Quantitative Analysis for

Decision Making (MBA 652)

Chapter One
Introduction to Management Science

By: Daniel Tekle (Assistant Professor of Management)

 Introduction

• Development of management thought progresses

through different eras.
– Pre-scientific era
– Classical thought

– Neo-classical thought
– Quantitative Thought
– System thought
 Quantitative Approach to decision Making

• focuses on improving decision making via the

application of quantitative techniques.
• Rule of thumb and trail-error method of decision
making won’t works for complex situation.
• So several mathematical models have been developed
since 1940s in UK like linear programming,
Transportation model, queuing model, etc.
 Management Science
• Management science is the application of a
scientific approach involving extensive use
of quantitative analysis to solving
management problems.
• Encompasses a number of mathematically
oriented techniques, which have widespread
credit in improving effectiveness &
productivity of business.
 Management Science
• also referred to as;
– Operations research,
– Quantitative methods,
– Quantitative analysis, and
– Decision sciences
• Techniques can be applied to solve problems in different types of
organizations, including;
–Services,
–Government,
–Military,
–Business and industry, and
–Health care.
 Management Science (MS)
• Encompasses a logical approach to problem
solving.
– It is more than just a collection of techniques
– logical, consistent, and systematic approach to
problem solving are also useful (Scientific
Methods)
 The Management Science Approach to
Problem Solving
• Scientific method follows recognized and
ordered series of steps:
– Observation
– Definition of the problem,
– Model construction,
– Model solution and
– Implementation of solution results
 1. Problem Observation
• the identification of a problem that exists in the system
(organization).
• The system must be continuously and closely observed so
that problems can be identified as soon as they occur or are
anticipated.
• Manager, and Management scientist can observe problems.
 Management scientist

• a person skilled in the techniques of

management science and trained to identify
problems, who has been hired specifically to
solve problems using management science
techniques.
 2. Definition of the Problem
• the problem must be clearly & concisely
defined.
• Improperly defined problem has no solution
or has inappropriate solution.

• The extent or degree of problem existed

should be indicated
 Problem Definition
• Managers problem can be;
– Objectives: Maximization of profit or Minimization of cost
– Constraints

• Quantitative approach will depend heavily on how

accurately the objective and constraints can be
expressed in terms of mathematical equations or
relationships.
 3. Model Construction
• A model is an abstract mathematical
representation of a problem situation.
• A model is a functional relationship that
includes symbols, numbers, and equations.
• Symbols are known as Variables where as
numbers are called Parameters.

• Two variables: dependent variable and

Independent variable
 Model Construction: cont.
• The purpose of model is to help manager infer
about the real situation by analyzing the model.
• Manager should identify which model, or
models, seem best suited for the problem.

• Hence, manager should aware of the different

models available.
 Example of Model
• Suppose
  ABC firm sells a product at 8$ where its
production cost amounts 5$ per unit & fixed cost
of 100$. What is the profit () relationship with
costs (C) and sales (Q)?

functional relationship
 Variables & Parameters
•  
• & Q are variables, numbers are parameters.

• is dependent variable: to be explained by unit sold (Q).

• Q is independent variable: used to predict

• Parameters (3 & -100) are constant values that

are generally coefficients of the variables.
 Example continued
•  
• Assume the product is made from steel and the
firm owes 100 pound of steel. For producing 1
unit, it requires 4 pounds of steel. How much
unit can be produced with the available steel?

The profit also affected by the available steel.

 Cont.
•  Relating the two equation, we can get

Subject to

• The firm objective is to maximize the profit from

the sales of the product. However, the number of
sales constrained by the available steel.
• Therefore, is called objective function.
• Where as is called constraint function.
 Model Elements
•  Consider the model again.

s.t.

• Parameters like 3, 100, 4, and 100 are

Uncontrollable inputs to the model.
• Variables and Q are controllable inputs. These
are what can be controlled and determined by
managers. They are called decision Variable
 Deterministic & Stochastic Model
• Uncontrollable inputs can either be known exactly
or be uncertain and subject to variation.
• Deterministic Model: involves known
uncontrollable value in advance.
• Stochastic or probabilistic Model: involves
uncontrollable inputs that is uncertain and subject
to variation
 4. Model Solution
•• A
  management science technique usually applies to a
specific model type.
• Model solution is problem solution.

