Management Science REVIEWER

 

2.  How to acquire and process data and information required to make decisions effectively

MANAGEMENT SCIENCE

MANAGEMENT ➢  MANAGEMENT is a process which is used to

achieve certain goals through the utilization of resources (people, money, energy, materials, space, time). These RESOURCES are considered as the INPUTS, and the attainment of goals is viewed as the OUTPUT of the process. ➢  MANAGEMENT consists of the interlocking functions of creating corporate policy and planning, organizing, directing, and controlling an organization’s resources to achieve the organization’s objectives.  objectives. 

3.  How to monitor decisions once they are implemented. 4.  How to organize the decision making and decision implementation process Generally, entails: 1.  Discovering, developing, defining, and evaluating the goals of the org and the alternative policies that will lead toward the goal. 2.  Getting the organization to adapt the policy.

FUNCTIONS OF MANAGEMENT

3.  Scrutinizing the effectiveness of the policies that are adapted.

  Planning –  To decide beforehand what is to be done

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in the future

  Organizing –  Establishment of effective authority

4.  Initiating steps to change policies that are ineffective or inadequately effective.

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relationships among selected work, persons and work places in order for the group to work together effectively

 

Characteristics of Management Science

1.  The primary focus on managerial decisionmaking 2.  The application of scientific approach and

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Staffing Recruiting the employees by evaluating –  their skills and knowledge and then offering them specific job roles accordingly.

  Directing –  It is the task of the manager to guide,

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supervise, lead, and motivate the subordinates to achieve predetermined goal

decision-making 3.  The examination of the decision situation from a broad perspective 4.  The use of methods and knowledge from several disciplines 5.  A reliance on mathematical models 6.  The extensive use of computers THE TOOLS OF MANAGEMENT SCIENCE PROGRAM EVALUATION AND REVIEW TECHNIQUE. (PERT )

  Controlling –  A process of comparing the actual

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performance with the set of standards of the company to ensure that activities are performed as planned, and if not, then there is corrective action.

–  MANAGEMENT SCIENCE/OPERATIONS MANAGEMENT SCIENCE/OPERATIONS RESEARCH application of scientific methods, ➢  any techniques, and tools to problems involving the operations of system so as to provide those in control of the operations with optimum solutions to the problem. ➢  It attempts to provide those who manage organized systems with an objective and quantitative basis for decision making.

Concerned with: 1.  How managerial decisions are and should be made.

➢  planning and control technique that allows

managers to decompose a project into specific activities and to plan far in advance when it is to be completed. The main function PERT  is to determine the time required to complete a project. BREAKEVEN ANALYSIS ➢  helps managers determine how many units must

be sold before a product is profitable. calculation of the point at ➢  a which revenues equal expenses. In securities trading, the break-even point is the point at which gains equal losses. Decision Tree  –   like ➢  A decision support tool that uses a tree  – model decisions and their possible consequences, including chance event outcomes, resource costs, and utility

 

NODES the ➢  represent possible attributes associated with an event 1.  Root ➢  The first node ➢  represents the attribute with largest information

gain 2.  Branches ➢  represent the attributes values

2.  The scientific selection and progressive teaching and development of employees. (Emphasize weakness and strength of workers) 3.  The bringing together of scientifically selected employees and scientifically developed methods for designing jobs. (Everybody is aware of improvement) 4.  A division of work resulting in interdependence between managers and works. (cooperation) BRANCH and BOUND ➢  a step by step procedure when a very large number of alternatives exist for certain managerial problems.

3.  Leaves ➢  represent the classes

NETWORK MODELS ➢  a family of tools designed for the purpose of planning and controlling complex projects.

DECISION TABLES ➢  A tabular form where allocation and investment problems involving a relatively small number of possible solutions are presented.

MARKOV CHAINS ➢  used for predicting the outcome of processes where systems or units change their condition over time. GAME THEORY ➢  provides a systematic approach to decision making in competitive environments and a

framework for the study of conflict. INVENTORY MODELS ➢  For certain types of inventory control problems, special model that attempt to minimize the cost associated with ordering and carrying inventories have been developed.

