BPB 20403

MANAGEMENT SCIENCE 1
Chapter 1

INTRODUCTION

Dr Chandra

Management Science 1 Introduction

Problem Solving and Decision Making

Problem Solving
The process of identifying a difference between the actual and the
desired state of affairs and then action to resolve the difference.

Seven steps:
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.
Management Science 1 Introduction
Decision Making
A term generally associated with the first five step of the problem-
solving problem.

Example
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 ha s resulted in offers from

companies in Kuala Lumpur, Terengganu, Pahang and Johor.

Management Science 1 Introduction

1. Identify and define the problem.
Unemployed and seeking satisfying career.

2. Determine the set of alternative solutions.

1. Accept the position in Kuala Lumpur.
2. Accept the position in Terengganu.
3. Accept the position in Pahang.
4. Accept the position in Johor.
3. Determine the criterion or criteria that will be used to
evaluate the alternatives.
Single-criterion decision problems
Problems in which the objective is to find the best solution with
respect to one criterion.
Salary

Management Science 1 Introduction

Multicriteria decision problems
Problems in which the objective is to find the best solution with
respect to more than one criterion.
Salary, potential for advancement and location

4. Evaluate the alternatives.

Alternative Salary Advancement Location

1. Kuala Lumpur RM 8,500 Excellent Excellent
2. Terengganu RM 6,000 Excellent Good
3. Pahang RM 6,000 Good Excellent
4. Johor RM 7,000 Average Good
5. Choose an alternative.
Alternative 1

Management Science 1 Introduction

Management Science 1 Introduction
Quantitative Analysis and Decision Making

Qualitative analysis
Primarily based on the judgment and experience. It include intuitive
feel and is more an art than science.
Manager has had experience with similar problems, problem
is relatively simple

Quantitative analysis
Primarily based on the quantitative facts or data associated with
the problem. Initially, mathematical expressions will be developed
describing the objectives, constraints, and other relationships that
exist in the problem.Then, by using quantitative methods the prob-
lem will be solved.
Manager has had little experience, problem is sufficiently com-
plex
Management Science 1 Introduction
Management Science 1 Introduction
Good reasons why a quantitative analysis is the best in
decision-making process:
1. The problem is complex, and the manager cannot develop a
good solution without the aid of quantitative analysis.

2. The problem is especially important (e.g., a great deal of

money is involved), and the manager desires a thorough
analysis before attempting to make a decision.

3. The problem is new, and the manager has no previous

experience from which to draw.

4. The problem is repetitive, and the manager saves time and

effort by relying on quantitative procedures to make routine
decision recommendations.
Management Science 1 Introduction
Exercise
A firm just completed a new plant that will produce more than 500
different products, using more than 50 different production lines
and machines. The production scheduling decisions are critical in
that sales will be lost if customer demands are not met on time. If
no individual in the firm has experience with this production
operation, and if new production schedules must be generated each
week, why should the firm consider a quantitative approach to the
production scheduling problem?

Answer
A quantitative approach should be considered because the problem
is large, complex, important, new, and repetitive.

Management Science 1 Introduction

Quantitative Analysis

z Once the problem has been adequately structured, a

mathematical model will be developed.

z Quantitative methods will be employed to find best solution.

z This best solution will be recommended to the manager

z The process of developing and solving models is the essence of

the quantitative analysis process.

Management Science 1 Introduction

Model development

Model
A representation of a real object or situation.

Iconic model
A physical replica, or representation, of a real object. toy truck,
smaller scale airplane

Analog model
Although physical in form, an analog model does not have a phys-
ical appearance similar to the real object or situation it represents.
speedometer, thermometer

Management Science 1 Introduction

Mathematical model
Mathematical symbols and expressions used to represent a real sit-
uation.

Example
The total profit from the sale of a product can be determined by
multiplying the profit per unit by the quantity sold. Let
x = the number of unit sold
Profit per unit = RM 10.
Then, the mathematical model for the total profit, P

P = 10x

Management Science 1 Introduction

Managerial problem
Maximization of profit
Minimization of cost
Restriction or constraints

Constrain
Restriction or limitation imposed on a problem.

Example cont...
5 hours are required to produce each unit and only 40 hours of
production time are available per week.

5x 40

Management Science 1 Introduction

Objective function
A mathematical expression that describes the problems objective.

P = 10x (from previous example)

Rewriting the decision problem
How many units of the product should be scheduled each week to
maximize profit ?

Maximize P = 10x (objective function)

subject to (s.t.)

5x 40
(constraints)
x0

Management Science 1 Introduction

Uncontrollable inputs
The environmental factors or inputs that cannot be controlled by
the decision maker.

Controllable inputs (Decision variables)

The inputs that are controlled or determined by the decision maker.

Management Science 1 Introduction

Deterministic model
A model in which all uncontrollable inputs are known and cannot
vary.

Stochastic (probabilistic) model

A model in which at least one uncontrollable input is uncertain and
subject to variation.

Optimal solution
The specific decision-variable value or values that provide the best
output for the model.

Infeasible solution
A decision alternative or solution that does not satisfy one or more
constraints.
Management Science 1 Introduction
Feasible solution
A decision alternative or solution that satisfy all constraints.

