Management Science

INTRODUCTION
A. Applied Management Science
 Definition: The science of solving business problems. The major reason that MS/OR has evolved as quickly as it
has is due to the evolution in computing power.
B. Management Science
 Definition: The discipline that adapts the scientific approach for problem solving to help managers make
informed decisions.

 Goal: To recommend the course of action that is expected to yield the best outcome with what is available.

 Basic steps in problem solving process:

 Analyzing business situations and building mathematical models to describe them;
 Solving the mathematical models;
 Communicating/implementing recommendations based on the models and their solutions.

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

 Steps in problem solving

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.
D. Decision Making
 Definition: It is the act of selecting a preferred course of action among alternatives.
: It is the term generally associated with the first five steps of the problem solving process.
Thus, the first step of decision making is to identify and define the problem, and it ends with the
choosing of an alternative, which is the act of making the decision.

 Criteria/Criterion: Criteria, standard, norms, accepted, benchmark, basis.

: are the preferences of the decision maker.
: Something that is used as a reason for making a judgement or decision.
Some typical decision criteria:
1. Ease of implementation 6. Cost savings
2. Cost 7. Increase in sales or market share
3. Ease of modification/scalability/flexibility 8. Return on investment
4. Employee morale 9. Similarity to existing organization products
5. Risk levels 10. Increase in customer satisfaction
 Types of decision problems

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 o Single-criterion decision problems - are problems in which the objective is to find the best solution with
respect to one criterion.
o Multicriteria decision problems - are problems that involve more than one criterion.

 Steps in decision making process

1) Structuring the problem 2) Analyzing the problem
a. Define the problem a. Evaluate the alternatives.
b. Identify the alternatives b. Choose an alternative.
c. Determine the criteria/criterion.

E. Problem Analysis Phase

 Two basic forms:
1) Qualitative analysis - is based primarily on the manager’s judgment and experience; it includes the
manager’s intuitive “feel” for the problem and more of an art than science.

2) Quantitative analysis - focuses on the quantitative facts or data associated with the problem. It includes the
development of mathematical expressions that describe the objectives, constraints, and other relationships
that exist in the problem. Then, by using one or more quantitative methods, the analyst will make a
recommendation based on the quantitative aspects of the problem.
o Although skills in the qualitative approach are inherent in the manager and usually increased with
experience, the skills of the quantitative approach can be learned only by studying the assumptions
and methods of management science.
o A manager who is knowledgeable in quantitative decision making procedures is in a much better
position to compare and evaluate the qualitative and quantitative sources of recommendations and
ultimately to combine the two sources in order to make the best possible decision.

Some of the reasons why a quantitative approach is beneficial in the decision- making process:
1. The problem is complex.
2. The problem is significant (e.g. involvement of large amount of money which needs a thorough analysis).
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.

 Model - is a selected simplified representation of the essential or relevant entities of some specific reality and their
characteristics.
o Iconic model – a physical replica of a real object.
o Analog model – physical in form but do not have the same physical appearance as the object being
modelled.
o Mathematical model – includes the representation of a problem by a system of symbols and mathematical
relationships or expressions.

Example:
The total profit from the sale of a product can be determined by multiplying the profit per unit by the number
of units sold. If the profit per unit of selling smart phones is P500, then the total profit P for selling x number
of units is P = 500x.

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 *** In general, experimenting with models requires less time and is less expensive than experimenting with the real object or
situation. The value of model-based conclusions and decisions is dependent on how well the model represents the real
situation. ***
F. Management Science Techniques
 Linear Programming is a problem solving approach developed for situations involving maximizing or minimizing a
linear function subjects to linear constraints that limit the degree to which the objective can be pursued.
 Integer Linear Programming is an approach used for problems that can be set up as linear programs, with the
additional requirement that some or all of the decision variables be integer values.
 Distribution models are specialized solutions procedures for problems which can be graphically represented by
nodes and arcs.
 Project Scheduling or PERT/CPM are techniques which help managers carry out their project scheduling
responsibilities.
 Waiting Line or Queueing Models are developed to help managers understand and make better decisions
concerning the operation of systems involving lines.
 Goal Programming is a technique for solving multicriteria decision problems, usually within the framework of linear
programming.
 Forecasting methods are techniques that can be used to predict future aspects of a business operation.

