Management

Science – An
Introduction
By: Rosemarie P. Duhaylungsod
 MANAGEMENT

• It is a process used to achieve

certain goals through the
utilization of resources (people,
money, energy, materials, space,
time).
 Management Science (MS)
• It is an approach to managerial
decision making based on the
scientific method, makes extensive
use of quantitative analysis.
• The alternative name for quantitative
approaches to decision making is
Operations Research (OR).
 OTHER TERMS:

• Operational research
• Operations analysis
• quantitative analysis
• quantitative methods
• decision analysis
• decision science
• The significant development of the
Operations Research disciplines and
techniques started during World War II in
form of military applications (strategic and
tactical tasks).
• After this period many more
methodological developments followed
and at the end of 20th century the
information technology explosion created
new possibilities for management science.
• It is nowadays hardly realizable to carry
out an analysis and make decisions
without computers.
• Many software products are used in
management science. Some simple
decisions can be made using standard
spreadsheets (MS Excel), whereas the
complex real problems require
professional software (Lindo, Lingo,
Xpress, AIMMS, CPLEX, etc.).
 Two classical definitions:

• MS/OR is the application of scientific

methods, techniques and tools to
problems involving the operations of
systems so as to provide those in
control of the operations with
optimum solutions to the problems.
 Two classical definitions:

• MS/OR is the application of the

scientific method to the study of
the operations of large, complex
organizations or activities.
 MANAGEMENT SCIENCE

• The application of the scientific

method to the analysis and
solution of managerial decision
problems.
 Major
Characteristics of MS are:
• A primary focus on managerial decision
making.
• The application of the scientific approach
to the decision making process.
• The examination of the decision situation
from a broad perspective; i.e. the
application of a system approach.
 Major
Characteristics of MS are:
• The use of methods and knowledge
from several disciplines.
• A reliance on formal mathematical
models.
• The extensive use of computers.
 Decision Making

• It is a process of choosing between

two or more available alternative
courses of action for the purpose of
attaining a specific goal.
• The conclusion of the process is a
decision.
 Steps in Decision Making

1. Defining the problem.

2. Searching for alternative courses of
action.
3. Evaluating the alternatives.
4. Selecting one alternative.
 Systems Approach

• Involves finding and defining all of the

mentioned elements and relations
between them in the real world.
• This approach is the necessary
assumption for using management
science techniques, as they require
the exact description of a problem.
 Systems Approach

• Only system approach enables

the formulation of the problem in
the mathematical way.
• The structure of systems
consists of three related parts:
inputs, processes and outputs.
 Systems Approach

• Inputs enter the system (people,

raw materials, money).
• Processes convert the inputs into
outputs (processes may use
energy, operating procedures,
employees, machines).
 Systems Approach

• Outputs leave the system (products,

served customers).
• In many applications the outputs are
connected with the goal of the
management (profit maximization,
total costs minimization).
 Systems Approach

• A closed system is totally independent of

and fully isolated from influences of the
environment (elements outside the
system).
• An open system is significantly
interconnected with the environment; this
type of system exchanges information,
material, energy, people with the
environment.
 Models and Modeling

• The model is a fundamental term of

management science.
• Modeling is the process of handling
real-world problems and describing
them in mathematical terms.
Modeling Process
 Problem Definition

• recognition of the problem in reality and

its definition.
• If we, for example, produce different
products, the question is:
– how to set the production?
– how many of each product should be
produced?
• In this step it is necessary to define goals
that the management wants to achieve.
 Problem Definition

• In the example, it could be

maximization of revenue or
minimization of total cost.
• It is obvious that we have to know the
details of production process and all
the necessary information from
marketing, finance, accounting, etc.
 Problem Definition

• what kinds of material are used and what

is the available stock of them,
• how many people can be involved in the
production,
• how much material, energy, time and
money is necessary for producing one unit
of each product, how many people are
needed,
 Problem Definition