Mathematical Programming ➢  Attempts to maximize the attainment level of one goal subject to a set of requirements and limitations. The following models are covered in these text: ▪  Linear Programming  ➢  used to determine the best way to allocate resources to achieve some desired objectives. ▪ 

Transportation and assignment models ▪  Integer and goal programming

Dynamic Programming ➢  An approach to decisions that are basically sequential in nature or can be reformulated so s o as to be considered sequential. Frederick Winslow Taylor ➢  Father of Management Science ➢  Conduction Time and Motion Study

4 Principles of Management Science 1.  The development of a scientific method of designing jobs to replace rule of thumb methods. (There is always an improvement and development of new technique.)

WAITING LINE (QUEUEING) MODELS ➢  For certain types of problems involving waiting lines, special descriptive models have been developed to predict the performance of service systems. SIMULATION MODELS ➢  For the analysis of complex systems when all

other models fail, management science uses descriptive  –  –   type simulation models (i.e., artificial intelligence, heuristic programming, management games, systems simulation, and Monte Carlo simulation) FORECASTING ➢  To predict the outcome of managerial decisions, various forecasting approaches are employed. Many of these are based on Statistics. THE TOOLS OF MANAGEMENT SCIENCE: THE PROTOTYPE MANAGERIAL PROBLEMS  ALLOCATION PROBLEMS

These problems arise when: 1.  There are a number of activities to be performed 2.  There exist two or more different ways to perform these activities 3.  Resources or facilities are scarce

 

DISTRIBUTION PROBLEMS ➢  Moving a commodity from several sources to several destinations at minimum costs constitutes a transportation problem. Several types of problems can be viewed and solved as transportation problems. A related topic is the assignment problem, in which certain items, such as a person or an activity, are to be assigned, on a one  –   –  to  –   –  one basis, to other items such as facilities and services. NETWORK PROBLEMS ➢  Describe flows of commodities, activities, information, or other resources between locations. COMPETITIVE SITUATIONS ➢  When the results of a decision are determined not only by one’s own course of action but also by that of a decision maker, a competitive situation exists. This situation may be viewed as a game which each party attempts to win. INVENTORY CONTROL ➢  Inventories can result in a large savings by preventing shortages, providing discounts on large quantities purchased or produced,

eliminating changes in the level of production, and reducing ordering and setup costs. The problem is to find the proper level of inventory which is determined by the decisions “when” and “how much” to order, that will minimize the total cost. WAITING LINE PROBLEMS ➢  The problem is to find the appropriate size of the

facility as well as to determine its operating procedures in such a way as to minimize the sum s um of the relevant costs. PREDICTING THE BEHAVIOR OF A SYSTEM ➢  Management

is frequently interested in predicting the behavior of a system under different conditions. While this is not classified as a prototype problem by itself, it can be use in constructing prototype procedures and/or evaluating solutions.

SENSITIVITY ANALYSIS

 or   This model is also referred to as what-if  or

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simulation analysis.   Sensitivity analysis is a financial model that determines how different values for a set of independent variables affect a dependent variable.   It is done within defined boundaries that are determined by the set of independent (input) variables. by financial analysts  analysts to   Is most commonly used by  predict the outcome of a specific action when performed under certain conditions.

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  For example, sensitivity analysis can be used to

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study the effect of a change in interest rates on bond prices if the interest rates increased by 1%. The “what“what-if” question would be: “what would happen to the price of a bond if interest rates went up by 1%?” This question is answered with sensitivity analysis.   The analysis is performed in excel under the data section of the ribbon and the “what“what -if analysis” button, which contains goal seek and data table. Breakeven •

➢  the price at which a security position can be

closed out with no profit or loss.

Breakeven point ➢  the production level at which total revenues equal total expenses. Contribution Margin ➢  the excess between the selling price of the product and total variable costs. Fixed cost ➢  the cost which remains constant at different levels of output produced by an enterprise. Variable cost ➢  the cost which changes with the changes in the quantity of output produced. Mixed cost a  fixed cost cost  component cost  that contains both a  ➢  cost  cost   component.   It is important and a  a  variable cost to understand the mix of these elements of a cost, so that one can predict how costs will change with different levels of   activity activity..   Sales mix ➢  calculation that determines the proportion of each product a business  business  sells sells  relative to total sales. The sales mix is significant because some products or services may be more profitable than others, and if a company's sales mix changes, its

profits also change. Managing sales mix is a tool to maximize company profit. Sales Price ➢  the price of a good or a service that is being offered a discount. Selling Price  ➢  is the price at which something offered for sale. analysis   ❖  Sensitivity analysis conduct “what if” analysis  ➢  What if the sale price changes? ➢  What if costs change? ➢  What if the sales mix changes?

