ECON 3300

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ECON 3300

• LECTURE 1
• 08/21/06

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Outline

• Introduction Management science
• Break Even Analysis
• Example in Excel
• Management science techniques
• Linear Programming
• Probabilistic techniques
• Simulation
• Forecasting and inventory management
• Areas of application

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Outline

• Decision Support Systems

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Management Science

• Application of scientific approach to solve
  scientific problems
• Helps managers take better decisions
• Encompasses various mathematical oriented
  techniques (Management science) and other
  disciplines
• A logical, systematic approach for problem
  solving

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Problem Solving

• Steps
• Observation
• Definition of problem
• Model construction
• Solution
• Implementation

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Flow chart Management Science Process
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Observation

• Identification of problem
• System must be continuously and closely observed
  quick identification
• Problems
• Result of crisis
• Anticipatory or planning situation

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Definition of problem

• Clear and concise definition of problem once it
  is identified
• Improper definition no solution or wrong
  solution
• Limits of the problem and its effect on other
  units definition of the problem

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Model Construction

• Abstract representation of an existing problem
  situation
• Could be a graph or chart or set of mathematical
  relationships
• Example A product costs 5 to produce and sells
  for 20. The total profit can be obtained using
  the equation

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Model Solution

• Management science techniques generate two type
  of results
• Solutions/decisions
• Descriptive results (Average (Mean) What is
  happening in the system. For example the monthly
  sales average)
• Variable values obtained from solving model
  information which helps manager in actual
  decision making

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Implementation

• Critical step but often overlooked
• Implementation generally done by person not
  involved in making model
• Model construction critical
• Clarity important regarding how model works and
  what it is supposed to do

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Break Even Analysis/Profit Analysis

• Simple, straightforward method
• Aim To determine quantity of product that will
  equate total revenue with total cost
• Point at which it happens Break even point
• Important information for the manager

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Break Even Analysis

• Three important components
• Volume (Level of sales/production by company)
• Cost (Fixed cost variable cost)
• Profit (Total revenue Total cost)
• Total cost Variable cost Fixed cost
• Total variable cost f(volume, variable cost per
  unit)

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Break Even Analysis
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Break Even Analysis
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Graphical representation-BEA
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Break Even Analysis

• It enables us to see how level of profit changes
  with volume
• In the earlier model all parameters assumed
  constant not true in reality
• Solution sensitive to parameter value changes

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Break Even Analysis
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Break Even Analysis
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Example in Excel
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Role of Mgmt Science - Course

• Course focuses on management science
  techniques/tools for two of the five steps
• Model construction
• Solution

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Techniques

• Linear Programming several variations
• Several different problem scenarios
• Transportation, transshipment and assignment
  problems
• Probabilistic techniques select among several
  different decision alternatives (uncertain future
  conditions given)
• Simulation A mathematical model that replicates
  real world system

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Techniques

• Forecasting and Inventory management
• Historical sales or demand data - build
  mathematical function
• Estimate product demand in future
• Areas of application project planning, capital
  budgeting, production planning, inventory
  analysis etc.
• SEPS, Interfaces etc good journals to see how
  these techniques are applied to solve real world
  problems

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Decision Support Systems (DSS)

• Computer advancements -combination of several
  management science techniques and other solution
  techniques made possible
• Complex interrelated organization problems can be
  easily solved DSS
• Examples Excel, Expert (AHP), ERP etc

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Decision Support System - Diagram
Our area of interest (ECON 3300)
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Summary

• Introduction Management science
• Break Even Analysis its significance
• Example solved in Excel
• Various techniques introduced
• DSS discussed