INTRODUCTION TO MANAGEMENT SCIENCE

Introduction to Management Science Models

United Airlines operates a fleet of hundreds of different types of aircraft and employs thousands of people as pilots, flight attendants, ticket agents, ground crews, and service personnel in its operations throughout the United States, Canada, Central and South America, Europe, Asia and Australia. The complexity of operations requires United to be highly mechanized and to utilize the latest mathematical tools, information , and computer technology so that it can:

Develop master flight schedules Forecast demand for its routes Determine an aircraft lease/ purchase plan Assign planes and crews to the routes Set fares Purchase fuel Schedule airport ticket agents and service personnel. Schedule maintenance crews. Maintain service facilities. Lease airport gates. Design and monitor its frequent flyer program

Factors impacting these decisions include: Budget, equipment, and personnel restrictions Union agreements for personnel scheduling Federal Aviation Administration guidelines Safe distance/ turnaround time requirements The flexibility to react in real time to complications due to weather, congestion, and other causes. These are but a few of complicated and interrelated problems and constraints affecting Uniteds bottom-line profitability. Proper planning and operations require more sophisticated analyses than merely making educated guesses. Accordingly, United Airlines makes liberal use of management science models to increase profits and customer satisfaction in a constrained environment.

What is Management Science

Management Science is the discipline that adapts the scientific approach for problem solving to executive decision making in order to accomplish the goal of doing the best you can with what youve got. It involves: Analyzing and building mathematical models of complex business situations Solving and refining the mathematical models typically using spreadsheets and/ or other software programs to gain insights into the business situations. Communicating/ implementing the resulting insights and recommendations based on these models.

Business and Management Science

Every enterprise has an objective to accomplish. Companies that operate for profit want to provide products or services to customers in order to make money for their owners or stockholders. A non profit organization such as a hospital may want to provide services to patients at minimum cost. In general , the goal of both for profit and non-profit organizations is to optimize the use of available resources, given all the internal and external constraints placed on them. Success is usually measured by how well they do.

Thus an organization is always looking for ways to run more efficiently, more effectively, and, in the case of profit motivated businesses, more profitably. In other words organization want to do the best they can with what theyve got. This is the realm in which management science operates.

Management Science

Management Science, an approach to decision making based on the scientific method, makes extensive use of quantitative analysis. In addition to management science, two other and widely accepted names are operations research and decision science. Operations Research is assuming an increasing degree of importance in theory and practice of management. Some of the factors which are responsible for this development are:

Decision problems of modern management are so complex that only a systematic and scientifically based analysis can yield realistic solutions. 2. Availability of different types of quantitative models for solving these complex managerial problems. 3. Availability of high speed computers has made it possible both in terms of time and cost to apply quantitative models to all real life problems in all types of organizational problems such as business, industry, military, government, health and so on.
1.

Evolution of Operations Research

Operations research is generally considered to have originated during the world war II period, when teams were formed to deal with strategic and tactical problems faced by the military. These teams, which often consisted of people with diverse specialties (e.g. mathematician, engineers, and behavioral scientist), were joined together to solve a common problem through the utilization of the scientific method.

Problem Solving and Decision Making

Problem Solving can be defined as the process of identifying a difference between the actual and the desired state of affairs and then taking action to resolve the difference. Steps in problem solving: 1. Identify and define the problem 2. Determine the set of alternative solutions. 3. Determine the criterion or criteria that will be used to evaluate the alternatives. 4. Evaluate the alternatives 5. Choose an alternative

6. Implement the selected alternative. 7. Evaluate the results to determine whether a satisfactory solution has been obtained. Decision Making is the term generally associated with the first five steps of the problem solving process. Thus, the first step of decision making is to identify and define the problem. Decision making ends with the choosing of an alternative, which is the act of making the decision.

Example of Decision Making

For the moment assume that you are currently unemployed and that you would like a position that will lead to a satisfying career. Suppose that your job search has resulted in offers from companies in Banglore, NCR, Delhi. Thus alternatives for your decision problem can be stated as follows: 1. Accept the position in Banglore. 2. Accept the position in NCR. 3. Accept the position in Delhi. 4. Accept the position in NCR.