• what is our budget,

• unit prices of the final products
(revenue maximization), unit cost of
each product (total cost minimization),
• the level of demand for each product.
 Formulation and Construction of
Model
• The following step is the key issue of the
modeling process – formulation and
construction of a mathematical model.
• The problem defined above is being
transformed into the mathematical form,
i.e. into the world of numbers, symbols,
parameters, variables, functions,
equations, inequalities, etc.
 Formulation and Construction of
Model
• In this case, variables correspond to the
amounts of products, parameters are the
material stock, budget, unit prices, etc.
• There are several constraints (equations,
inequalities) in the model, which do not allow us
to exceed production possibilities and which
assure that the produced amount is on the
demanded level.
• The model includes the objective function for
revenue (or total cost).
 Formulation and Construction of
Model
• Construction of the model is doubtless the
most difficult and the most important part
of the whole process.
• Remember, the model is just the
simplification of reality.
• The simpler the model, the easier its
manipulation and solution will be.
 Formulation and Construction of
Model
• However, the simplest models could be far
from reality and it has no sense to
implement the results because of their low
significance.
• The most complex model, e.g. with exact
(nonlinear) relationships between
variables, can be perfect representation of
reality; it is hardly solvable.
 Formulation and Construction of
Model
• Whenever we start to construct a new
model, it is necessary to remember
an important rule:
– Finding the proper balance between the
level of simplification of the model and
the good representation of reality.
 Models

• There are two kinds of models:

deterministic and probabilistic.
 Deterministic Model

• In deterministic models all aspects are known

with certainty. We can e.g. assume that the
stock level, budget or used energy are exact
numbers.
• Similarly, we exactly know how much of raw
material will be used per each unit of a specific
product.
• Deterministic models are not certainly perfect,
but they may offer a reasonably good
approximation of reality.
 Probabilistic Models

• Probabilistic models contain a specific

level of uncertainty.
• Low level of uncertainty can be ignored
and deterministic models can be used
instead of the probabilistic models.
• In case of high level of uncertainty we
should consider random variables instead
of constants.
 Probabilistic Models

• We should assume that the demand for

our products cannot be determined
exactly.
• Probabilistic models, of course, require
different (mostly more complex) approach
to their solutions, the methods therefore
differ from the methods used for
deterministic models.
 Solution

• Solution to the proposed model is more or

less a technical job.
• When we make a decision on the form of
applied model, we should consider
methods, techniques or principles used for
the solution.
• Each area of management science gives
typical examples of problems and
suggests specific ways of solution.
 Solution

• The typical goal of the most problems is to find

an optimal solution, i.e. the best of all feasible
solutions (solutions that satisfy all the
constraints).
• In the example, the optimal solution is the one,
which gives the highest revenue (the lowest total
cost), while respecting all the constraints.
• This solution determines how many items of
each product we should produce and what
revenue (total cost) we can expect.
 Solution
• Expansion of computers brought new
opportunities for solving wide range of real
problems and nowadays it is hardly
possible to get results without the use of
computers and efficient software.
• Professional software offers the user-
friendly environment with easy control,
enables flexible entering of inputs and
provides detailed outputs with possibility of
experiments with the model.
 Solution
• From this point of view very important step
is the model validation and sensitivity
analysis.
• Validation of the model is its comparison
with the real system.
• The better a model represents the reality,
the more valid it is.
• General method for testing the validity of a
model is to compare its performance with
some past data available for the actual
system.
 Solution

• If we want to examine the impact of

changes in inputs on changes in outputs,
we have a convenient tool for this purpose
– sensitivity analysis.
• For example, there is specific stock of raw
material. The level of stock is mostly the
limitative factor for the production and
hence for the attainable revenue.
 Solution

• The interesting question is: what will

happen to the proposed production (and
revenue) if we avail of one additional unit
of any material?
• In case all the material is used for our
production, we can reasonably expect
that, using one additional unit, we are able
to produce more products and gain more
money.
 Implementation

