Introduction to Management Science

Why should we study management science?

• Decision Making – is an integral part of our daily lives because we make decisions every day. Some
may be simple that can made very quickly (e.g.: what to wear), however, some decisions are more
complicated and important that need more careful consideration (e.g.: in business)
• Managers should not be making decisions out of their whims rather, need to be supported by
management science techniques.

What is management science?

• An approach to decision making based on the scientific method.
• Scientific method – use as a basis in development of analytical methods and quantitative techniques
to aim managers in making complex decisions
• Makes extensive use of analytical methods and quantitative.
• Also known as “Operative Research”, “Decision Science”, and most recently, “Business Analytics”
• It had its early roots in World War II and is flourishing in business and industry with the aid of
computers.
• Militaries need to deal strategic and tactical problems
• After the war, concept of Management Science is applied in business because one is fighting a
battle to earn profits and compete with other companies in the same industry
• Frederic W. Taylor – initiated the scientific management revolution of the early 1900s which provided
the foundation for the use of quantitative methods in management
• Still used in todays world and become meaningful especially we can use computers to make
complex mathematical computations and helps us make decisions based on the computations

Techniques/Methods of Decision Making

Qualitative
• Subjective by nature
• Which means decisions are made based on personal feelings and opinions
• Rely on information that is not easily measurable
• Difficult to express in numbers, eg: feedback from customers
• Analysis on information from interview transcripts, and have to use judgement and experience in
making decisions
• Wide-ranging/broad focus: Results are often ambiguous but may contain additional information
• Results in qualitative
• E.g.: customers like your product but would appreciate faster deliveries
• Different outputs of analysis let you use qualitative output to check what the quantitative
data says and to keep extra information for additional action
Quantitative
• Objective by nature
• Which means decisions are influenced by personal feelings but representing facts
• Relies on statistical methods and mathematical evaluations
• e.g.: calculate % customers experienced from the product, % how many will recommend
the product
• Provide a numerical basis for decision making
• Can be expressed using numbers, eg: # of complaints
• Limited/Narrow focus: Results tend to be decisive and does not include extra information
 • Because it is focused narrowly on a particular characteristic
• E.g.: customers satisfaction
Which technique should we do to make a decision?

• It is important to combine both to make appropriate decision

• E.g: analyze how much your customers like a product so we can decide:
Qualitative: To increase production (find from customer interviews that customers like the product)
Quantitative: Example: 75% of the customers would purchase the product again or recommend it
• Therefore, we can use quantitative result to justify increasing production since it reinforces the
qualitative result
• However, in the event, the 2 methods produce different results so we need to do more analysis

examples of qualitative methods

• Strength • Employees
• Weakness • Shareholders
• Opportunities • Managers
• Threats • Environment
• Local Community
• Suppliers
• Political • Government
• Economic • Consumers
• Social
• Technological

• Looking at how successful the

company is

examples of qualitative methods

• Investment Appraisal
• Break-even Analysis
• Market Research
• Measures of Correlation
• Forecasting
• Decision Analysis (Decision Trees)
• Linear Programming
• PERT/CPM

Types of managerial decisions

• Personal – cannot ordinarily be delegated to others
• Decisions that a person takes in his/her own capacity
• E.g.: a manager wants to resign he/she is making a personal decision
• Organizational – can often, if not always, be delegated to others
• Taken in his/her official capacity
 • Manager is on leave, he/she can ask someone else to attend a meeting on his/her own
behalf. These decisions affect organizational behavior
• Routine – everyday highly repetitive management decisions which by themselves may have little impact
on the overall organization
• E.g.: hiring a new employee when someone resigns
• Non-routine – unique, most top management policy decisions, one-time decisions involving long-range
commitments of relative permanence or duration, or those involving large investments
• E.g.: investment in a new building costing 1M pesos
Both play an important role in a success of an organization
• Programmed – routine/repetitive decisions handled through standard operating procedures
• E.g.: employee commits a theft the consequences from the offending employee is automatic
dismissal. Guidelines are written in company’s manual
• Non-programmed – unique/one-shot decisions which must be made by managers using available
information and their own judgement
• Not indicated in the company manual
• and made by managers using available information experienced and professional
judgements

