Management science (also referred to as operations research, quantitative methods, quantitative
analysis, decision sciences, and business analytics) is the application of a scientific approach to solving
management problems to help managers make better decisions. The logical, consistent, and systematic
approach to problem solving can be as useful (and valuable) as the knowledge of the mechanics of the
mathematical techniques themselves.
The management science process
1. Problem: Once it has been determined that a problem exists, the problem must be clearly
and concisely defined.
2. Model: A management science model is an abstract representation of an existing problem
situation. It can be in the form of a graph or chart, but most frequently a management
science model consists of a set of mathematical relationships. These mathematical
relationships are made up of numbers and symbols.
Ex: The product costs $5 to produce and sells for $20. A model that computes the total profit
that will accrue from the items sold is
Z= 20X-5X.
The symbols x and Z are variables. The term variable is used because no set numeric
value has been specified for these items. Z is a dependent variable because its value is dependent
on the number of units sold; x is an independent variable. The numbers $20 and $5 in the
equation are referred to as parameters. Parameters are constant values that are generally
coefficients of the variables (symbols) in an equation. Parameters usually remain constant during
the process of solving a specific problem. The parameter values are derived from data (i.e.,
pieces of information) from the problem environment. The equation as a whole is known as a
functional relationship (also called function and relationship).
Let us assume that the product is made from steel and that the business firm has 100
pounds of steel available. If it takes 4 pounds of steel to make each unit of the
product, we can develop an additional mathematical relationship to represent steel
usage:
4�=100 lb. of steel
Now our model consists of two relationships:
Maximize Z=20X-5X
Subject to 4X=100 units
We say that the profit equation in this new model is an objective function, and the resource
equation is a constraint.
Thus, when we determine the value of x, it represents a potential (or recommended) decision for
the manager. Therefore, x is also known as a decision variable. The next step in the management
science process is to solve the model to determine the value of the decision variable.
�=$20�−5�4�=100
3. Model Solution: Once models have been constructed in management science, they
are solved using the management science techniques presented in this text. A
management science solution technique usually applies to a specific type of model.
Thus, the model type and solution method are both part of the management science
technique. We are able to say that a model is solved because the model represents a
problem. When we refer to model solution, we also mean problem solution.
4. 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. This is a critical but often
overlooked step in the process. It is not always a given that once a model is developed
or a solution found, it is automatically used.
Business analytics is a somewhat general term that seems to have a number of
different definitions, but in broad terms it is considered to be a process for using large
amounts of data combined with information technology, statistics, management
science techniques, and mathematical modeling to help managers solve problems and
make decisions that will improve their business performance. It makes use of these
technological tools to help businesses understand their past performance and to help
them plan and make decisions for the future; thus analytics is said to be descriptive,
predictive, and prescriptive.
Business students are being advised that in the future companies will expect them to
have an analytics skill set, and these skills need to include knowledge of statistics,
mathematical modeling, and quantitative tools—the topics traditionally considered to
be management science. The ability to bring critical thinking to problem-solving
scenarios is an important aspect of business analytics, which management science
provides, a platform for a student to develop data literacy, the ability to access,
interpret, manipulate, summarize, and communicate data in a decision-making
situation.
Model Building: Break-Even Analysis also called profit analysis: The point where
total revenue equals total cost is called the break-even point, and at this point profit is
zero. The break-even point gives a manager a point of reference in determining how
many units will be needed to ensure a profit.
Components of Break-Even Analysis: Two types of cost are typically incurred in the
production of a product: fixed costs and variable costs. Fixed costs are generally
independent of the volume of units produced and sold. That is, fixed costs remain
constant, regardless of how many units of product are produced within a given range.
Fixed costs can include such items as rent on plant and equipment, taxes, staff and
management salaries, insurance, advertising, depreciation, heat and light, and plant
maintenance. Taken together, these items result in total fixed costs.
Variable costs are determined on a per-unit basis. Thus, total variable costs depend
on the number of units produced. Variable costs include such items as raw materials
and resources, direct labor, packaging, material handling, and freight.
Total cost = Fixed Cost +Variable Cost of all units produced
The third component in our break-even model is profit. Profit is the difference
between total revenue and total cost. Total revenue is the volume multiplied by the
price per unit.
Total Profit = Total Revenue – Total Cost =Volume*Selling Price per Unit – Fixed
Cost – Volume*Cost per Unit
Z= VP-FC-VC=>V(P-C)-FC, If Z=0 then V(P-C) =FC=>V=FC/(P-C)
At the break-even point, where total revenue equals total cost, the profit, Z, equals zero. Thus, if
we let profit, Z, equal zero in our total profit equation and solve for v, we can determine the
break-even volume:
Volume = Fixed Cost/ (Price per Unit - Cost Per Unit)
Graphical Solution – Using Excel you can analyze the B-E-P.
Sensitivity Analysis – by Changing the values of Price and Cost per unit, Managers can
find the optimum solution to get maximum profit.
Classification of management science techniques
A decision support system
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