Based on the flowchart for the production model on previous page)

Total Hours of
Decision Alternative
Projected Profit Production Feasible Solution?
(Production Quantity)
(10 profit per unit) (5 production time (Hours Used ≤ 40)
x
per unit)
0 0 0 Yes
2 20 10 Yes
4 30 20 Yes
6 60 30 Yes
8 80 40 Yes
10 100 50 No
12 120 60 No

An important part of the quantitative analysis process is the preparation of managerial

reports based on the model’s solution. The solution based on the quantitative analysis of a problem
is one of the inputs the manager considers before making a final decision. The results of the model
must appear in a managerial report that can be easily understood by the decision maker. The report
includes the recommended decision and other pertinent information about the results that may be
helpful to the decision maker.

The manager is responsible for integrating the quantitative solution with qualitative
considerations in order to make the best possible decision. After completing the decision-making
process, the manager must oversee the implementation and follow-up evaluation of the decision.

1.5. Models of Cost, Revenue, and Profit

Some of the most basic quantitative models arising in business and economic applications
are those involving the relationship between a volume variable—such as production volume or
sales volume—and cost, revenue, and profit. Financial planning, production planning, sales quotas,
and other areas of decision making can benefit from such cost, revenue, and profit models.

Cost of manufacturing is usually defined as a sum of two costs: fixed cost and variable
cost.

• Fixed cost is the portion of the total cost that does not depend on the production volume;
this cost remains the same no matter how much is produced.

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 • Variable cost is the portion of the total cost that is dependent on and varies with the
production volume.

Marginal cost is defined as the rate of change of the total cost with respect to production
volume. It is the cost increase associated with a one-unit increase in the production volume.

Marginal revenue is defined as the rate of change of total revenue with respect to sales
volume. That is, it is the increase in total revenue resulting from a one-unit increase in sales
volume.

One of the most important criteria for management decision making is profit. Managers
need to be able to know the profit implications of their decisions.

The volume that results in total revenue equaling total cost (providing P0 profit) is called
the breakeven point. If the breakeven point is known, a manager can quickly infer that a volume
above the breakeven point will result in a profit, whereas a volume below the breakeven point will
result in a loss.

SAMPLE GRAPH FOR A BREAKEVEN ANALYSIS

The breakeven point for a product provides valuable information for a manager who must
make a yes/no decision concerning production of the product.

Sample Problem:

The O’Neill Shoe Manufacturing Company will produce a special-style shoe if the order
size is large enough to provide a reasonable profit. For each special-style order, the company incurs
a fixed cost of $1000 for the production setup. The variable cost is $30 per pair, and each pair sells
for $40.

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a. Let x indicate the number of pairs of shoes produced. Develop a mathematical model for the
total cost of producing x pairs of shoes.

b. Let P indicate the total profit. Develop a mathematical model for the total profit realized from
an order for x pairs of shoes.

c. How large must the shoe order be before O’Neill will break even?

Answer:

a. 𝑇𝐶 = 1000 + 30𝑥

b. 𝑃 = 40𝑥 − (100 + 30𝑥) 𝑜𝑟 𝑃 = 10𝑥 − 1000

c. 𝑃 = 0
Thus, 𝑃 = 10𝑥 − 1000
0 = 10𝑥 − 1000
10𝑥 = 1000
𝑥 = 100

1.6. Management Science Techniques

• Linear Programming
̶ 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

̶ 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

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 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
̶ 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

̶ Developed to help managers understand and make better decisions concerning the
operation of systems involving waiting lines.

• Simulation
̶ 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
̶ Used to determine optimal strategies in situations involving several decision
alternatives and an uncertain or risk-filled pattern of events.

• Goal Programming
̶ 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
̶ Techniques that can be used to predict future aspects of a business operation.

• Markov Process Models

̶ 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.

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 1.7. Management Science Application

Not all management science techniques are equally useful or equally used by business firms
and other organizations. Some techniques are used quite frequently by business practitioners and
managers; others are used less often. The most frequently used techniques are linear and integer
programming, simulation, network analysis (including critical path method/project evaluation and
review technique [CPM/PERT]), inventory control, decision analysis, and queuing theory, as well
as probability and statistics.

The following are some areas where management science is used:

• Government • Scheduling
• Health Care • Marketing Planning
• Service Organizations • Quality Control
• Project Planning • Plant Location
• Capital Budgeting • Maintenance Policy
• Production Planning • Personnel Management
• Inventory Analysis • Product Demand Forecasting

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