4/13/2025

MANAGEMENT SCIENCE

TRAN THI BICH NHUNG

Tranthibichnhung.cs2@[Link]

Contents

Chapter 1: Principles of scientific management

Chapter 2: Business resource management
Chapter 3: Business analysis model
Chapter 4: Process management
Chapter 5: Managers and management skills

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CHAPTER 3: BUSINESS
ANALYSIS MODEL
TRAN THI BICH NHUNG
Tranthibichnhung.cs2@[Link]

Learning Objectives

1. Optimization model
2. Forecasting model
3. Correlation model
4. Network model
5. The Monte Carlo Model

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Optimization model

Linear Programming: An Overview

 Objectives of business decisions frequently involve maximizing

profit or minimizing costs.

There are three steps in applying the linear

programming technique:
1. Identify problem as being solvable by
linear programming.
2. Formulate a mathematical model of the
unstructured problem.
3. Solve the model by using established
mathematical techniques

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Model Components

LP Model Formulation
A Maximization Example (1 of 5)

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LP Model Formulation
A Maximization Example (2 of 5)

Product mix problem - Beaver Creek Pottery Company

How many bowls and mugs should be produced to maximize
profits given labor and materials constraints?
Product resource requirements and unit profit:
Resource Requirements

Labor Clay Profit

Product
(Hr./Unit) (Lb./Unit) ($/Unit)

Bowl 1 4 40

Mug 2 3 50

LP Model Formulation
A Maximization Example (3 of 5)

Step 1 : Clearly define the decision variables.

How many bowls and mugs to produce
x1, X2: the number of bowls, mugs
Step 2 : Construct the objective function
Z = $40 X1 + $50 X2
Step 3 : Formulate the constraints
The resources (clay and labor) available
1X1 + 2X2 <= 40 hours
4X1 + 3 X2 <= 120
X1,X2 > 0

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LP Model Formulation
A Maximization Example (4 of 5)

Complete Linear Programming Model:

Maximize Z = $40x1 + $50x2

subject to: 1x1 + 2x2  40

4x1 + 3x2  120
x1, x2  0

LP Model Formulation
A Maximization Example (5 of 5)

Resource 40 hrs of labor per day

Availability: 120 lbs of clay
Decision x1 = number of bowls to produce/day
Variables: x2 = number of mugs to produce/day
Objective Maximize Z = $40x1 + $50x2
Function: Where Z = profit per day
Resource 1x1 + 2x2  40 hours of labor
Constraints: 4x1 + 3x2  120 pounds of clay
Non-Negativity x1  0; x2  0
Constraints:

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LP Model Formulation
A Maximization Example – feasible solution

A feasible solution does not violate any of the constraints:

Example: x1 = 5 bowls
x2 = 10 mugs
Z = $40x1 + $50x2 = $700

Labor constraint check: 1(5) + 2(10) = 25 < 40 hours

Clay constraint check: 4(5) + 3(10) = 70 < 120 pounds

LP Model Formulation
A Maximization Example – infeasible solution

An infeasible solution violates at least one of the

constraints:

Example: x1 = 10 bowls
x2 = 20 mugs
Z = $40x1 + $50x2 = $1400

Labor constraint check: 1(10) + 2(20) = 50 > 40 hours

The solution to this problem must maximize

profit without violating the constraints.

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Graphical Solution of LP Models

Graphical solution is limited to linear programming models

containing only two decision variables (can be used with
three variables but only with great difficulty).

Graphical methods provide visualization of how a solution

for a linear programming problem is obtained.

Coordinate Axes
Graphical Solution (1 of 12)

X2 is mugs

Maximize Z = $40x1 + $50x2

subject to: 1x1 + 2x2  40
4x2 + 3x2  120
x 1, x2  0

X1 is bowls
Figure 2.2 Coordinates for Graphical Analysis

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Labor Constraint
Graphical Solution (2 of 12)

Maximize Z = $40x1 + $50x2

subject to: 1x1 + 2x2  40
4x2 + 3x2  120
x 1, x2  0

Figure 2.3 Graph of Labor Constraint

Labor Constraint Area

Graphical Solution (3 of 12)

Maximize Z = $40x1 + $50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x 1, x2  0

Figure 2.4 Labor Constraint Area

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Clay Constraint Area

Graphical Solution (4 of 12)

Maximize Z = $40x1 + $50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x 1, x2  0

