Management Science

(EBM2123)
LU1: Introduction to Decision Theory

Prepared by: Mohd Uzairi

Problem Solving & Decision Making
 Problem Solving & Decision Making
Problem Solving
Process of identifying a
difference between the
actual and the desired state
of affairs, and then taking
action to resolve the
difference.
Define the problem
Decision Making
Identify the alternatives
A part of problem solving
steps, where it starts with
defining the problem and
Determine the criteria ends at choosing of an
alternative, which is the act
of making the decision.
Evaluate the alternatives
Choose an alternatives Decision Theory
An analytic and systematic
approach to the study of
Implement the decision
decision making, i.e. to
tackle problems
Evaluate the results
 Quantitative Analysis & Decision Making

Define the problem

Structuring the
problem

Identify the alternatives

Determine the criteria

Qualitative Analysis

Based on subjective judgment from

the problem

Evaluate the alternatives unquantified information, and experience

Analyzing

Quantitative Analysis
Choose an alternatives
Scientific approach
Involve data processing & manipulation
Why Quantitative Analysis?

Problem Manager cant develop

good solution without
is the aid of quantitative
complex analysis

A thorough analysis is
Problem is
desired for decision
making important

Problem Decision maker has no

experience from which
is new to draw

Able to save time & Problem

effort to make routine is
decision repetitive
Quantitative Analysis
In quantitative analysis, problem are structured by developing
a mathematical model to represent the problem.

Terms Definition
Mathematical model A set of mathematical relationship
Objective function The description of the problems objective
Constraints The description of restrictions associated with the problem
Variable A measurable quantity of input
Parameter A measurable quantity that is inherent in the problem, or
uncontrollable input, i.e. environmental factor that affect
objective function and constraints
Decision variable Controllable input/variable, i.e. input that are determined by
decision maker
Stochastic or A mathematical model which uncontrollable input are
Probabilistic model uncertain and subject to variation (e.g. future demand)
Flowchart of the process of transforming
model inputs into output

Uncontrollable Inputs
(Environmental Factors)

Controllable Inputs Output

Mathematical Model
(Decision Variables) (Projected results)
 Example of Problem
Bakery ABC sells its cake with a profit of $10 per cake. It takes 5
hours to bake a cake and it only operates 40 hours a week. How
many cakes it should bakes each week to maximize profit?

Uncontrollable Inputs
(Environmental Factors)
10 profits per unit ($)
5 production time per unit (Hours)
40 production capacity (Hours)

Controllable Inputs Mathematical Model Output

(Decision Variables) Maximize = 10 (Projected results)
Subject to (s.t.)
Production quantity, Total Profit,
5 40
0
Example of Problem
Bakery ABC sells its cake with a profit of $10 per cake. It takes 5
hours to bake a cake and it only operates 40 hours a week. How
many cakes it should bakes each week to maximize profit?

Maximize = 10 Objective function

s.t.
5 40 Constraints
0
where
= total profit
= number of cake

Not all decision making utilizing management science

approach are using mathematical model as above
Break-even Analysis

An analysis to determine
the point at which
revenue received equals
the costs associated with
receiving the revenue

What is the minimum amount of sales that is required

to cover cost of doing business
 Break-even Analysis
Break even point is where total cost (TC) is equal to
total revenue (TR)
= (1)
If sale price is P and number of product is X,
= (2)
and, total cost is the sum of total fixed (TFC) and total
variable cost (TVC)
= +
= + (3)
Where
V = variable cost per unit
 Break-even Analysis
Break even point is where
= +
=
( ) =

=

 Quiz
The ONeill Shoe Manufacturing Company will produce a special-style shoe if the
order size is large enough to provide a reasonable profit. For each special-style
order, the company incurs a fixed cost of $1000 for the production setup. The
variable cost is $30 per pair, and each pair sells for $40.

a. Let x indicate the number of pairs of shoes produced. Develop a mathematical

model for the total cost of producing x pairs of shoes.

b. Let P indicate the total profit. Develop a mathematical model for the total profit
realized from an order for x pairs of shoes.

c. How large must the shoe order be before ONeill will break even?
Management Science Techniques

Decision Analysis Linear Programming

Integer Linear Programming

Goal Programming

Network Model
Analytic Hierarchy Process
Project Scheduling (PERT/CPM)
Forecasting
Inventory Models

Markov Process Models

Simulation

Dynamic Programming Waiting-Line or Queuing Models

Decision Support System
A decision support system (DSS) is a computer-based information
system that supports business or organizational decision-making
activities.

DSS are used to

1) Assist managers in their decision processes
2) Support, rather than replace managerial judgment
3) Improve decision making processes

Example of DSSs includes

a) Optimization software (route, schedule etc.)
b) Forecasting system (demand, cost etc.)
c) Revenue management system