 

  What if the sale price changes?

✓  If fixed cost increase, it is going to move up

-Contribution margin change -Breakeven point will change

and stay parallel. Breakeven will increase too. SENSITIVITY ANALYSIS EXAMPLE:   John is in charge of sales for HOLIDAY CO that sells Christmas decorations at a shopping mall. John knows that the holiday season is approaching and that the mall will be crowded. He wants to find out whether an increase in customer traffic at the mall will raise the

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Mixed Cost

revenue  of HOLIDAY CO and if so, by total  sales revenue total how much. ✓  If the selling price increase, selling prices

per unit will go up, breakeven point went down. So you have to sell much less unit to breakeven. ✓  Conversely, if the selling price have decrease, breakeven will increase. So you have to sell more units to breakeven. What if the variable cost change? -Contribution margin change -Breakeven point will change

  The average price of a packet of Christmas

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decorations is $20 and during the previous year’s holiday season, holiday co sold 500 packs of Christmas decorations, resulting in total sales worth $10,000.

  After carrying out a financial sensitivity analysis,

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 john determines that a 10% increase in customer traffic at the mall results in a 7% increase in the number of sales.

  Using this information, john can predict how

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much money company xyz will generate if customer traffic increases by 20%, 40%, or 100%. an alysis,   Based on john’s financial sensitivity analysis,

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these will result in an increase in revenue by 14%, 28%, and 70%, respectively.

ADVANTAGES OF FINANCIAL SENSITIVITY ANALYSIS ADVANTAGES There are many important reasons to perform sensitivity analysis:

any  type of   Sensitivity analysis adds credibility to any 

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financial model  model by testing the model across a wide set of possibilities.

✓  If the variable cost per unit increases,

breakeven point will increase too. So you

  Financial sensitivity analysis allows the analyst to

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be flexible with the boundaries within which to test the sensitivity of the dependent variables to the independent variables. For example, the model to study the effect of a 5-point change in interest rates on bond prices would be different from the financial model that would be used to study the effect of a 20-point change in interest rates on bond prices.

have to sell more units in order to breakeven ✓  If variable cost per unit decrease, you would have less unit to sell in order to breakeven. What if fixed cost change? -It will not affect contribution margin -It will change breakeven point

  Sensitivity analysis helps one make informed

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choices. Decision-makers use the model to understand how responsive the output is to changes in certain variables. This relationship can help an analyst in deriving tangible conclusions and be instrumental in making optimal decisions.

 

MARKOV’S CHAIN  ➢  a

mathematical system that experiences transitions from one state to another according to certain probabilistic rules. ➢  The defining characteristic of a Markov’s chain is that no matter how the process arrived at its present state, the possible future states are fixed. In other words, the probability of transitioning to any particular state is dependent solely on the current state and time elapsed. ➢  The state space, or set of all possible states, can be anything: letters, numbers, weather conditions, baseball scores, or stock performances. FINANCIAL APPLICATION ➢  a software program that facilitates the management of business processes that deal with money. EXAMPLES OF FINANCIAL APPLICATION: 1.  Accounts Payable Software ➢  allows a business to stay on top of outstanding payments and make sure all payments are made correctly and on time.

2.  Accounts Receivable Software ➢  allows a business to efficiently manage customer activity and automate invoice processing to ensure timely revenue collection. 3.  Budget Management Software ➢  provides forecasting and planning tools to help business make informed decisions during the budgeting process. 4.  Fixed Assets Software ➢  simplifies the process of registering assets, managing assets, locating ghost assets and depreciating assets. 5.  Project Accounting Software ➢  allows a businesses to manage the people, processes and costs for individual projects. Provides project managers with the ability to store all project related information in one place. 6.  General Ledger Software 7.  Payroll Software OPERATION MANAGEMENT APPLICATIONS ➢  the administration of business practices to create the highest level of efficiency possible within an organization. It is chiefly concerned with:   Planning   Organizing and   Supervising •

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FUNCTIONS OF MANAGEMEN M ANAGEMENT T APPLICATIONS ➢  To ensure that an organization successfully turns inputs to outputs in an efficient manner. It attempts to balance cost with revenue to achieve the highest net operating profit possible by converting materials and labor into goods and services.