Management Science 1 Introduction

Exercise
Recall the example.

Maximize P = 10x
subject to (s.t.)
5x 40
x0
Suppose the firm in this example considers a second product that
has a unit profit of $5 and requires 2 hours of production time for
each unit produced. Use y as the number of units of product 2
produced.

Management Science 1 Introduction

a. Show the mathematical model when both products are
considered simultaneously.

Answer:

Maximize P = 10x + 5y
subject to (s.t.)
5x + 2y 40
x 0, y 0

Management Science 1 Introduction

b. Identify the controllable and uncontrollable inputs for this
model.

Answer:

Controllable inputs: x and y

Uncontrollable inputs: profit(10,5), labor-hours (5,2), and

labor-hour availability (40)

Management Science 1 Introduction

c. Draw the flowchart of the input-output process for this model.

Answer:

See figure in slide no. 16

d. What are the optimal solution values of x and y?

Answer:

x = 0, y = 20; Profit= $100 (Solution by trial and error)

Management Science 1 Introduction

e. Is the model developed in part (a) a deterministic or a
stochastic model ?

Answer:

Deterministic

Management Science 1 Introduction

Model of cost, revenue and profit

Fixed cost
Cost that independent of the number of items to be produced.
(before production start)
Example: Lighting,heating,purchase,rent or lease of equipment.

Variable cost
Cost that depend on the number of items to be produced.
Example: Wages,raw materials,energy.

Example:
Cost of running a car:
1) Fixed cost : repayment of purchase loan, road tax, insurance
2) Variable cost: for each mile travelled (petrol,oil,tyres)
Management Science 1 Introduction
Model of Cost

Total cost
= fixed cost + variable cost
= fixed cost(F) + [cost per unit(C) number of units (x)]

TC(x) = F + Cx

Example:
The variable costs associated with a certain process are RM 0.65
per item. The fixed costs per day have been calculated as RM 250.
Let x is the size of the production run (i. e. number of items
produced). Derive the function for cost per item.
250 + 0.65x
TC(x) = 250 + 0.65x Cost per item, CPI(x) =
x
Management Science 1 Introduction
Model of Revenue
Revenue
= price per unit(P) number of units sold (x)
R(x) = Px

Example:
A company sells a product with selling price of RM 35. Find the
revenue, if the company plans to sell 30 units of the products.

Revenue = RM 35 30 = RM 1050

Management Science 1 Introduction

Model of Profit
Profit
= Revenue(R(x)) total cost(TC(x))
Pr(x) = R(x) TC(x)

Example:
A manufacturer knows that if x (hundred) products are demanded
in a particular week:
(i) the total cost function is 14 + 3x,
(ii) the total revenue function is 19x 2x2 .
Derive the profit function.

P (x) = 19x 2x2 (14 + 3x) = 16x 2x2 14.

Management Science 1 Introduction

Break - even analysis

Break - even point

number of units that must be sold before a profit is made (profit=0)

revenue = total cost

P x = F + Cx
P x Cx = F
x(P C) = F
F
x=
P C
F
Break-even point: x =
P C

Management Science 1 Introduction

Example:
A new product needs RM 200, 000 spent on research, development,
equipment and other preparations before production can start.
During normal production each unit costs RM 20 to make and sells
for RM 30. Find the BEP.
F 200000
BEP, x = = = 20000 units.
P C 30 20

Management Science 1 Introduction

Break - even chart ?

Management Science 1 Introduction

Example:
A company makes and sells 200 units of a product every week; the
fixed costs for buildings, machines and employees are RM 12, 000 a
week, while raw material and other variable costs are RM 50 a unit.

a) What is the profit/loss if the selling price is RM 130 a unit?

P r(x) = P x (F + Cx)
= 130 200 (12000 + 50 200)
= RM 4000
Profit = RM 4000 a week

Management Science 1 Introduction

b) What is the profit/loss if the selling price is RM 80 a unit?

P r(x) = P x (F + Cx)
= 80 200 (12000 + 50 200)
= RM 6000
Loss = RM 6000 a week
c) What is the profit/loss if the selling price is fixed at RM 80 but
sales rise to 450 units a week?

P r(x) = P x (F + Cx)
= 80 450 (12000 + 50 450)
= RM 1500
Profit = RM 1500 a week

Management Science 1 Introduction

Example:
a) At breakeven point, how much profit a company will
generate? Explain why?
Profit = 0, because total costs = total revenues
which is neither profit or loss experience
b) A company sells a product with a variable cost of $6 per unit
and fixed cost is $80, 000 per month. Each unit has a selling
price of $10. Calculate the number of units that must be sold
in a month for the company to earn a profit of $60, 000.
Total revenues -Total cost = Profit
$10x - ($80,000 + $6x) = $60,000
$10x - $80,000 - $6x = $60,000
$4x = $140,000
x = 35,000 units
Management Science 1 Introduction
Management science techniques

Linear programming
Integer linear programming
Network models
Project scheduling : PERT/CPM
Inventory models
Waiting line or queueing model
Simulation
Decision analysis
Goal programming
Analytic hierarchy process
Forecasting
Markov process model
Dynamic programming
Management Science 1 Introduction