Alternative Banglore NCR NCR Delhi

Starting Salary 38, 500

Potential for Advancement Excellent Average Good Average

Job Location Average

36,000 37,000

36,000

Good

Good

Excellent

Decision making process may take two basic form

Qualitative Analysis Quantitative Analysis Qualitative analysis is based primarily on the managers judgment and experience; it includes the managers intuitive feel for the problem and is more than a art than a science

Reasons for using Quantitative Analysis is used in Decision Making

The problem is complex, and the manager cannot develop a good solution without the aid of quantitative analysis. The problem is especially important (e.g., a great deal of money is involved), and the manager desires a through analysis before attempting to make a decision. The problem is new, and the manager has no previous experience from which to draw. The problem is repetitive, and the manager saves time and effort by relying on quantitative procedures to make routine decision recommendations.

Model Development
Objective function Constraints Non-Negative restriction

Objective Function

A mathematical expression that describes the problems objectives is referred to as the objective function. For example, the profit equation P = 10 x would be an objective function of a firm attempting to maximize profit.

Constraints

Constraints are the set of restrictions on the objective function. For example, the production capacity constraint: 5 hours are required to produce each unit and only 40 hours of production time are available per week.

5 x 40

Complete Mathematical Model

Maximize Subject to P = 10 x 5x 40 x0 objective function constraints non - negative restriction

Example

Suppose, NewOffice furniture produces three products desks, chairs, and molded steel (which it sells to other manufacturers) and is trying to decide on the number of desks (D), chairs (C), and pounds of molded steel (M) to produce during a particular production run. If new office nets a $50 profit on each desk produced, $30 on each chair produced, and $6 per pound of molded steel produced, the total profit for a production run can be molded by the expression: 50D + 30C + 6M

Similarly, if 7 pounds of raw steel are needed to manufacture a desk, 3 pounds to manufacture a chair, and 1.5 pounds to produce a pound of moulded steel, the amount of raw steel used during the production run is moulded by the expression: 7D+3C+1.5M For example, if NewOffice has only 2000 pounds of raw steel available for the production run, the functional constraint that expresses the fact that it cannot use more than 2000 pounds of raw steel is moulded by the inequality:

7 D + 3C + 1.5M 2000

Other constraints are

At least 100 desks must be produced to satisfy contract commitments, and due to the availability of seat cushions, no more than 500 chairs can be produced, these can be expressed as follows: D 100 and C 500 If the quantities of desks and chairs produced during the production run must be integer valued (the amount of molded steel must not be integer valued). The

Maximize Subject to

50D+30C + 6M 7D+3C +1.5M 2000 D 100 C 500 D,C, M 0 D,C are integers

(Total Profit) (Raw Steel) (Contract) (Cushions) (nonnegativity)

Classification of Mathematical Models

Optimization Models Prediction Models Deterministic Models Stochastic Models

Definitions:

Operations research may be described as a scientific approach to decision-making that involves the operations of organizational system. The application of the scientific method to study of operations of large complex organizations or activities. It provides top level administrators with a quantitative basis for decisions that will increase the effectiveness of such organizations in carrying out their basic purposes.

Features of OR/ MS
Decision-making Scientific Approach Objective Inter-disciplinary Team Approach

The Team Concept

Building a good mathematical model is an art that is at the heart of the management science process. The greater the knowledge of the project under study, the more reliable the model is in assessing the true situation. The petroleum industry is one that has made liberal use of management science models.

Team Member
Chemical Engineer Economist Marketing Analyst Financial Officer Accountant Production Manager Transportation Specialist

Petroleum blending requirements Forecasts of oil prices Forecast of market demand for gasoline Analysis of cash flow Cash flow / tax requirements Analysis of production capabilities Distribution of refined oil products

Expertise

Methodology of Operations Research* The Seven Steps to a Good OR Analysis

Feedback loops at all levels!

Methodology of Operations Research* The Seven Steps to a Good OR Analysis

What are the objectives? Is the proposed problem too narrow? Is it too broad?

Methodology of Operations Research* The Seven Steps to a Good OR Analysis

What data should be collected? How will data be collected? How do different components of the system interact with each other?

