Management Science Chapter Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-1 Chapter Topics  The Management Science Approach to Problem Solving  Model Building: Break-Even Analysis  Computer Solution  Management Science Modeling Techniques  Business Usage of Management Science Techniques  Management Science Models in Decision Support Systems Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-2 The Management Science Approach  Management science uses a scientific approach to solving management problems  It is used in a variety of organizations to solve many different types of problems  It encompasses a logical mathematical approach to problem solving  Management science, also known as operations research, quantitative methods, etc., involves a philosophy of problem solving in a logical manner Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-3 The Management Science Process Figure 1.1 Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-4 Steps in the Management Science Process  Observation - Identification of a problem that exists (or may occur soon) in a system or organization  Definition of the Problem - problem must be clearly and consistently defined, showing its boundaries and interactions with the objectives of the organization  Model Construction - Development of the functional mathematical relationships that describe the decision variables, objective function and constraints of the problem  Model Solution - Models solved using management science techniques  Model Implementation - Actual use of the model or its solution Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-5 Example of Model Construction (1 of 3) Information and Data:  Business firm makes and sells a steel product  Product costs $5 to produce  Product sells for $20  Product requires pounds of steel to make  Firm has 100 pounds of steel Business Problem:  Determine the number of units to produce to Copyright © 2010 Pearson Education, Inc Publishing as make the most profit, given the limited Prentice Hall 1-6 Example of Model Construction (2 of 3) Variables: X = # units to produce (decision variable) Z = total profit (in $) Model: Z = $20X - $5X (objective function) 4X = 100 lb of steel (resource constraint) Parameters: (known values) $20, $5, lbs, 100 lbs Formal Specification of Model: Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-7 mple of Model Construction (3 of 3) Model Solve the constraint equation: Solution: 4x = 100 (4x)/4 = (100)/4 x = 25 units Substitute this value into the profit function: Z = $20x - $5x = (20)(25) – (5)(25) = $375 Copyright © 2010 Pearson Education, Inc Publishing as (Produce 25 units, to yield a Prentice Hall 1-8 Model Building: Break-Even Analysis (1 of 9) ■Used to determine the number of units of a product to sell or produce that will equate total revenue with total cost ■The volume at which total revenue equals total cost is called the break-even point ■Profit at break-even point is zero Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-9 Model Building: Break-Even Analysis (2 of 9) Model Components  Fixed Cost (cf) - costs that remain constant regardless of number of units produced  Variable Cost (cv) - unit production cost of product  Volume (v) – the number of units produced or sold  Total variable cost (vcv) - function of volume (v) and unit variable cost Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-10 Model Building: Break-Even Analysis (6 of 9) Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall Figure 1.2 1-14 Model Building: Break-Even Analysis (7 of 9) Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall Figure 1.3 1-15 Model Building: Break-Even Analysis (8 of 9) Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall Figure 1.4 1-16 Model Building: Break-Even Analysis (9 of 9) Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall Figure 1.5 1-17 Break-Even Analysis: Excel Solution (1 of 5) Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall Exhibit 1.1 1-18 Break-Even Analysis: Excel QM Solution (2 of 5) Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall Exhibit 1-19 Break-Even Analysis: Excel QM Solution (3 of 5) Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall Exhibit 1-20 Break-Even Analysis: QM Solution (4 of 5) Exhibit 1.4 Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-21 Break-Even Analysis: QM Solution (5 of 5) Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall Exhibit 1.5 1-22 Classification of Management Science Techniques Figure 1.6 Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall Modeling 1-23 Characteristics of Modeling Techniques Linear Mathematical Programming clear objective; restrictions on resources and requirements; parameters known with certainty (Chap 2-6, 9)  Probabilistic Techniques - results contain uncertainty (Chap 11-13)  Network Techniques - model often formulated as diagram; deterministic or probabilistic (Chap 7-8)  Other Techniques - variety of deterministic and probabilistic methods for specific types of© problems including forecasting, inventory, Copyright 2010 Pearson Education, Inc Publishing  as Prentice Hall 1-24 Business Use of Management Science  Some application areas: - Project Planning - Capital Budgeting - Inventory Analysis - Production Planning - Scheduling  Interfaces - Applications journal published by Institute for Operations Research and Management Sciences (INFORMS) Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-25 Decision Support Systems (DSS) A decision support system is a computer-based system that helps decision makers address complex problems that cut across different parts of an organization and operations Features of Decision Support Systems  Interactive  Use databases & management science models  Address “what if” questions  Perform sensitivity analysis Examples include: ERP – Enterprise Resource Planning OLAP – Online Analytical Processing Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-26 Management Science Models Decision Support Systems (2 of 2) Figure 1.7 A Decision Support System Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-27 Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-28 .. .Chapter Topics  The Management Science Approach to Problem Solving  Model Building: Break-Even Analysis  Computer Solution  Management Science Modeling Techniques  Business Usage of Management. .. Management Science Techniques  Management Science Models in Decision Support Systems Copyright © 2010 Pearson Education, Inc Publishing as Prentice Hall 1-2 The Management Science Approach  Management. .. Analysis (1 of 9) ■Used to determine the number of units of a product to sell or produce that will equate total revenue with total cost ■The volume at which total revenue equals total cost is called