Chapter 1

Management Science

Chapter Topics
Management Science Approach to
Problem Solving
Model Building: Break-Even Analysis
Management Science Modeling
Techniques
Business Usage of Management Science
Management Science Models in Decision
Support Systems

Management Science
A scientific approach to solving
management problems
Encompasses a number of mathematically
oriented techniques
Applications are frequently credited with
increasing efficiency and productivity of
business firms.
Can be referred to as operations research,
quantitative methods, quantitative analysis
and decision sciences

The Management
Science Process

Management Science
Approach to Problem
Solving
Observation: in order to identify problems in a
system or an organization
Problem definition: should be clear and concise,
limits well defined, should include the objectives of
the organization
Model: usually consists of mathematical relationships
in terms of numbers and symbols such as parameters
and variables.
Model solution: application of management science
techniques specific to types of models.
Implementation: actual use of the model and its
solution

Model Construction
Model: abstract mathematical representation of a
problem
Variable: symbol that represents an item which can take
different values
Parameters: known constant values that are usually
coefficients of variables in equations
Data: pieces of information from the problem environment
Functions: mathematical expressions which consist of
parameters and symbols; building blocks of models.
Decision variable: a variable whose value is set by the
decision maker
Objective function: a function that quantifies the
solution to a problem according to a specific objective
Constraint: a condition that the solution to a model
should satisfy

 Problem: a business firm sells a product made of

steel, which costs $5 to produce and sells for $20.
Each product requires 4 pounds of steel and the
firm has 100 pounds of steel. The firm wants to
maximize its profit.
Decision variables?
Objective Function?
Constraints?
Solution?

Break-Even Analysis
Break even: determine volume such that
total revenue = total cost.
Volume: level of production
Fixed cost: independent of volume
Variable cost: dependent on volume
Total revenue: volume times price per unit
Profit = total revenue total cost
Break even: profit = 0.

v : volume
=?
p : unit price = $23
cf : fixed cost = $10,000
cv: variable cost
Z : profit

= $8

=?

Functional relationship?
Break even point?

Graphical Solution

Graphical Solution
(Alternative)

Break Even Sensitivity

What happens if
Price change?
Variable cost change?
Fixed cost change?

Break Even Sensitivity

Break Even Sensitivity

(Alternative)

Classification of
Management Science
Techniques

Online
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Management Science
Modeling Applications

Some application areas:

Project Planning
Capital Budgeting
Inventory Analysis
Marketing Planning
Production Planning
Quality Control
Plant Location
Personnel Management
Scheduling
Interfaces: Applications journal published by Institute for
Operations Research and Management Sciences (INFORMS)

Management Science
Models in Decision
Support Systems
A decision support system (DSS) is a computer-based system

that helps decision makers address complex problems that

cut across different parts of an organization and operations.
A DSS is normally interactive, combining various databases
and different management science models and solution
techniques with a user interface that enables the decision
Decision
systems
maker to support
ask questions
and receive answers.
are most useful in
answering what-if?
questions and performing
sensitivity analysis.