Figure 2.5 Clay Constraint Area

Both Constraints
Graphical Solution (5 of 12)

Maximize Z = $40x1 + $50x2

subject to: 1x1 + 2x2  40
4x1 + 3x2  120
x 1, x2  0

Figure 2.6 Graph of Both Model Constraints

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Feasible Solution Area

Graphical Solution (6 of 12)

Maximize Z = $40x1 + $50x2

subject to: 1x1 + 2x2  40
4x2 + 3x2  120
x 1, x2  0

Figure 2.7 Feasible Solution Area

Objective Function Solution = $800

Graphical Solution (7 of 12)

Maximize Z = $40x1 + $50x2

subject to: 1x1 + 2x2  40
4x2 + 3x2  120
x 1, x2  0

Figure 2.8 Objection Function Line for Z = $800

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Alternative Objective Function Solution Lines

Graphical Solution (8 of 12)

Maximize Z = $40x1 + $50x2

subject to: 1x1 + 2x2  40
4x2 + 3x2  120
x 1, x2  0

Figure 2.9 Alternative Objective Function Lines

Optimal Solution
Graphical Solution (9 of 12)

Maximize Z = $40x1 + $50x2

subject to: 1x1 + 2x2  40
4x2 + 3x2  120
x 1, x2  0

Figure 2.10 Identification of Optimal Solution Point

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Optimal Solution Coordinates

Graphical Solution (10 of 12)

Maximize Z = $40x1 + $50x2

subject to: 1x1 + 2x2  40
4x2 + 3x2  120
x 1, x2  0

Figure 2.11 Optimal Solution Coordinates

Extreme (Corner) Point Solutions

Graphical Solution (11 of 12)

Maximize Z = $40x1 + $50x2

subject to: 1x1 + 2x2  40
4x2 + 3x2  120
x 1, x2  0

Figure 2.12 Solutions at All Corner Points

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Optimal Solution for New Objective Function

Graphical Solution (12 of 12)

Maximize Z = $70x1 + $20x2

subject to: 1x1 + 2x2  40
4x2 + 3x2  120
x 1, x2  0

Figure 2.13 Optimal Solution with Z = 70x1 + 20x2

Slack Variables

 Standard form requires that all constraints be in the

form of equations (equalities).
 A slack variable is added to a  constraint (weak
inequality) to convert it to an equation (=).
 A slack variable typically represents an unused
resource.
 A slack variable contributes nothing to the objective
function value.

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Linear Programming Model: Standard Form

Max Z = 40x1 + 50x2 + s1 + s2

subject to: 1x1 + 2x2 + s1 = 40
4x2 + 3x2 + s2 = 120
x1, x2, s1, s2  0
Where:
x1 = number of bowls
x2 = number of mugs
s1, s2 are slack variables

Figure 2.14 Solution Points A, B, and C with Slack

LP Model Formulation – Minimization (1 of 8)

 Two brands of fertilizer available - Super-gro, Crop-quick.

 Field requires at least 16 pounds of nitrogen and 24 pou
nds of phosphate.
 Super-gro costs $6 per bag, Crop-quick $3 per bag.
 Problem: How much of each brand to purchase to minimi
ze total cost of fertilizer given following data ?

Chemical Contribution

Nitrogen Phosphate
Brand
(lb/bag) (lb/bag)
Super-gro 2 4
Crop-quick 4 3

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LP Model Formulation – Minimization (2 of 8)

Figure 2.15 Fertilizing

farmer’s field

LP Model Formulation – Minimization (3 of 8)

Decision Variables:
x1 = bags of Super-gro
x2 = bags of Crop-quick

The Objective Function:

Minimize Z = $6x1 + 3x2
Where:$6x1 = cost of bags of Super-Gro
$3x2 = cost of bags of Crop-Quick

Model Constraints:
2x1 + 4x2  16 lb (nitrogen constraint)
4x1 + 3x2  24 lb (phosphate constraint)
x1, x2  0 (non-negativity constraint)

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Constraint Graph – Minimization (4 of 8)

Minimize Z = $6x1 + $3x2

subject to: 2x1 + 4x2  16
4x2 + 3x2  24
x 1, x2  0

Figure 2.16 Graph of Both Model Constraints

Feasible Region– Minimization (5 of 8)

Minimize Z = $6x1 + $3x2

subject to: 2x1 + 4x2  16
4x2 + 3x2  24
x 1, x2  0

Figure 2.17 Feasible Solution Area

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Optimal Solution Point – Minimization (6 of 8)