Methodology of Operations Research* The Seven Steps to a Good OR Analysis

What kind of model should be used? Is the model accurate? Is the model too complex?

Methodology of Operations Research* The Seven Steps to a Good OR Analysis

Do outputs match current observations for current inputs? Are outputs reasonable? Could the model be erroneous?

Methodology of Operations Research* The Seven Steps to a Good OR Analysis

What if there are conflicting objectives? Inherently the most difficult step. This is where software tools will help us!

Methodology of Operations Research* The Seven Steps to a Good OR Analysis

Must communicate results in laymans terms. System must be user friendly!

Methodology of Operations Research* The Seven Steps to a Good OR Analysis

Users must be trained on the new system. System must be observed over time to ensure it works properly.

Operations Research Models in Practice

Allocation models Inventory models Waiting line (or Queuing) models Network models Simulation models Decision models

Successful OR Applications
Company Hewlett Packard Taco Bell Proctor & Gamble Delta Airlines AT&T Yellow Freight Systems, Inc. San Francisco Police Dept. Bethlehem Steel North American Van Lines Citgo Petroleum United Airlines Dairyman's Creamery Phillips Petroleum Year 1998 1998 1997 1994 1993 1992 1989 1989 1988 1987 1986 1985 1983 Problem Designing buffers into production line Employee scheduling Redesign production & distributon system Assigning planes to routes Call center design Design trucking network Patrol Scheduling Design an Ingot Mold Stripper Assigning loads to drivers Refinery operations & distribution Scheduling reservation personnel Optimal production levels Equipment replacement Techniques Used Queuing models IP, Forecasting, Simulation Transportation models Integer Programming Queuing models, Simulation Network models, Forecasting, Simulation Linear Programming Integer Programming Network modeling Linear Programming, Forecasting LP, Queuing, Forecasting Linear Programming Network modeling Annual Savings $280 million $13 million $200 million $100 million $750 million $17.3 million $11 million $8 million $2.5 million $70 million $6 million $48,000 $90,000

Model Construction
A model is an abstract mathematical representation of a problem situation. As an example, consider a business firm that sells a product. 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 = $ 20 x 5x

Z = $ 20 x 5x
In the equation x represents the number of units of the product that are sold, and Z represents the total profit that results from the sale of the product. The symbols x and Z are variables. Z is a dependent variable because its value is dependent on the no. of units sold, x is independent variable. The numbers $ 20 and $ 5 in the equation are referred to as parameters. They are generally constant values. The equation as a whole is known as functional relationship. Profit (Z) is a function of no. of units sold (x).

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 x = 100 lb. of steel

This equation indicates that for every unit produced, 4 of the available 100 pounds of steel will be used. Now our model consists of two relationships:

Z = $20 x 5 x 4 x = 100

The mathematical model can be written as:

max imize Z = $ 20 x 5 x subject to 4 x = 100

This model now represents the managers problem of determining the number of units to produce ( x ). Thus , we determine the value of x , it represents a potential (recommended) decision for the manager. Therefore, x is also known as the decision variable. The next step in the management science process is to solve the model to determine the value of decision variable.

The solution technique is simple algebra. Solving the constraint equation for x , we have

4 x = 100 100 x = 4 x = 2 5 u n its

Solving the value of 25 for x into the profit function results in the total profit:

Z = $20 x 5 x = 2 0(2 5 ) - 5 (25 ) = $ 37 5

BreakEven Analysis

The purpose of break-even analysis is to determine the number of units of a product (i.e., the volume) to sell or produce that will equate total revenue with total cost. 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

Volume is the level of sales or production by a company. It can be expressed as a number of units (i.e. quantity) produced or sold. Cost
Fixed Costs are independent of volume and remain constant. It includes rent on plant and equipments, taxes, staff and management salaries, insurance, advertising and depreciation, heat and light, plant maintenance, and so on. Variable costs depend on the number of items produced. It includes items such as raw materials, and resources, direct labour, packaging, material handling and freight.

Profit is the difference between total revenue and total cost

Total variable costs are a function of the volume and variable cost per unit. Mathematically, it can be expressed as: total variable cost =

vcv

where c v is the variable cost per unit and v = volume Total cost = total fixed cost + total variable cost or T C = c f + vcv where c
f

is fixed cost.