Operation management application software is a broad term as it can help a business with anything from business process management to manufacturing automation. Ultimately, it makes sure that business operations, whether delivering services or products, are effective and efficient. 1.  Travelperk  ➢  the next-generation business travel platform pioneering the future of business travel. all-in-one platform gives travelers ➢  Travelperk’s all-in-one the freedom they want whilst providing companies with the control they need. The result is saved time, money, and hassle for everyone. Travelperk has the world’s largest travel inventory alongside powerful management features, 24/7 customer support, state-of-the-art technology and consumergrade design, all of which is enabling companies worldwide to get the most out of their travel. 2.  Icertis ➢  is the leading provider of contract lifecycle management in the cloud. Icertis contract management (ICM) is an innovative, easy-touse platform that is highly configurable and continually adapts to complex business needs. 3.  Gatekeeper  ➢  a cloud-based vendor and contact management solution. Key features include automated alerts, customization and collaboration tools and integrations with other software. Users can manage contracts and vendor information, track workloads, monitor risk and store documents using gatekeeper.

COMMON OPERATIONAL MANAGEMENT ISSUES: 1.  Managing overheads   Overheads can easily mount up, whether they’re coming in the form of admin expenses, insurance, rent or utility charges. Excessive overheads can be particularly damaging if they aren’t managed in a timely fashion, so they’re a fairly big problem for small businesses to contend with.   Solution: take a look at your spending and see what can be cut back. Any service ser vice that’s surplus to your team or your customers’ requirements should be scaled down. Quick fixes like cloud computing, free video call services, •

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telecommuting where possible, and renting rather than buying office equipment, can all be useful here. 2.  Monitoring performance   How do you measure performance? And, how do potential indicators illustrate that your team is performing to its fullest? If certain members of your team aren’t working as well as they should, your business could suffer as a result. •

1.  Accounts Receivable Turnover Ratio ➢  also known as the debtor’s turnover ratio, is an efficiency ratio that measures how efficiently a company is collecting revenue  –  –   and by extension, how efficiently it is using its assets. ➢  measures the number of times over a given period that a company collects its average accounts receivable.

AR Turnover Ratio =

Net Credit Sales

 

Average Accounts Receivable

  Solution: detail a set of performance indicators

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that show how well your team and your business is performing. Rather than using simplistic finance indicators, it can be highly beneficial to identify, clarify and agree upon the expectations of respective teams. Identify how the results will be measured, monitor the progress made and evaluate performances at the end of the management cycle. 3.  Responding to competition

  In this day and age, starting a business is more

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realistic and achievable than ever. But, with so much easily-accessible information and guidance out there, it does mean that there can theoretically be more competition in the same market. And whether your competition focuses on a single service or a broader market, how do you stand out from the rest?

  Solution: keeping an eye on competitor activity

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can give you an inside track on how to get ahead. Monitoring their processes and practices can help you anticipate their next moves – moves  – and  and adapt your strategy accordingly.

DATA ENVELOPMENT ➢  A linear programming based technique for measuring the performance efficiency of organizational units which are termed as Decision Making Units (DMUs). This technique aims to measure how efficiently a DMU uses the resources available to generate a set of outputs ➢  The analysis compares the relative efficiency of

organizational “units” such as bank branches, hospitals, vehicles, shops and other instances where units perform similar tasks. These units utilise similar resources, referred to as inputs, to generate similar outputs. EFFICIENCY RATIO firm’s ability  ability ➢  metrics that are used in analyzing a firm’s to effectively employ its resources, such as

capital and assets, to produce income.

2.  Inventory Turnover Ratio ➢  the number of times a business sells and replaces its stock of goods during a given period. ➢  considers the cost of goods sold, relative to its average inventory for a year or in any a set period of time.