Minimize Z = $6x1 + $3x2

subject to: 2x1 + 4x2  16
4x2 + 3x2  24
x 1, x2  0

Figure 2.18 Optimum Solution Point

Surplus Variables – Minimization (7 of 8)

 A surplus variable is subtracted from a  constraint to

convert it to an equation (=).
 A surplus variable represents an excess above a
constraint requirement level.
 A surplus variable contributes nothing to the calculated
value of the objective function.
 Subtracting surplus variables in the farmer problem
constraints:
2x1 + 4x2 - s1 = 16 (nitrogen)
4x1 + 3x2 - s2 = 24 (phosphate)

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Graphical Solutions – Minimization (8 of 8)

Minimize Z = $6x1 + $3x2 + 0s1 + 0s2

subject to: 2x1 + 4x2 – s1 = 16
4x2 + 3x2 – s2 = 24
x1, x2, s1, s2  0

Figure 2.19 Graph of Fertilizer Example

Irregular Types of Linear Programming Problems

For some linear programming models, the general

rules do not apply.

Special types of problems include those with:

 Multiple optimal solutions
 Infeasible solutions
 Unbounded solutions

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Multiple Optimal Solutions Beaver Creek Pottery

The objective function is

parallel to a constraint line.
Maximize Z=$40x1 + 30x2
subject to: 1x1 + 2x2  40
4x2 + 3x2  120
x 1, x2  0
Where:
x1 = number of bowls
x2 = number of mugs

Figure 2.20 Example with Multiple Optimal Solutions

An Infeasible Problem

Every possible solution

violates at least one constraint:
Maximize Z = 5x1 + 3x2
subject to: 4x1 + 2x2  8
x1  4
x2  6
x 1, x2  0

Figure 2.21 Graph of an Infeasible Problem

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An Unbounded Problem

Value of the objective

function increases indefinitely:
Maximize Z = 4x1 + 2x2
subject to: x1  4
x2  2
x 1, x2  0

Figure 2.22 Graph of an Unbounded Problem

Characteristics of Linear Programming Problems

 A decision amongst alternative courses of action is

required.
 The decision is represented in the model by decision
variables.
 The problem encompasses a goal, expressed as an
objective function, that the decision maker wants to
achieve.
 Restrictions (represented by constraints) exist that limit
the extent of achievement of the objective.
 The objective and constraints must be definable by linear
mathematical functional relationships.

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Properties of Linear Programming Models

Proportionality - The rate of change (slope) of the

objective function and constraint equations is constant.
Additivity - Terms in the objective function and constraint
equations must be additive.
Divisibility -Decision variables can take on any fractional
value and are therefore continuous as opposed to integer
in nature.
Certainty - Values of all the model parameters are
assumed to be known with certainty (non-probabilistic).

Problem Statement
Example Problem No. 1 (1 of 3)

■ Hot dog mixture in 1000-pound batches.

■ Two ingredients, chicken ($3/lb) and beef ($5/lb).
■ Recipe requirements:
at least 500 pounds of “chicken”
at least 200 pounds of “beef”
■ Ratio of chicken to beef must be at least 2 to 1.
■ Determine optimal mixture of ingredients that will mini
mize costs.

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Solution
Example Problem No. 1 (2 of 3)
Step 1:
Identify decision variables.
x1 = lb of chicken in mixture
x2 = lb of beef in mixture
Step 2:
Formulate the objective function.
Minimize Z = $3x1 + $5x2
where Z = cost per 1,000-lb batch
$3x1 = cost of chicken
$5x2 = cost of beef

Solution
Example Problem No. 1 (3 of 3)

Step 3:
Establish Model Constraints
x1 + x2 = 1,000 lb
x1  500 lb of chicken
x2  200 lb of beef
x1/x2  2/1 or x1 - 2x2  0
x1, x2  0
The Model: Minimize Z = $3x1 + 5x2
subject to: x1 + x2 = 1,000 lb
x1  500
x2  200
x1 - 2x2  0
x1,x2  0

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Example Problem No. 2 (1 of 3)

Solve the following model
graphically:
Maximize Z = 4x1 + 5x2
subject to: x1 + 2x2  10
6x1 + 6x2  36
x1  4
x 1, x 2  0