TIME SERIES ANALYSIS AND FORECASTING

A. Time Series Patterns
 Definition: Time Series is a sequence of observations on variable measured at successive points in time or over
successive periods of time. Time Series Plot is a graphical presentation of the relationship between time and the
time series variable.
 Patterns:
o Horizontal Pattern – data fluctuate randomly around a constant mean over time
o Trend Pattern – series show a gradual shifts or movements to relatively higher or lower values over a longer
period of time
o Seasonal Pattern – movements in historical data are analyzed over multiple years
o Cyclical Pattern – time series plot shows an alternating sequence of points below and above the trend line that
lasts for more than a year
B. Forecast Accuracy
 Definition: It is used to determine how well a particular forecasting method is able to reproduce the time series data
that are already available
 Forecasting Methods:
o Naïve Forecasting – uses the most recent data value as the forecast for the next period
o Average of Past Values – uses the average of all the historical data available as the forecast for the next period
o Simple Moving Average – it is computed by choosing the number of items in the time series data to include in
the average
o Weighted Moving Average – uses weight for each data value in the moving average
o Exponential Smoothing – a special case of weighted moving averages method in which we select only the
weight for the most recent observation
o Extension of Exponential Smoothing/Trend-Adjusted Exponential Smoothing
 NOTE – To compute the initial trend and the starting forecast:

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 FORMULA:

o Linear Trend Equation

𝑛Σty− ΣtΣy Σ𝑦−𝑏Σ𝑡

FORMULA: 𝐹 = 𝑎 + 𝑏𝑡 ; 𝑏 = ;𝑎 =
𝑛Σ𝑡 2−(Σ𝑡)2 𝑛

o Seasonality – time series in which the data experiences regular and predictable changes that recur every
calendar year. Any predictable fluctuation or pattern that recurs or repeats over a one-year period is said to
be seasonal

 Measures:
o Mean of the Forecast Errors (MFE)
Where:
t = period, et = error at period t, k = number of periods at the beginning of the
FORMULA: time series, n = total periods

o Mean Absolute Error/Deviation (MAE/MAD)

Where:
t = period, |et|= absolute value of error at period t, k = number of periods at the
FORMULA: beginning of the time series, n = total periods

o Mean Square Error (MSE)

Where:
t = period, e2t = squared error at period t, k = number of periods at the
beginning of the time series, n = total periods
FORMULA:

o Mean Absolute Percentage Error (MAPE)

Where:
t = period, et = squared error at period t, k = number of periods at the
FORMULA: beginning of the time series, n = total periods, Yt = actual

LINEAR PROGRAMMING
A. Terminologies
 Linear - refers to the relationship involving two or more variables which show first-degree mathematical
statement. The graph of a linear equation is a straight line.
 Programming - refers to the use of certain mathematical techniques or algorithms to obtain best possible
solution or the optimal solution.
 Linear Programming
- is a branch of applied mathematics, which is a mathematical technique that involves maximizing (≤) and
minimizing (≥) a linear function subject to given linear constraints.
- is a method of dealing with decision problems that can be expressed as constrained linear models.
- is a mathematical technique for finding the best uses of an organization’s resources.

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  Inequality - is a mathematical statement describing that one expression or quantity is not of equal value with
another expression or quantity. The graph of inequality is a half-plane.
 Graphical Solution Method - is a two-dimensional geometric analysis of Linear Programming problems with
two decision variables, x and y.
 Decision Variables - are variables that correspond to the decision that must be made in order to identify a
solution to the problem.
Example:
w be the number of laptops y be the number of alcoholic beverages
x be the number of bottles of softdrinks z be the number of desk top

B. Characteristics of Linear Programming Problem:

1. Objective Function
- is an expression, which shows the relationship between the variables in the problem and the firm’s goal
- is a mathematical statement reflecting the objective of the operation (problem)
- The objective of the decision maker must be to maximize or minimize.
- Maximization problem involves profit, market share, revenue, sales, production, etc.
- Minimization involves cost, distance, time, worker, etc.

2. Constraints - are referred to the availability of resources like labor time, machine time, raw materials, work or
storage, space, etc.

Two kinds of constraints:

1. Structural Constraint (explicit constraints) – are the conditions stated in the problem and the limit on the
availability of resources.
2. Non-negativity constraint (implicit constraints) – states that the variables are always greater than or equal to
zero such as the number of units produced, number of hours, area, distance, volume, etc. It means
that we are always working in the first (or northeast) quadrant of a graph.

Take Note!
Words or expressions to denote ≤ are: “no more than”, “available”, “at most”, “limited to”, etc.
For ≥: “at least”, “more than”, “exceed”, “minimum”, etc.

C. Requirements of Linear Programming Models

1. The decision maker must have an objective to achieve. This objective must relate to a quantity such as profit or
cost, which the decision maker wishes to optimize.
2. There must be at least two decision variables that the decision maker can operate at different levels.
3. The decision variables must be operated at levels that do not violate the limitations/ restrictions placed on the
decision maker.
4. The variables must be interrelated and the decision maker must be able to express the relationship in terms of
linear equations or linear inequalities.

D. Steps in Linear Programming Model Formulation

1. If possible, tabulate the given information in the problem.
2. Identify the objective (either to maximize or to minimize a certain quantity).

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 3. Identify the decision variables.
4. Write an equation which expresses the quantity to be maximized or to be minimized in terms of the decision
variables. This is the objective function.
5. Write the equations or inequalities that express the different constraints. These are the explicit constraints.
6. Include the non-negativity constraint.

