Introduction to Management Science Chapter One
What is Management Science? • Management Science is a “discipline” that attempts to aid managerial decision making by applying a scientific approach to managerial problems that involve quantitative factors.
Why Study Management Science? • Gain an appreciation for the relevance and power of MS. • Learn to recognize when MS can (and cannot)be fruitfully Applied • Learn how to apply the major techniques of MS to analyze a variety or managerial problems. • Develop an understanding of how to interpret the results of a MS study.
The Nature of Management Science • MS is a Discipline • Current Roots in 1940’s and 50’s • Operations Research, OR, MS, MS/OR • Simplex algorithm, Danzig (1947) • MS aids managerial decision making • MS uses a scientific approach
Management Science Uses a Scientific Approach • Define the problem and gather data. • Formulate a model (typically a mathematic model) to represent the problem. • Develop a computer-based procedure for deriving solutions to the problem from the model. • Test the model and refine it as needed. • Apply the model to analyze the problem and develop recommendations for management. • Help to implement the team’s recommendations that are adopted by management
Special Products Break-Even Analysis • The Special Products Company produces expensive and unusual gifts. • The latest new-product proposal is a limited edition grandfather clock. • Data: • If they go ahead with this product, a fixed cost of $50,000 is incurred. • The variable cost is $400 per clock produced. • Each clock sold would generate $900 in revenue. • A sales forecast will be obtained. Question: Should they produce the clocks, and if so, how many?
Expressing the Problem Mathematically • Decision variable: • Q = Number of grandfather clocks to produce • Costs: • Fixed Cost = $50,000 (if Q > 0) • Variable Cost = $400 Q • Total Cost = • 0, if Q = 0 • $50,000 + $400 Q, if Q > 0 • Profit: • Profit = Total revenue – Total cost • Profit = 0, if Q = 0 • Profit = $900Q – ($50,000 + $400Q) = –$50,000 + $500Q, if Q > 0
Management Science Interactive Modules • Sensitivity analysis can be performed using the Break-Even module in the Interactive Management Science Modules (available on your MS Courseware CD packaged with the text). • Here we see the impact of changing the fixed cost to $75,000.