Total Revenue = v p where p is price per unit.

Total Revenue = total revenue total cost

Z = vp ( c Z = vp c
f

+ vcv )

vcv

Example: Consider Western Clothing Company, which produces denim jeans. The company incurs the following monthly costs to produce denim jeans: fixed cost = c f = $10,000 Variable cost = c v = $ 8 per unit If we arbitrarily let the monthly sales volume, v, equal 400 pairs of denim jeans, the total cost is

TC = c

+ v c v= $10,000 + (400) (8) per pair

= $ 13, 200

If denim jeans sell for $ 23 per pair and we sell 400 pairs per month, then the total monthly revenue is Total revenue = v p = (400) (23) = $ 9,200 Total Profit = total revenue total cost

Z = vp ( c

+ v c v ) = $ 9,200 - $ 13,200
= - $ 4,000

Obviously, the clothing company does not want to operate with a monthly loss of $ 4,000 because doing so might eventually result in bankruptcy

If we assume that price is static because of market conditions and that fixed costs and variable cost per unit are not subject to change, then only part of the model that can be varied is volume. Using the modeling terms we developed earlier in this chapter, price, fixed costs and variable cost are parameters, whereas the volume, v, is a decision variable. In break-even analysis we want to compute the value of v that will result in zero profit.
Z = vp c
f

vcv

0 = v ( 2 3 ) 1 0 ,0 0 0 v ( 8 ) 0 = 2 3 v 1 0 ,0 0 0 8 v 1 5 v = 1 0 ,0 0 0 v = 6 6 6 .7 p a ir s o f je a n s

In other words, if the company produces and sells 666.7 pairs of jeans, the profit (and loss) will be zero and the company will break even. This gives a company a point of reference from which to determine how many pairs of jeans it needs to produce and sell in order to gain a profit. For example, a sales volume of 800 pairs of denim jeans will result in the following monthly profit
Z = vp c
f

vcv

= $ ( 8 0 0 )( 2 3 ) 1 0 ,0 0 0 ( 8 0 0 )( 8 ) = $ 2 ,0 0 0

In general, the break-even volume can be determined using the following formula
Z = vp c
f

vcv
f

0 = v( p cv ) c v( p cv ) = c v =
For our example
f

p cv

v =

p cv

1 0 ,0 0 0 = 23 8 = 6 6 6 .7 p a ir s o f je a n s

Graphical Solution

Sensitivity Analysis

When we developed this model, we assumed that our parameters, fixed and variable cost and price were constant. In reality such parameters are frequently uncertain and can rarely be assumed to be constant, and changes in any of the parameters can effect the model solution. The study of changes in any of the parameters is called sensitivity analysis i.e. seeing how sensitive the model is to changes.

Change in Price
v = = c
f

The first thing we analyze the price. We will increase the price of denim jeans from $23 to $30.
p cv

1 0 ,0 0 0 30 8 = 4 5 4 .5 p a ir s o f je a n s

As expected, this increases the total revenue, and it therefore reduces the break even point from 666.7 to 454.5 pairs of jeans.

Sensitivity Analysis with a change in price

Change in Variable Cost

Suppose the stitching on the denim jeans is changed to make the jeans more attractive and stronger. This change results in an increase in variable costs of $ 4 per pair of jeans, thus raising the variable cost per unit, c v , to $ 12 per pair. This change (in conjunction with our previous price change to $ 30) results in a new break even volume:
v = = c
f

p cv

1 0 ,0 0 0 30 12 = 5 5 5 .5 p a ir s o f je a n s

Sensitivity Analysis with a change in variable cost

Change in Fixed Cost

Next lets consider an increase in advertising expenditures to offset the potential loss in sales resulting from a price increase. Increase in advertising expenditure increase the fixed cost. If the company increases its monthly advertising budget by $ 3, 000, then the total fixed cost, c f , becomes $ 13,000
v = c
f

p cv

1 3 ,0 0 0 = 30 12 = 7 2 2 .2 p a ir s o f je a n s

Sensitivity Analysis with a change in fixed cost