Inventory Turnover Ratio =

Cost of Goods Sold

 

Average Invetories

3.  Accounts Payable Turnover ➢  A liquidity ratio that shows a company’s ability to pay off its accounts payable by comparing net credit purchases to the average accounts payable during a period.

AP Turnover Ratio =

Total Purchases Average Accounts Payable

4.  Working Capital Turnover ➢  a ratio that measures how efficiently a company is using its working capital to support a given level of sales.

Working Capital Turnover Ratio =

Net sales

 

Working Capital

5.  Fixed Asset Turnover ➢  an efficiency ratio that indicates how well or efficiently the business uses fixed assets to generate sales.

Fixed Asset Turnover Ratio =

Net sales Average Fixed Assets

 

6. Asset Turnover  ➢  Measures the efficiency with which a company uses its assets to produce sales. Fixed Asset Turnover Ratio =

Net sales Average Fixed Assets

 

 

GRAPHICALL ANALYSIS GRAPHICA

REVENUE MANAGEMENT MANAGEMENT ➢  Is the art and science of predicting real-time customer demand at the micromarket level and optimizing the price and availability of products. ➢  “Selling the right product to the right client at the

right moment at the right price via the right distribution channel with the best cost efficiency”  

In order for a business to employ a revenue management strategy effectively, a number of conditions must be in place: ✓  Different customers must be willing to pay

different prices for the same service or commodity

✓  The business must be some ability to predict the

changing levels of demand ahead of time ✓  Only a fixed amount of resources are available to

be sold at any given time USERS: ✓  Hotels ✓  Airlines

✓  Cinema ✓  Restaurants

IMPORTANCE OF REVENUE MANAGEMENT 1.  Customer Expectations ➢  Revenue management provides companies with a better understanding of what their customers expect in the company’s product.  product.   2.  Competitive Pricing ➢  Revenue management enables the company to create a competitive pricing strategy that will draw in customers and give the company an edge over its competitors. 3.  Market Segments ➢  Revenue management seeks to show the company the full extent of its market segment and to introduce the company to

new market segments that are available. 4.  Company Divisions ➢  Revenue management creates a strong awareness between the activities of different company divisions, and particularly the activities of those working on sales and marketing, and those on the front line of service. PORTFOLIO ANALYSIS MODELS  ➢  Is the process of reviewing and assessing elements of the entire portfolio of securities and products in a business. THE BOSTON CONSULTING GROUP SHARE-MATRIX ➢  The earliest, simplest and best known portfolio

model is concerned with the generation and use of cash within a business and can be used to analyze strategic business units.

 

IMPORTANCE OF PORTFOLIO ANALYSIS ✓  It helps in evaluating how your investment portfolio is performing in terms of rate of return and risk. ✓  It provides guidance as to where changes to your investment allocations should be made to keep you on track to meet your investment objective. LIMITATION: ✓  It

cannot predict the future results-- past performance is never a guarantee for future results.

Transportation Problem ➢  a special type of LPP where the objective is to minimize the cost of distributing a product from a number of sources or origins to a number of destinations. Mathematical Model of Transportation Problem   Let F denote the factory where the goods are being manufactured & W denote the warehouse where finished products are stored by the company before shipping to various destinations.

ASSET ALLOCATIONS ✓  It refers to the strategy or dividing your investments

among different categories: ➢  Stock ✓  Ownership in a company ✓  Market capitalization ✓  Company location ➢  Bonds ✓  A loan to a company or government

Further let X = quantity shipped from F to the W and C= transportation cost per unit of shipping from F to W Objective function can be represented as: Minimize Z (shipping cost) = C₁X₁ + C₂X₂ + C₃X₃ + C₄X₄ + C₅X₅ + C₆X₆ + C₇X₇ + C₈X₈ + C₉X₉  C₉X₉   Supply constraints S₁   ✗  X₁ + X₂ + X₃ = S₁ 

✓  A contract between two parties.

