INTRODUCTION TO MANAGEMENT SCIENCE

(Objective function)
• The Management Science Approach to Problem Solving

• Model Construction: Production (Constraints)

• Management Science Modeling Techniques

(Non-negativity constraints)
• Breakeven Analysis and Excel Model Example
• Indifference Point Analysis
Applications of Management Science in Business :
Opening a Fairwood Fast Food Restaurant
Business questions:

1. Is it worth doing? (Break-even analysis, Forecasting)

2. What seating capacity should we build? (Decision analysis)
3. How much food material to prepare? (Forecasting)
4. How to schedule the staff to ensure a certain customer service level?
(Linear programming, waiting line management)

The Management Science Approach

• Management science uses an objective (logical, scientific and mathematical) approach to solve management problems.
• It is used in a variety of organizations to solve many different types of problems.
– Investment, resource allocation, production mix, marketing, multi-period scheduling etc.
THE MANAGEMENT SCIENCE PROCESS

Steps in the Management Science Process

• Observation - Identification of a problem that exists in a system or an organization.

• Definition of the Problem - Problem must be clearly and consistently defined showing its boundaries and interaction with the objectives of the organization.
• Model Construction - Development of the functional relationships that describe the decision variables, objective function and constraints of the problem.
• Model Solution - Model solved using management science techniques.
• Model Implementation - Actual use of the model or its solution.

Example of Model Construction

Problem Definition
Information and Data:
- A bakery makes and sells birthday cakes (Cake A and Cake B)
- Cake A costs $100 to produce, Cake B costs $120
- Cake A sells for $200 while Cake B sells for $250
- Cakes A and B require 0.5 and 0.8 pounds of double cream to make, respectively
- The bakery has 20 pounds of double cream for each day
 Business problem: Assuming all cakes produced can be sold out, determine the numbers of different cakes to produce to make the most profit given the limited amount of double
cream available.

Example of Model Construction

Mathematical Model

Decision Variable: ​x = number of Cake A to produce

​ ​ ​y = number of Cake B to produce
​Z = total profit
​Model: Z = $200x +$250y- $100x - $120y (objective function)
0.5x +0.8y <= 20 lb of double cream (resource constraint)
Parameters: $200, $100, 0.5 lb, 20 lbs (known values)

​Formal specification of model:

maximize Z = $200x + $250y - $100x - $120y
subject to 0.5x +0.8y <= 20

​ x >= 0, y>= 0

Characteristics of Modeling Techniques

• Linear mathematical programming: clear objective; restrictions on resources and requirements; parameters known with certainty.
• Probabilistic techniques: results contain uncertainty.
• Network techniques: model often formulated as diagram; deterministic or probabilistic.
• Forecasting and inventory analysis techniques: probabilistic and deterministic methods in demand forecasting and inventory control.
• Other techniques: variety of deterministic and probabilistic methods for specific types of problems.
LINEAR PROGRAMMING - a powerful quantitative tool used by operations and other manages to obtain optimal solutions to problems that involve restrictions or limitations

• Applications include:
1. Establishing locations for emergency equipment and personnel to minimize response time
2. Developing optimal production schedules
3. Developing financial plans
4. Determining optimal diet plans

LP MODELS- mathematical representations of constrained optimization problems

LP MODEL COMPONENTS:

❖ Objective function - A mathematical statement of profit (or cost) for a given solution
❖ Decision variables - Amounts of either inputs or outputs
❖ Constraints - Limitations that restrict the available alternatives
❖ Parameters - Numerical constants
LP ASSUMPTIONS
In order for LP models to be used effectively, certain assumptions must be satisfied:

❖ Linearity - the impact of decision variables is linear in constraints and in the objective function
❖ Divisibility - non-integer values of decision variables are acceptable
❖ Certainty - values of parameters are known and constant
❖ Non-negativity - negative values of decision variables are unacceptable
MODEL FORMULATION

1. List and define the decision variables (D.V.)

– These typically represent quantities
2. State the objective function (O.F.)
– It includes every D.V. in the model and its contribution to profit (or cost)
3. List the constraints
– Right hand side value
– Relationship symbol (≤, ≥, or =)
– Left Hand Side
• The variables subject to the constraint, and their coefficients that indicate how much of the RHS quantity one unit of the D.V. represents
4. Non-negativity constraints

EXAMPLE– LP FORMULATION ​

GRAPHICAL LP - a method for finding optimal solutions to two-variable problems

❖ Procedure
1. Set up the objective function and the constraints in mathematical format
2. Plot the constraints
3. Identify the feasible solution space
The set of all feasible combinations of decision variables as defined by the constraints

4. Plot the objective function

5. Determine the optimal solution

Example– Graphical LP:

STEP 1

STEP 2
Plotting constraints:
Begin by placing the non-negativity constraints on a graph
Plotting constraints:
Other constraints

1. Replace the inequality sign with an equal sign.

2. Determine where the line intersects each axis
3. Mark these intersection on the axes, and connect them with a straight line
4. Indicate by shading, whether the inequality is greater than or less than
5. Repeat steps 1 – 4 for each constraint

STEP 3
Feasible Solution Space
The set of points that satisfy all constraints simultaneously

STEP 4

Plotting the objective function line

• This follows the same logic as plotting a constraint line

• There is no equal sign, so we simply set the objective function to some quantity (profit or cost)
• The profit line can now be interpreted as an isoprofit line
• Every point on this line represents a combination of the decision variables that result in the same profit (in this case, to the profit you selected)

• As we increase the value for the objective function:

– The isoprofit line moves further away from the origin
– The isoprofit lines are parallel
 STEP 5

• Where is the optimal solution?