Step 1: Plot the constraints a

s equations

Figure 2.23 Constraint Equations

Example Problem No. 2 (2 of 3)

Maximize Z = 4x1 + 5x2

subject to: x1 + 2x2  10
6x1 + 6x2  36
x1  4
x 1, x 2  0
Step 2: Determine the feasible
solution space

Figure 2.24 Feasible Solution Space and Extreme Poin

ts

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Example Problem No. 2 (3 of 3)

Maximize Z = 4x1 + 5x2

subject to: x1 + 2x2  10
6x1 + 6x2  36
x1  4
x 1, x 2  0
Step 3 and 4: Determine the
solution points and optimal
solution

Figure 2.25 Optimal Solution Point

Forecasting model

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Forecasting model

1. Forecasting components
2. Forecasting methods
3. Time series methods
4. Linear trend line
5. Forecast accuracy

Forecasting components
 Short-range forecasts are daily operations
 Medium-range forecasts are usually from a month up to a year
 Long-range forecasts are more strategic and for over a year
 A trend is a gradual, long-term, up-or-down movement of
demand
 Random variations are unpredictable movements in demand
that follow no pattern
 A cycle is an up-and-down repetitive movement in demand.
 A seasonal pattern is an up-and-down, repetitive movement
within a trend occurring periodically

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Forecasting components

Forecasting methods
The basic types of forecasting: time series, regression methods,
and qualitative methods
 Time series forecasts are statistical techniques that use
historical data
 Regression develops a mathematical relationship between the
forecasted item and factors that cause it to behave the way it
does
 Qualitative methods use judgment, expertise, and opinion to
make forecasts

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Time series methods

(1) Moving average

The moving average method is good for stable demand with

no pronounced behavioral patterns.

Time series methods

(1) Moving average

Example:

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Time series methods

(1) Moving average
Example:

Time series methods

(1) Moving average
Example:

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Time series methods

(2) Weighted moving average

In a weighted moving average, weights are assigned to the most

recent data

Time series methods

(3) Exponential Smoothing
Exponential smoothing is an averaging method that reacts
more strongly to recent changes in demand than to more
distant past data.

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Time series methods

(3) Exponential Smoothing
Example:

Time series methods

(3) Exponential Smoothing
Example:

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Time series methods

(3) Exponential Smoothing
Example:

Time series methods

(4) Linear Trend Line: A linear trend line is a linear regression model that
relates demand to time.
A linear trend line relates a dependent variable, which for our purposes is
demand, to one independent variable, time, in the form of a linear equation, as
follows:

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Time series methods

Time series methods

Example:

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Time series methods

Example:

Time series methods

Example: Linear trend line

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Time series methods

(5) Seasonal adjustment:
It is possible to adjust for seasonality by multiplying the normal forecast by a
seasonal factor

Example:

Time series methods

(5) Seasonal adjustment:

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Time series methods

(5) Seasonal adjustment:

Forecast accuracy
The forecast error is the difference between the forecast and
actual demand.
Mean absolute deviation (MAD),
Mean absolute percent deviation (MAPD)
Cumulative error (E)
Mean squared error (MSE)

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Forecast accuracy
Mean absolute deviation (MAD)

Forecast accuracy
Mean absolute deviation (MAD)

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Forecast accuracy
Mean absolute deviation (MAD)

Forecast accuracy
Mean absolute deviation (MAD)

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Forecast accuracy
Mean absolute percent deviation (MAPD) - MAPD is absolute
error as a percentage of demand

Forecast accuracy
Cumulative error (E) - Cumulative error is the sum of the
forecast errors

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Forecast accuracy
Mean squared error (MSE) - individual error values are
squared and then summed and averaged

Correlation model

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Correlation model
Correlation is a measure of the strength of the relationship
between independent and dependent variables.
The formula for the correlation coefficient is:

The coefficient of determination is the percentage of the

variation in the dependent variable that results from the
independent variable.

Regression methods
Simple linear regression relates one dependent variable to one
independent variable in the form of a linear equation:

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Regression methods
Simple linear regression relates one dependent variable to one
independent variable in the form of a linear equation:

Regression methods

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Regression methods

Network flow model

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Network flow model

A network is an arrangement of paths connected at various
points, through which items move

Networks are popular because they provide a picture of

a system and because a large number of systems can be
easily modeled as networks

Network flow models

describe the flow of items through a system.