Example: (Linear Programming Model Formulation)

MD Electronics Corp. is planning to produce two products C13 and C15. At the assembly plant, a C13 unit requires 4
hours and a C15 requires 5 hours. C13 and C15 units require 3 and 2 hours, respectively, for finishing. At most 220 hours and
210 hours of assembly and finishing, respectively, are available per month. If the anticipated profit is P30/unit for C13 and
P25/unit for C15, find the product mix to maximize profit.

Objective: To maximize profit, z

Decision Variables: Let x be the number of units of C13
y be the number of units of C15
Objective Function: Maximize z = 30x + 25y
Constraints:
Available Assembly Plant Hours: 4 + 3 ≤ 220
Available Finishing Dept. Hours: 5 + 2 ≤ 210
Non-negativity Constraint (NNC): x, y ≥ 0

E. Graphical Solution to a Linear Programming Problem

 Two Ways: I. Method of Corners (Extreme Point Theorem)
II. Objective Function Line Method (Isoprofit/Isocost Line Method)

 To find the optimal solution (or the best feasible solution), it is necessary to display graphically, where the feasible solutions
are. The solutions permitted by all the constraints are the feasible solutions and the portion of the two-dimensional graph
where the feasible solutions lie is referred to as the feasible region.

Theorem 1: The Extreme Point Theorem

• If a linear programming problem has a solution then it must occur at a vertex, or corner point, of the feasible set S
associated with the problem.
• Moreover, if the objective function is optimized (either maximized or minimized) at two adjacent vertices of , then
it is optimized at every point on the line segment joining these vertices, in which case there are infinitely many
solutions to the LP problem

Theorem 2: The Existence of a Solution

• Suppose we are given an LP problem with a feasible set S and the objective function,
a. If S is bounded, then LP has both a maximum and minimum value on (Figure 1-A).
b. If S is unbounded and both and are nonnegative, then has a minimum value on S provided that the
constraints defining S include the inequalities 0 and 0 (Figure 1-B).
c. If S is the empty set, then the linear programming problem has no solution; that is, has neither a maximum
nor a minimum value (Figure 1-C).

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I. Steps in Solving LP Problems Using the Method of Corners (Based on the Extreme Point Theorem)
1. Graph the constraints (both equality and inequality).
2. Shade the region of the feasible solution, S. Label all the corner points.
3. Find the coordinates of all the corner points.
4. Evaluate the objective function at each corner point.
5. Identify the corner point that satisfies the objective (either to maximize or minimize). If there is only one such
corner point, then this corner constitute a unique solution to the LP problem. If two adjacent corner points satisfy
the objective, then there are infinitely many optimal solutions given by the points on the line segment determined
by the two adjacent corner points.

Example:
Formulate the LP problem and solve graphically using the Method of Corners (Extreme Points Method).
A nutritionist advises an individual who is suffering from iron and vitamin-B deficiency to take at least 2400 mg of iron,
2100 mg of vitamin B1 and 1500 mg of vitamin B2 over a certain period of time. Two vitamin capsules are suitable, Neuro-Iron
and Sango-Iron. Each Neuro-Iron capsule costs P6 and contains 40 mg of iron, 10 mg of vitamin B1 and 5 mg of vitamin B2. Each
Sango- Iron costs P8 and contains 10 mg or iron and 15 mg each of vitamins B1 and B2. What combination of each brand should
the individual purchase in order to meet the minimum iron and vitamin requirements at the lowest cost?

Objective: To minimize cost, z

Decision Variables: Let x be the number of capsules of Neuro-Iron
y be the number of capsules of Sango-Iron
Objective Function: Minimize z = 6x + 8y
Constraints:
Required minimum iron intake: 40x + 10y ≥ 2 400
Required minimum vitamin B intake: 10x + 15y ≥ 2 100
Required minimum vitamin B2 intake: 5x + 15y ≥ 1 500
Non-negativity constraints: x, y ≥ 0

Find the Intercepts of each constraints (for graphing):

1. 40x + 10y = 2 400 2. 10x + 15y = 2 100 3. 5x + 15y = 1 500
x 60 0 x 0 210 x 0 300
y 0 240 y 140 0 y 100 0

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 Graph: (Plot the intercepts per constraints, shade the feasible region/solution and label the extreme/corner points.)

Solution to Point B
Intersection of:
10x + 15y = 2 100 and 5x + 15y = 1 500

To get the value of x:

Substitute to get y:

Solution to Point C
Intersection of: 40x + 10y = 2 400 and 10x + 15y = 2 100
To get the values of x and y:

Take note that you can

use any method/s or
way/s to get the values of
Points B and C: (x,y)


Extreme Points (evaluate through substitution in the objective function: Min. z = 6x + 8y)
A. (300, 0) = 6(300) + 8(0) = 1 800
B. (120, 60) = 6(120) + 8(60) = 1 200
C. (30, 120) = 6(30) + 8(120) = 1 140
D. (0, 240) = 6(0) + 8(240) = 1 920

Conclusion
The individual should purchase a combination of 30 capsules of Neuro-Iron and 120 capsules of Sangro-Iron
in order for him/her to meet the minimum iron and vitamin requirements at the lowest cost of P1, 140.00.

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