Companies and government issue bonds because they need to borrow large amount of money. ➢  Alternative Cash ➢  Real Estate

S₂   ✗  X₄ + X₅ + X₆ = S₂  S₃   ✗  X₇ + X₈ + X₉ = S₃  Demand constraints D₁   ✗  X₁ + X₄ + X₇ = D₁ 

✓  Property consisting of land and the

D₂   ✗  X₂ + X₅ + X₈ = D₂ 

buildings on it, along with its natural resources such as crops, minerals or water

D₃   ✗  X₃ + X₆ + X₉ = D₃  Balanced and Unbalanced TP

CONCEPT OF DIVERSIFICATION ✓  Process of allocating capital in a way that reduces the exposure to anyone particular asset or risk ✓  It reduces the vulnerability of market changes in one investment categories.

✘  The total supply available at the factories exactly matches the total demand at the destinations. Hence, there is neither excess supply nor excess demand. Such type of problems where supply and demand are exactly equal are known as

Things to consider: ✓  What you’re saving for? ✓  How much time you have? ✓  How you feel about it? (Risk Tolerance Profile)

✘  A

Balanced Transportation Problem. 

unbalanced if the supply and demand are not equal.  ✗  If Supply < Demand, a dummy supply variable is introduced in the equation to

TRANSPORTATION TRANSPORTATIO N MODELS 

make it equal to demand.

➢  Plays an important role in logistics and supply chain

management for reducing cost and improving service. ➢  A product is to be transported from a number of sources to a number of destinations at the minimum possible cost. ➢  Each source is able to supply a fixed number of units of the product, and each destination has a fixed number of demands for the product. Application of Transportation Model ➢  Minimize shipping costs ➢  Determine low cost location

➢  Find minimum cost production schedule

transportation problem is said to be

✗  If Demand < Supply a dummy demand variable is also introduced to make it equal to supply.

Phases of Solution of Transportation Problem   Phase I- obtain the initial basic feasible solution   Phase II- obtain the optimal basic solution •

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Phase I - Initial Basic Feasible Solution ✘  Northwest Corner Rule ✘  Least Cost Method

✘  Vogle’s Approximation Method

 

Northwest Corner Rule  Requires that we start in the upper left-handed cell (or the northwest corner) of the table and allocate units to shipping routes as follows: 1.  Exhaust the supply of each row before moving down to the next row. 2.  Exhaust the requirements of each column before moving to the next column on the right 3.  Check to ensure that all supplies and demands are met Least Cost Method The straightforward approach uses the following steps: 1.  Identify the cell with the lowest cost. Break any ties for the lowest cost arbitrarily. 2.  Allocate as many units as possible to that cell without exceeding the supply or demand. Then cross out that row or column (or both) that is exhausted by this assignment. 3.  Find the cell with the lowest from the remaining (not crossed out) cells. 4.  Repeat steps number 2 and 3 until all units have been allocated. Vogle’s Approximation Method 

Applying the VAM requires the following steps: 1.  Determine the penalty cost for each row (column) by subtracting the lowest unit cell cost in the row (column) from the next lowest unit cell cost in the same row (column). 2.  Identify the row or column with the greatest penalty cost. Break the ties arbitrarily (if there are any). Allocate as much as possible to the variable with the lowest unit cost in the selected row or column. Adjust the supply and demand and cross out the row or column that is already satisfied. If a row and column are satisfied simultaneously, only cross out one of the two and allocate a supply or demand of zero to the one that remains. 3.  Continue with step 1. 4.  Stop the process if all row and column requirements are met. If not, go to the next step. 5.  Recalculate the differences between the two lowest cells remaining in all rows and columns. Any row and column with zero supply or demand should not be used in calculating further differences. Then go to Step 2. 6.  The Vogle’s approximation method (VAM) usually produces an optimal or near  –   –  optimal starting solution. One study found that VAM yields and optimum solution in 80 percent of the sample problems tested.

Phase II- Optimum Basic Solution  Stepping Stone Method 1.  Select any unused square to evaluate 2.  Beginning at this square, trace a closed path back to the original square via squares that are currently being used. 3.  Beginning with a plus (+) sign at the unused corner, place alternate minus and plus signs at each corner of the path just traced. 4.  Calculate an improvement index by first adding the unit-cost figures found in each square containing a plus sign and subtracting the unit cost in each square containing minus sign. 5.  Repeat steps 1 to 4 until you have calculated an improvement index for all unused squares. If all indices are ≥ 0, you have reached an optimal solution. ASSIGNMENT ASSIGNMEN T MODEL