Decision making models

• Econologic or Economic Man Model
• Bounded Rationality or Administrative Man Model
• Implicit Favorite or Gamesman Model

Econologic or Economic Man Model

Assumptions:
• People are economically rational
• People attempt to maximize outcomes un an orderly and sequential process
• Economic Rationality - basic concept in making naming models in decision making. Exists when
people attempt to maximize objectively measure or montages (money or goods produce)
• Assumes that people will choose the decision or course of action that has the greatest advantage or
payoff from among the many alternatives
• Assumes that they go about the search in a plan
Steps:
• Discover symptoms
• Set goal or define problem
• Develop criterion
• Develop all alternatives
• Determine all outcomes
• Select best alternative
• Act or implement decision
Notice that the model develops all alternatives and determines all outcomes, meaning if we use this model it
will take too much in making a decision especially if there are many alternatives to choose from.
If there are too many alternatives, then this model is not the best model to use for decisions that made to be
made in timely manner

Bounded Rationality or Administrative Man Model

 • Does not assume individual rationality in the decision process
Assumptions:
• People are usually settle for much less
• Because the decisions that they make typically demand greater information process
capabilities than they posses
• They seek a kind of bounded and limited decisions
• People examine possible solutions to a problem sequentially
• Rather than identifying all possible solutions and selecting the best, it only seeks to satisfy
• Only consider other alternatives if not acceptable
Steps:
• Set goal or define problem
• Establish level of aspiration
• Employ heuristic programs to identify feasible alternatives
• Heuristic Technique – any approach to problem solving or self-discovery employs practical
method not guaranteed to be optimal, perfect, or rational but instead, sufficient for reaching
an immediate goal. Therefore, the model is also called as satisfier.
• If feasibility is not identified, adjust aspiration level until feasible alternative is identified.
• Appraise alternative
• If unacceptable, go back to step 3. If acceptable, act.
• Appraise the ease of aspiration level attainment. If unacceptable, go back to step 2. Otherwise, do as
what is acted upon.

Implicit Favorite or Gamesman Model

• Developed by Soelberg in 1967
• Observed the job choice process of graduating business students and found out that in many cases
students already identify implicit favorites early in recruiting and choice process.
• However, they continued their search for additional alternatives and quickly selected the best
alternative candidate called confirmation candidate.
Assumptions:
• People are biased towards their favored choices
Steps:
• Set goal - Identify implicit favorite
• Compare and rank implicitly rejected alternatives
• Identify confirmation candidate
• Establish decision rules or criterion
• Announce decision
• Act

PROBLEM SOLVING PROCESS

• Life is all about decisions.
• Someday, you might be hired to make decisions.
• There are three logical divisions in the problem-solving process: Structure, Analyze, Manage
• Structure – to construct or arrange according to a plan, give a pattern or organization
• Analyze – to examine methodically and in detail the constitution or structure of something
especially information for purposes of explanation and interpretation
 • Manage – to supervise or oversee
• The formal problem-solving process:
• Define the problem
• Identify the set of alternative solutions
• Determine criteria used to evaluate alternatives
• Evaluate alternatives (both qualitative and quantitative data)
• Choose an alternative (Make a decision)
• Implement the selected option
• Evaluate results to determine to determine if problem has been satisfactorily solved
Problem Solving is a larger process that starts with identification of problem and ends in evaluation of the
effectiveness of the chosen solution

DECISION MAKING PROCESS

• Single-criterion decision problems
• Problems in which the objective is to find the best solution with respect to one criterion
only
• Multicriteria decision problems
• Problems that involve more than one criterion

DECISION MAKING PROCESS: analysis phase

Qualitative Analysis Quantitative Analysis
Based largely on the manager’s judgment and Analyst will concentrate on the quantitative facts or
experience data associated with the problem
Includes the manager’s intuitive “feel” for the Analyst will develop mathematical expressions that
problem describe the objectives, constraints, and other
relationships that exist in the problem
Is more of an art than a science Analyst will use one or more quantitative methods to
make a recommendation

