Introduction to Management Science Analyzing the Problem

Body of Knowledge • Identify the Alternatives

The body of knowledge involving quantitative • Choose an Alternative

approaches to decision making is referred to
Types of Problems
• Management Science
• Problems in which the objective is to find the best
• Operations Research solution with respect to one criterion are referred to
as single-criterion decision problems.
• Decision Science
• Problems that involve more than one criterion are
It had its early roots in World War II and is referred to as multi-criteria decision problems.
flourishing in business and industry due, in part, to
ANALYSIS PHASE OF DECISION-MAKING
• Numerous methodological developments (e.g. PROCESS
simplex method for linear programming problems)
Qualitative Analysis
• A virtual explosion in computer power
• Based largely on the manager's judgement and
Problem Solving experience
7 Steps of Problem Solving (first 5 steps are the • Includes the manager's intuitive "feel" for the
process of decision making) problem • Is more of an art than a science
1) Define the problem Quantitative Analysis
2) Determine the set of alternative solutions • Analyst will concentrate on the quant facts or data
3) Determine the criteria for evaluating alternatives associated with the problem

4) Evaluate the alternatives • Analyst will develop mathematical expressions

that describe the objective, constraints, and other
5) Choose an alternative (make a decision) selected relationships that exist in the problem
alternative
• Analyst will use one or more quantitative methods
6) Implement the chosen alternative to make a recommendation.

7) Evaluate the results POTENTIAL REASONS FOR A

QUANTITATIVE ANALYSIS APPROACH TO
DECISION MAKING
DECISION-MAKING PROCESS
1. The problem is complex
Structuring the Problem
2. The problem is very important
• Define the Problem
3. The problem is new
• Identify the Alternatives
4. The problem is repetitive
• Determine the Criteria
QUANTITATIVE ANALYSIS PROCESS Decision Variable- controllable inputs: decision
alternatives specified by the decision maker, such as
1) Model Development number of units of a product to produce.
2) Data Preparation Deterministic Model- if all uncontrollable inputs to
3) Model Solution the model are known and cannot vary

4) Report Generation Stochastic (or Probabilistic) - model If any

uncontrollable are uncertain and subject to variation
MODEL DEVELOPMENT Often more difficult to analyse.

Models are representations of real objects or Cost/Benefit considerations- must be made in

situations selecting an appropriate mathematical model
frequently a less complicated and perhaps less
3 forms of models are: 1. Iconic models - physical
precise) model is more appropriate than a more
replica, or representation, of a real object.
complex and accurate one, due to cost and ease of
2. Analog models - physical in form, but does not solution considerations.
have a physical appearance similar to the real object
MODEL TESTING AND VALIDATION
or situation it represents
• Often, goodness accuracy of a model cannot be
3. Mathematical models - represent real world
assessed until solutions are generated
problems through a system of mathematical formula
s and expressions based on key assumptions, • Small test problems having known, or at least
estimates, or statistical analyses. expected solutions can be used for model testing
and validation
Generally, experimenting with models (compared to
experimenting with the real situation) • If the model generates expected solutions, use the
model on the full-scale problem
• Requires less time
• If inaccuracies or potential shortcomings inherent
• Less expensive
in the model are identified, take corrective action
• Involves less risk such as:

The more closely the model represents the real a) Collection of more-accurate input data
situation, the accurate the conclusions and
b) Modification of the model
predictions will be.
REPORT GENERATION
Important Terms to REMEMBER
• A managerial report based on the results of the
Objective Function- a mathematical expression
model, should be prepared
that describes the problem’s objective, such as
maximizing profit or minimizing cost • The report should be easily understood by the
decision maker
Constraints- a set of restrictions or limitations,
such as production capacities • The report should include

Uncontrollable Inputs- environmental factors that a) The recommended decision

are not under the control of the decision maker
b) Other pertinent information about the results
MODELS OF COST, REVENUE, AND a) Let x indicate the number of calculators
PROFIT produced. Develop a mathematical model
for the total cost of producing x number of
COST AND VOLUME MODELS calculator.

• The cost of manufacturing or producing a product Answer: C(x) = FC + VC(x)

is a function of the volume produced. C(x) = 2,000 + 60(x)

Variable Cost– is the portion of the total cost that b) Let P indicate the total profit. Develop a
is dependent on and varies with the production mathematical model for the total profit
volume. realized from an order for x calculator.

Fixed Cost – is the portion of the total cost that Answer: P(x) = R(x) – C(x)
does not depend on the production volume; this cost P(x) = 80(x) – [2,000 + 60(x)]
remains the same no matter how much is produced

C(x) = Fixed Cost + Variable Cost (x) c) How large must the calculator order be
before KAYANG KAYA will breakeven?
X is the number of units
REVENUE AND VOLUME MODELS R(x) = C(x)
80(x) = [2,000 + 60(x)]
R(x) = Selling Price (x) 80(x) – 60 (x) = 2,000
20(x) = 2,000
X is the number of units Answer: X =100
PROFITAND VOLUME MODELS
To check:
P(x) = R(x) – C(x)
R(x) = C(x)
X is the number of units 80(x) = [2,000 + 60(x)]
80(100) = [2,000 + 60(100)]
BREAKEVEN ANALYSIS- breakeven point is 8000 = 2,000 + 6000
the volume that results in total revenue equalling 8000 = 8000
total cost.

Illustrative Example:
KAYANG KAYA MO YAN Company will
produce a special-style calculator if the ord er size is
large enough to provide a reasonable profit. For
each special-style order, the company incurs a fixed
cost of P2,000 for the production setup. The
variable cost is P60 per calculator, and each
calculator sells for P80.
Exercise
A retail store in Des Moines, Iowa, receives shipments of a particular product from Kansas City and
Minneapolis.
Let x =number of units of the product received from Kansas City
Y =number of units of the product received from Minneapolis
a. Write an expression for the total number of units of the product received by the retail store in Des Moines.
b. Shipments from Kansas City cost $0.20 per unit, and shipments from Minneapolis cost $0.25 per unit.
Develop an objective function representing the total cost of shipments to Des Moines.
c. Assuming the monthly demand at the retail store is 5000 units, develop a constraint that requires 5000 units
to be shipped to Des Moines.
d. No more than 4000 units can be shipped from Kansas City, and no more than 3000 units can be shipped from
Minneapolis in a month. Develop constraints to model this situation.
e. Of course, negative amounts cannot be shipped. Combine the objective function and constraints developed to
state a mathematical model for satisfying the demand at the Des Moines retail store at minimum cost.
Exercise
For most products, higher prices result in a decreased demand, whereas lower prices result in an increased
demand.
Let
d = annual demand for a product in units
p = price per unit

Assume that a firm accepts the following price-demand relationship as being realistic:
d = 800 - 10p, where p must be between $20 and $70.

a. How many units can the firm sell at the $20 per-unit price? At the $70 per-unit price?
b. What happens to annual units demanded for the product if the firm increases the per unit price from $26 to
$27?
c. Show the mathematical model for the total revenue (TR), which is the annual demand multiplied by the unit
price.
d. Based on other considerations, the firm’s management will only consider price alternatives of $30, $40, and
$5 0. Use your model from part (b) to determine the price alternative that will maximize the total revenue.
e. What are the expected annual demand and the total revenue corresponding to your recommended price?