Network components
Nodes, denoted by circles, represent junction points connecting
branches
Branches, represented as lines, connect nodes and show flow
from one point to another

The values assigned to branches typically represent distance, time, or cost

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The shortest route problems

The shortest route problem is to find the shortest distance
between an origin and various destination points.

The shortest route problems

The manager wants to determine the best routes (in terms of the
minimum travel time) for the trucks to take to reach their
destinations

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The shortest route problems

The Shortest Route Solution Approach
We begin the shortest route solution technique by starting at node 1 (the
origin) and determining the shortest time required to get to a directly
connected (i.e., adjacent) node. The three nodes directly connected to node
1 are 2, 3, and 4

The shortest route problems

The Shortest Route Solution Approach
Next, we will repeat the foregoing steps used to determine the shortest route to node 3.
First, we must determine all the nodes directly connected to the nodes in the permanent
set (nodes 1 and 3). Nodes 2, 4, and 6 are all directly connected to nodes 1 and 3, as
shown in Figure 7.5.

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The shortest route problems

The Shortest Route Solution Approach

The shortest route problems

The Shortest Route Solution Approach

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The shortest route problems

The Shortest Route Solution Approach

The shortest route problems

The Shortest Route Solution Approach

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The shortest route problems

The Shortest Route Solution Approach

The shortest route problems

The Shortest Route Solution Approach

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The shortest route problems

The Shortest Route Solution Approach

In summary, the steps of the shortest route solution method are as follows:
1. Select the node with the shortest direct route from the origin.
2. Establish a permanent set with the origin node and the node that was
selected in step 1.
3. Determine all nodes directly connected to the permanent set nodes.
4. Select the node with the shortest route (branch) from the group of nodes
directly connected to the permanent set nodes.
5. Repeat steps 3 and 4 until all nodes have joined the permanent set

The minimal spanning tree problem

The minimal spanning tree problem is to connect all nodes in
a network so that the total branch lengths are minimized

The cable television company wants to lay out the main cable
network in a way that will minimize the total length of cable
that must be installed.

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The minimal spanning tree problem

Start with any node in the network and select the closest node
to join the spanning tree. Select the closest node to any node
in the spanning area.
- We can start at any node in the network. However, the
conventional approach is to start with node 1

The minimal spanning tree problem

- The next step is to select the closest node not currently in the
spanning tree
- The addition of node 4 to our spanning tree is shown in
Figure 7.13

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The minimal spanning tree problem

Next, we repeat the process of selecting the closest node to
our present spanning tree (nodes 1, 3, and 4)

The minimal spanning tree problem

Our spanning tree now consists of nodes 1, 2, 3, and 4. The node
closest to this spanning tree is node 5

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The minimal spanning tree problem

The spanning tree now contains nodes 1, 2, 3, 4, and 5. The closest
node not currently connected to the spanning tree is node 7

The minimal spanning tree problem

This same minimal spanning tree could have been obtained
by starting at any of the six nodes other than node 1.

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The minimal spanning tree problem

In summary, the steps of the minimal spanning tree solution
method are as follows:
1. Select any starting node (conventionally, node 1 is selected).
2. Select the node closest to the starting node to join the
spanning tree.
3. Select the closest node not currently in the spanning tree.
4. Repeat step 3 until all nodes have joined the spanning tree.

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The maximal flow problems

The maximal flow problem is to maximize the amount of flow
of items from an origin to a destination.

The maximal flow problems

The first step in determining the maximum possible flow of
railroad cars through the rail system is to choose any path
arbitrarily from origin to destination and ship as much as
possible on that path

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The maximal flow problems

Select other feasible paths arbitrarily and determine maximum

flow along the paths until flow is no longer possible

The maximal flow problems

Now, we arbitrarily select another path. This time, we will choose

path 1–3–6, with a maximum possible flow of six cars

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The maximal flow problems

The available flow capacity along the path 1–3–4–6 is one car,
as shown in Figure 7.22. This increases the total flow from 14
cars to 15 cars.

The maximal flow problems

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The maximal flow problems

In summary, the steps of the maximal flow solution method:
1. Arbitrarily select any path in the network from origin to
destination.
2. Adjust the capacities at each node by subtracting the maximal
flow for the path selected in step 1.
3. Add the maximal flow along the path in the opposite direction
at each node.
4. Repeat steps 1, 2, and 3 until there are no more paths with
available flow capacity

The Monte Carlo Model

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Thank you

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