• This is the main goal of the management

and the original purpose of the whole
process – not the model itself, but
adjustment of reality according to the
recommendations ensuing from the results
of the modeling process.
• In case we do not use the results in the
real production process, all our effort was
absolutely vain.
 Implementation

• On the contrary, if we constructed the

model in a wrong way and we did not
validate it, the applied results could
seriously harm the real system.
• In order to achieve the best
management results, each step must
be carefully considered and cannot
be skipped.
 Typical managerial problems
where MS techniques could be applied:
• Inventory control.
• Facility design.
• Product-mix determination.
• Portfolio analysis.
• Scheduling and sequencing.
• Merger-growth analysis.
• Transportation planning.
• Portfolio analysis.
• Scheduling and sequencing.
 Typical managerial problems
where MS techniques could be applied:
• Design of information systems.
• Allocation of scarce resources.
• Investment decisions (new plants, etc.).
• Project management – planning and control.
• New product decisions.
• Sales force decisions.
• Market research decisions.
• Research and development decisions.
• Oil and gas exploration decisions.
 Typical managerial problems
where MS techniques could be applied:
• Merger-growth analysis.
• Transportation planning.
• Pricing decisions.
• Competitive bidding decisions.
• Quality control decisions.
• Machine setup problems in production.
• Distribution decisions.
• Manpower planning and control decisions.
• Credit policy analysis.
• Research and development effectiveness.
 MS Techniques

• Linear Programming
• It is one of the best-known tools of
management science.
• This approach mostly defines the problem
as the maximizing (minimizing) a linear
function, respecting the set of linear
constraints.
• Integer Linear Programming (Binary &
Mixed)
 MS Techniques

• Goal Programming
• When several competing objectives have
to be considered simultaneously, more
powerful tool is needed.
• Goal programming is a special technique
for dealing with such cases, usually within
the framework of linear programming.
 MS Techniques

• Distribution Models
• A distribution problem is a special type of linear
programming problem. There are two main types of
distribution problems:
1. The transportation problem deals with shipments from
a number of sources to a number of destinations
2. The assignment problem deals with finding the best
one-to-one match for each of a given number of
possible “candidates” to a number of proposed
“positions”.
 MS Techniques

• Nonlinear Programming
• Models used in this area of management science are
similar to the models of linear programming; however
there is an important difference between them: nonlinear
models contain nonlinear objective function and/or some
nonlinear constraints.
• Methods used for solving tasks from this area of
management science are, of course, rather different from
the linear programming methods.
 MS Techniques

• Network Models
• Some problems can be described graphically as
a network (the set of nodes and arcs).
• Typical situation is a transportation network:
cities (nodes) are connected to each other by
roads (arcs).
• If we evaluate the network (in this case we are
interested e.g. in distances between all
• the cities), the task is often to find the minimal
distance from one city to all other cities.
 MS Techniques

• Network Models
• Some types of networks may be evaluated
by capacities instead of distances and
then the problem of maximal flow can be
solved. In many problems, solved with use
of the network models, the most important
value is unit cost and the goal is to find the
minimal total cost.
 MS Techniques

• Project Management
• In many situations the managers are responsible for
planning, scheduling and controlling projects that consist
of many separate jobs or tasks performed by a variety of
departments or individuals.
• An execution of each job takes specific time. There are
two basic methods for solving those problems: CPM
(Critical Path Method) and PERT (Program Evaluation
Review Technique).
• Both methods require the network representation of the
problem
 MS Techniques

• Inventory Models
• Inventory control is one of the most popular
techniques, which helps managers to determine
when and how much to order.
• The main goal is usually to find a proper balance
between the inventory holding cost and the cost
of executing an order.
• There are many various inventory models
because of many various real inventory systems.
 MS Techniques

• Inventory Models
• We consider two separated classes of models:
deterministic and probabilistic.
• In deterministic models the rate of demand is
constant through the time, whereas in
probabilistic inventory models the demand
fluctuates through the time and can be
expressed only in probabilistic terms.
 MS Techniques