Qualitative Analysis – manager’s feeling not on the numerical details that is why it is considered as an art than
a science
Quantitative Analysis – manager translates objectives into mathematical expressions to provide numerical
basis

Potential reasons of applying the quantitative analysis approach to decision making

• The problem is complex
• Too complicated and cannot make a decision out of nowhere because it might lead to a
wrong judgment
• Quantitative analysis is not an assurance in making a right decision however, the risks are
somehow lessen and would give a rational basis as to why you are making such decision
• The problem is very important
• Since it requires a lot of time and funds
• If not important, then forego it to acquire high cost and benefits
• The problem is new
• Do not have experience with known basis
• The problem is repetitive
• Using the same mathematical issue if the same problem than finding another
Quantitative analysis process:
A. Model Development
B. Data Preparation
C. Model Solution
D. Report Generation

• There’s no way to make infallible decisions

• Timeliness: If you want, you can take all the time in the world to research your decision. But
by the time all the data is in, it’s too late to decide.
o The more time, the more likely to make a decision
o Waiting too long may be too late to decide
• Completeness: It is impossible to consider all factors that might influence a decision
o Not all factors are not known to us
• Reliability: Some information is simply not available for decisions – at best, we can only get
estimates
o Some information is not reliable and available
• What are models?
• Representations of real objects or situations
• Approximation of reality: ALL MODELS ARE WRONG, BUT SOME ARE USEFUL
• All models are used to approximate reality, but their effectiveness depends on the reliability
of inputs.
• Follows the principle of:
GIGO = Garbage In
Garbage Out

TYPES OF MODELS
• Iconic (actual models) = physical replicas or scalar representations of real model
• Also known as actual models
• E.g.: model airplane which is like a real airplane but in a small scale
• Analog = physical in form, but do not physically resemble the object being modeled
• E.g.: heart drawing but it is not like the actual heart
• Mathematical = represent real world problems through a system of mathematical formulas and
expressions based on key assumptions, estimates, or statistical analyses.
• E.g.: Total Cost = Variable Cost + Fixed Cost
= 10 000 + 30 000
= 40 000

ADVANTAGES OF MODELS
• Experimenting with model, compared to experimenting with the real situation:
- Requires less time
- Is less expensive
- Involves less risk
E.g.: - Model airplane is easier, faster, and cheaper than actual airplane
• The more closely the model represents the real situation, he more accurate the conclusions
and predictions will be.

Mathematical models
• Elements of Mathematical Models:
- Objective Function – a mathematical expression that describes the problem’s objective,
such as maximizing profit or minimizing cost
- Constraints - a set of restrictions or limitations, such as production capacities (e.g.: time
and money because they are scarce)
- Uncontrollable Inputs – environmental factors that are not under the control of the decision
maker.
Examples:
a. Normal and expedited activity completion times
b. Activity expediting costs – may be beyond our control
c. Funds available for expediting – funds may not be enough
d. Precedence relationships of the activities – if stuck up to one project, could not
continue project
- Decision Variable – controllable inputs; decision alternatives specified by the decision
maker, such as the number of units of a product to produce
• Cost/Benefit considerations must be made in selecting an appropriate mathematical model.
• Frequently a less complicated (and perhaps less precise) model is more appropriate than a more
complex and accurate one due to cost and ease of solution considerations.

Uncontrollable Inputs
(Environmental Factors)

Controllable Inputs Mathematical Output

(Decision Variables) Model (Projected Results)

• Data presentation is not trivial step, due to the time required and the possibility of data collection
errors.
- It is an important step because requires time and collecting data may involve errors
• A model with 50 decision variables and 25 constraints could have over 1300 data elements
• Often, a fairly large data base is needed.
• Information systems specialists might be needed

• The analyst attempts to identify the alternative (the set of decision variable values) that provides the
“best” output for the model.
- E.g.: which among the alternatives help achieve to maximize profit
 • The “best” output is the optimal solution.
• If the alternative does not satisfy all the model constraints, it is rejected as being infeasible, regardless
of the objective function value.
• If the alternative satisfies all of the model constraints, it is feasible and a candidate for the “best”
solution.
• One solution approach is trial-and-error.
- Might not provide the best solution
- Inefficient (numerous calculations required)
• Special solution procedures have been developed for specific mathematical models.
- Some small models/problems can be solved by hand calculations
- Most practical applications require using a computer