Subject to

• To solve this model apply simple algebra. Solve the

constraint for Q and substitute the value in the profit
function.
 Solution
•  

• The firm can produce maximum of 25 units. The possible profit

from the sales of all 25 units can be:

Solution is not the decision, rather recommendation or

information that supports decision making.
 Problem Solution
A problem can have three solution:

1. Infeasible Solution: a solution that does not satisfy one

or more constraints.

2. Feasible Solution: a solution that satisfies all

constraints.

3. Optimal Solution: The specific decision-variable value

or values that provide the “best” output for the model.
 Implementation
• Implementation is the actual use of the model
once it has been developed or the solution to the
problem the model was developed to solve.
• The implementation process should start with the
understanding of how the model works.
 Problem
Identification

Implementation Problem
Definition
MS
Approach

Model Problem
Solution Modeling
 Application of MS
• Assignment: a decision to assign resources to specific
tasks so that it minimize the costs involved or maximize
the return.
• Data Mining: is concerned with sifting through large
amounts of data in order to identify and analyze relevant
information.
– MS model can be used in order to manage large volume data of
the organization
• Financial Decision Making:
– E.g. you can see how banks manage credit cards.

• Forecasting:
– air traffic volumes
– Sales
– Demand fore medical care

• Logistics: Logistics management is typically

concerned with managing an organization’s supply
chain efficiently and effectively.
• Marketing: decisions regarding the organization’s
marketing strategy.
– Mixture of media to be used for promotion
• Networks: is an interconnected group or system
of things.
– roads or railways-transportation network;
– Computers in a computer network
• Optimization: the best, or optimal, solution to a
decision problem.
– Maximize profit from our sales
– Minimize production costs
– Optimum size for our workforce
• Project Planning and Management
– capability of completing fairly quickly
• Queuing
– waiting at the checkout
– a queue of print jobs at the network printer
• Simulation:
– involves running virtual experiments so that the
consequences of alternative decisions can be analyzed.
• Transportation
– manufactured products
– medical supplies
– food and emergency supplies
 Models of Cost, Revenue and Profit

• Models arising in business 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 this mode
 Cost and Volume Models
•• The
  cost of producing a product is a function of the volume
produced.
• Variable costs(VQ)

• Fixed costs (FC)

= indicates the amount of change in “TC” due to one unit Change

in “Q” (Marginal Cost)
• The portion of TC that depends & varies with Production level.
 Example
• Consider Adika Textile factory incurs a fixed
costs of $10,000 and $8 variable costs per unit.
Assume the production manager projected sales
of 1000 jeans for the next month. What is the
total costs of the order?
 Revenue and Volume Models
•  
• Revenue (TR) is the function of volume sold.

represents the portion of Revenue that changes with

the amount of unit sold (Marginal Revenue).

E.g. Consider Adika Textile factory problem. The

factory selling price of a unit of jeans is $15. what is
the firm’s revenue if the 800 jeans have sold.
 Profit and Volume Models
••  
Profit is important decision making in the private sector

Using this model, manager can determine the profit

associated with each sales volume.
 Breakeven Analysis
• Manager
  can determine projected production level
that make the firm earn the required profit level.

• The decision to produce and sell a certain number

of products can be forecasted by the projected
profit model.
• Breakeven analysis is the determination of the
production level that make the firm either earn no
profit or incur no loss.
 Breakeven Point
• “No-loss,
  No-profit”
• At breakeven point, TR=TC, =0

…. Solve for Q

…. Breakeven point
• Manager can infer a volume above the breakeven
point will result in a profit.
 Exercise

•1.   Let: &

• Assume that a firm accepts the following price-demand
relationship as being realistic:
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. Model the annual revenue (TR) for the annual demand.
c. Based on other considerations, the firm’s management
will only consider price alternatives of $30, $40 and $50.
Determine the price alternative that will maximize the
total revenue.
d. What are the expected annual demand and the total
revenue corresponding to your recommended price?
Thank You