❖ The optimal solution occurs at the furthest point (for a maximization problem) from the origin the isoprofit can be moved and still be touching the feasible solution
space

❖ This optimum point will occur at the intersection of two constraints:

• Solve for the values of x and x where this occurs
1 2
 REDUNDANT CONSTRAINTS

– A constraint that does not form a unique boundary of the feasible solution space
– Test:
• A constraint is redundant if its removal does not alter the feasible solution space

SOLUTIONS AND CORNER POINTS

The solution to any problem will occur at one of the feasible solution space corner points
Enumeration approach:

• Determine the coordinates for each of the corner points of the feasible solution space
- Corner points occur at the intersections of constraints
• Substitute the coordinates of each corner point into the objective function
• The corner point with the maximum (or minimum, depending on the objective) value is optimal

SLACK AND SURPLUS

• Binding Constraint
– If a constraint form the optimal corner point of the feasible solution space, it is binding
– It effectively limits the value of the objective function
– If the constraint could be relaxed, the objective function could be improved

• Surplus
– When the value of decision variables are substituted into a ≥ constraint the amount by which the resulting value exceeds the right-hand side value

• Slack
– When the values of decision variables are substituted into a ≤ constraint, the amount by which the resulting value is less than the right-hand side
THE SIMPLEX METHOD
A general purpose linear programming algorithm that can be used to solve problems having more than two decision variables

COMPUTER SOLUTIONS

• MS Excel can be used to solve LP problems using its Solver routine

– Enter the problem into a worksheet
– Where there is a zero in Figure 6S.15, a formula was entered
• Solver automatically places a value of zero after you input the formula
 – You must designate the cells where you want the optimal values for the decision variables

• Click on Tools on the top of the worksheet, and in the drop-down menu, click on Solver
• Begin by setting the Target Cell
– This is where you want the optimal objective function value to be recorded
– Highlight Max (if the objective is to maximize)
– The changing cells are the cells where the optimal values of the decision variables will appear
• Add the constraint, by clicking add
– For each constraint, enter the cell that contains the left-hand side for the constraint
– Select the appropriate relationship sign (≤, ≥, or =)
– Enter the RHS value or click on the cell containing the value
• Repeat the process for each system constraint
• For the non-negativity constraints, enter the range of cells designated for the optimal values of the decision variables
– Click OK, rather than add
– You will be returned to the Solver menu
• Click on Options
– In the Options menu, Click on Assume Linear Model
– Click OK; you will be returned to the solver menu
• Click Solve
 SOLVER RESULTS
The Solver Results menu will appear

– You will have one of two results

• A Solution
• In the Solver Results menu Reports box
• Highlight both Answer and Sensitivity
• Click OK
• An Error message
• Make corrections and click solve

• Solver will incorporate the optimal values of the decision variables and the objective function into your original layout on your worksheets

ANSWER REPORT
SENSITIVITY REPORT

SENSITIVITY ANALYSIS

– Assessing the impact of potential changes to the numerical values of an LP model

– Three types of changes
• Objective function coefficients
• Right-hand values of constraints
• Constraint coefficients
O.F. COEFFICIENT CHANGES

• A change in the value of an O.F. coefficient can cause a change in the optimal solution of a problem
• Not every change will result in a changed solution
• Range of Optimality
– The range of O.F. coefficient values for which the optimal values of the decision variables will not change

BASIC AND NON-BASIC VARIABLES

• Basic variables
– Decision variables whose optimal values are non-zero
• Non-basic variables
– Decision variables whose optimal values are zero
– Reduced cost
• Unless the non-basic variable’s coefficient increases by more than its reduced cost, it will continue to be non-basic

RHS VALUE CHANGES

 • Shadow price
– Amount by which the value of the objective function would change with a one-unit change in the RHS value of a constraint
– Range of feasibility
• Range of values for the RHS of a constraint over which the shadow price remains the same

BINDING VS. NON-BINDING CONSTRAINTS

• Non-binding constraints
– have shadow price values that are equal to zero
– have slack (≤ constraint) or surplus (≥ constraint)
– Changing the RHS value of a non-binding constraint (over its range of feasibility) will have no effect on the optimal solution

• Binding constraint
– have shadow price values that are non-zero
– have no slack (≤ constraint) or surplus (≥ constraint)
– Changing the RHS value of a binding constraint will lead to a change in the optimal decision values and to a change in the value of the objective function