Computer software
A variety of software packages are available for solving mathematical models
• Spreadsheet packages such as Microsoft Excel
• The Management Scientist, developed by the textbook authors

Model testing and validation

Often, goodness/accuracy of a model cannot be assessed until solutions are generated.
• Small test problems having known, or at least expected, solutions can be used for model testing and
validation.
• If the model generates expected solutions, use the model on the full-scale problem.
• If inaccuracies or potential shortcomings inherent in the model are identified, take corrective action
such as:
- Collection of more-accurate input data
- Modification of the model

• A managerial report, based on the results of the model, should be prepared.

• The report should be easily understood by the decision maker.
• The report should include:
- The recommended decision
- Their pertinent information about the results (for example, how sensitive the model
solution is to the assumptions and data used in the model)

Implementation and follow up

• Successful implementation of model results is of critical importance.
• Secure as much user involvement as possible throughout the modeling process.
• Continue to monitor the contribution of the model.
• It might be necessary to refine or expand the model.

Other models
• Models of Cost, Revenue, and Profit
• Other Management Science Techniques
Some of the 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
Though the use of these models, a manager can determine the projected cost, revenue, and/or profit associated
with an established production quantity or a forecasted sales volume
The cost of manufacturing or producing a product is a function of the volume produced. This cost can usually
be defined as a sum of two costs:
• Fixed Cost – portion of the total cost that does not depends on the production volume; this cost remains
the same no matter how much is produced.
• Variable Cost – portion of the total cost that is dependent on and varies with the production volume
Example:
Nowlin Plastics produces a line of cell phone covers. Nowlin’s best-selling cover is its Viper model, a slim
but very durable black and gray plastic cover. Several products are produced on the same manufacturing line,
and a setup cost is incurred each time a changeover is made for a new product.
• Suppose that the setup cost for the Viper is $3000. This setup cost is a fixed cost that is incurred
regardless of the number of units eventually produced.
• In addition, suppose that variable labor and material costs are $2 for each unit produced, and that each
Viper cover sells for $5.
Required: Construct the cost-volume model, identify the marginal cost, marginal revenue, total profit
equation, and break-even point in units and in dollar sales. How much would be the profit or loss if 500 pieces
of Viper is sold? How about if 2000 pieces of Viper is sold?

Marginal cost – rate of change of the total cost with respect to production volume. The cost increase associated
with a one-unit increase in the production volume. This therefore includes only variable cost and not fixed
cost.
Marginal revenue - rate of change of total revenue with respect to sales volume. The increase in total revenue
resulting from a one-unit increase in sales volume.
Total profit – denotes P(x), is total revenue minus total cost
Break-even point in units – volume that results in total revenue equaling total cost (providing $0 profit)
Break-even point in diollar/peso sales – the dollar/peso sales that results in total revenue equaling total cost
(providing $0 profit)
The volume that results in total revenue equaling total cost (providing $0 profit) is called the breakeven point.

Other management science techniques

• Linear Programming – 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 – approach used for problems that can be set up as linear programs with the
additional requirement that some or all of the decision recommendations be integer values.
• Non-linear Programming - technique that allows for maximizing or minimizing a nonlinear function
subject to nonlinear constraints
• Project Scheduling: PERT (Program Evaluation and Review Technique) and CPM (Critical Path Method) – help
managers 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
• 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
• Walking Line (or queuing) Models – help managers understand and make better decision concerning the
operation of systems involving waiting lines
• Simulation – 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 pattern of future events.
• Goal Programming – technique for solving multi-criteria decision problem, usually within the framework
of linear programming
• Analytics Hierarchy Process – multi-criteria decision-making technique that 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 (such as
describing the probability that a machine, functioning in one period, will or beak down in another
period).
• Distribution/Network Models - specialized solution procedures for problems in transportation system
design, information system design, and project scheduling

Methods used most frequently

• Linear Programming
• Integer Programming
• Network Models (such as transportation and transshipment models)
• Simulation