• Waiting Line Models

• This area of management science techniques
deals with the situations where units (e.g.
customers) need to be served by a number of
channels (e.g. vendors).
• As the number of vendors is limited, some of the
units have to wait for the service in a queue.
• Hence the alternative name for the waiting line
models: Queuing Models.
 MS Techniques
Waiting Line Models
• In real situations both the process of units’ arrivals and
the service times are random and the probabilistic
approach is necessary.
• Simple waiting line models can be solved analytically
(exact solution using derivative formulas), whereas for
complex queuing systems the technique of simulation is
required.
• The main managerial goal in waiting line models is the
decision about the number of service lines (finding a
proper balance between size of the queue and the total
service cost).
 MS Techniques

• Simulation
• When managerial problems become more
complex, they are often impossible (or
non-effective because of spent time and
cost) to be solved using standard
techniques.
• For this purpose, simulation approach is
advantageous and in many cases it is the
only way how to manage the problem.
 MS Techniques

• Simulation
• Simulation is a computer experimentation
with a simulation model aimed at
describing and evaluating the real
system’s behavior - the computer program
simulates the real system.
• The typical situations for successful use of
simulation are complex waiting line models
and inventory models.
 MS Techniques

• Decision Analysis
• These techniques can be used to select optimal
strategies out of several decision alternatives.
• Managerial problems and appropriate tools are
divided, according to the kind of manager’s
information, into three classes: decisions under
certainty (deterministic), decision under risk
(probabilistic) and decisions under uncertainty.
• We consider special tools for this purpose:
decision tables and trees.
 MS Techniques

• Theory of Games
• This area is an extension of decision analysis to the
situations with two or more decision makers.
• Simultaneous decisions (selected strategies) of all
managers initiate an action that affects all decision
makers (players), i.e. their profit, cost, etc.
• In some conflicts, there is a possibility for two or more
decision makers to cooperate, while competing with the
others.
• In economic theory we can find a typical case of
strategic game - oligopoly model.
 MS Techniques

• Forecasting
• Forecasting methods support the manager’s
prediction of future aspects of a business
operation.
• Statistics and econometrics offer many
techniques based on time-series and regression
analysis.
• The main managerial goal is to project future
trends following the previous behavior of the
system.
 MS Techniques

• Forecasting
• The well known are the methods of Moving
Averages, Least Squares, Exponential
Smoothing, etc.
• Since the statistical significance is very
important for these models, the manager’s
experience with hypotheses validation and
statistical tests is necessary.
 MS Techniques

• Multicriteria Decision Making

• If we find a solution improving one criterion, it mostly
worsens some of other criteria. It is usually impossible to
optimize simultaneously all the criteria.
• Some problems are described with the set of constraints
and the set of objective functions. In this case the
solution is provided by multiobjective programming
techniques.
• The special category of this management science
technique is goal programming.
 MS Techniques

• Markov Analysis
• This technique can be used to describe
the behavior of a system in a dynamic
situation (evolution of the system
throughout the time).
• Markov analysis is a very powerful tool of
management science with many real
applications.
 MS Techniques

• Dynamic Programming
• Management must frequently consider a
sequence of decisions where each decision
significantly affects future decisions.
• Dynamic programming helps managers to solve
certain types of such sequential decision
problems.
• There is no single model for solving dynamic
programming problems and the problems are
therefore classified into many groups.
 MS Techniques

• Dynamic Programming
• One possible classification considers
deterministic and probabilistic models.
• Models often use network representation
of the sequential problems.
• Markov analysis can be considered as a
probabilistic model of dynamic
programming.
 MS Techniques

• The survey presented by Anderson, Sweeney,

and Williams [1] indicates that the most
frequently used techniques are statistical
methods, computer simulation, PERT/CPM,
linear programming and queuing theory.
• Frequency of using all mentioned techniques, of
course, depends on the specialization of the firm
and its size.
END 