MANAGEMENT SCIENCE

2nd SEMESTER | A.Y. 2022-2023

Alyssa Ashley C. Tuballes

Introduction to Management Science  Instead of harming other people, try to help

Management – it begins with having a goal. It is the planning and them in the process of achieving your
implementing strategies to achieve your objective. goals.

Elements of the Definition of Management Management Science

1. Management is a science and an art 4 Main Approaches to Management Universally Accepted Today
 Science – it can be studied
 Art – it requires human skills to apply 1. Traditional or Classical Management
 “By the book” approach.
2. Management starts with clearly identifying goals  Studying management as taught by famous figures,
 Goals should be measurable and attainable books, or traditional practices.

3. There are Areas of Consideration 2. Scientific or Quantitative Approach

 Before answering a certain question, there is always  Some goals can be solved with science or math.
factors to consider. Usually, these involves
limitations, both minimum and maximum. 3. Humanistic or Human Relations Approach
 Limitations are better if measurable.  More on people – oriented.
 It Is used if you prioritize good relationships with your
4. There are Five Functions of Management members.
a. Planning – thinking before doing
b. Organizing – the process of preparing all the 4. Modern Management
necessary resources in the plan  Advocates that the modern manager is a person
c. Staffing – finding the right people to be put on the aware of the history of management, but grounded on
right position at the right time. what are the trends of today, with good people skills,
d. Directing – Direction. It involves providing and the ability to learn and evolve to face the
Leadership, Communication, and Motivation. challenges of tomorrow.
e. Controlling – any adjustment that we make, so that
everything goes according to plan. History of Management Science

5. Management utilizes the Basic Resources  An offshoot of Scientific Management or Quantitative

 Anything that is available or can be produced that will Approach.
help us in achieving our goals.  Goals can be achieved in highly logical or scientific
 Main types of resources (6 M’s): manner, not just estimates.
 Man  Frederick Winslow Taylor
 Money  Known as the “Father of Time Study”
 Materials  His title, “Father of Scientific Management”
 Machines  Organized proper division of labor and
 Methods studied how people work and how long
 Markets they performed a task.
 Over-time pays and bonus income.
6. Resources are scarce (or limited)
 There are no such thing as unlimited resources.  Think Tanks
 Resource management is a fundamental concept of  an organization whose members were the
every leader. top authority figures of their respective
fields.
7. Management aims for Effectiveness and Efficiency  Professionals that are recruited by the
 Effective is result oriented, while efficiency is more on Allied Force during World War II to manage
the relationship between input and output. the best facilities, equipment and all the
 The goal of efficiency is to use less resources but resources needed to win the war.
achieve high results.
Modern Day Applications of Scientific Approach
8. Management's End Goal is to Achieve Objectives
 Always aim for your goals and how to achieve them. Examples of functions in business that can heavily influenced
with numerical systems:
9. Management advocates Social Responsibility 1. Financial activities like computing for profit, expenses,
 2 main elements: interest, banking, borrowing, lending, remuneration, etc.
 Achieving your objectives should happen 2. Measuring efficiency ratios in production, distribution, and
without violating the rights of others. marketing.
3. Population and market surveys, research, etc.
 MANAGEMENT SCIENCE
2nd SEMESTER | A.Y. 2022-2023
Alyssa Ashley C. Tuballes

4. Inventory replenishment and Purchasing for possible errors and will provide a basis for
5. Forecasting comparing alternative forecasts.
6. Cost-Benefit analysis 3. The forecast should be reliable. It should work
7. Accounting consistently.
8. Quality Control 4. The forecast should be expressed in meaningful units.
9. Capacity Planning 5. The forecast should be in writing.
10. Operations Technology 6. The forecasting technique should be simple to
understand and easy to use.
Forecasting
 any attempt to try and predict the future based on Steps in the Forecasting Process
quantitative means (using quantitative techniques and There are five basic steps in the forecasting process:
formulas) or non-quantitative means such as intuition,
trends (experience), facts or opinion. The main purpose 1. Determine the purpose of the forecast. What is its
of forecasting is to be prepared based on the possible purpose and when will it be needed? This will provide
future. an indication of the level of detail required in the
forecast, the number of resources (manpower,
Two Uses for a Forecast in the Production Setting of the computer time, pesos, etc.) that can be justified, and
Organization: the level of accuracy necessary.
1. To help the managers plan the system. 2. Establish a time horizon. The forecast must indicate a
2. To help the managers plan the use of the system. time limit, keeping in mind that accuracy decreases as
the time horizon increases.
 Planning the system involves long-range plans about the 3. Select a forecasting technique.
types of products and services to offer, what facilities and 4. Gather and analyze the appropriate data.
equipment to have, where to locate and so on. 5. Prepare the forecast.
 Planning the use of the system refers to short-range and 6. Monitor the forecast. A forecast must be monitored to
intermediate-range planning which involves tasks such as determine whether it is performing in a satisfactory
planning inventory and work force levels, planning, manner. If not, reexamine the method, assumptions,
purchasing and production, budgeting, and scheduling. validity of data, and so on; modify as needed; and
prepare a revised forecast.
*Forecasting is not only used to predict demand. We can also
use forecasting to predict profits, revenues, costs, productivity Approaches to Forecasting
changes, prices and availability of energy and raw materials,  Forecasts Based on Judgment and Opinion
interest rates, movements of key economic indicators and prices  Judgmental forecasts rely on analysis of subjective
of stocks and bonds. inputs obtained from various sources, such as
consumer surveys, the sales staff, managers and
Features Common to All Forecasts executives, and panels of experts. Quite
frequently, these sources provide insights that are
1. Forecasting techniques generally assume that the same not otherwise available.
underlying causal system that existed in the past will
continue to exist in the future. 1. Executive Opinions - this is a judgmental forecast
2. Forecasts are rarely perfect; actual results usually differ conducted by a small group or executives.
from predicted values. No one can predict precisely how an 2. Direct Consumer Contact Composites - this is a
often-large number of related factors will impinge upon the judgmental forecast shared by the sales staff of the
variable in question; this, and the presence of randomness, company. They are considered as a good source
precludes a perfect forecast. In short, allowances should be of information since they are the ones who are in
made for inaccuracies. constant contact with the consumers.
3. Forecasts for groups of items tend to be more accurate 3. Consumer Surveys - interviews, research,
than forecasts for individual items because forecasting questionnaires that are answered by the
errors among items in a group usually have a canceling consumers themselves.
effect. 4. Other approaches - Another approach is called the
4. Forecast accuracy decreases as the time period covered by Delphi Method. It involves managers and staff
the forecast - the time horizon - increases. completing a series of questionnaires, each
developed from the previous one, to achieve a
Elements of a Good Forecast consensus forecast.
A properly prepared forecast should fulfill certain requirements:
 Forecast Based on Time Series Data
1. The forecast should be timely.  A time-series is a time-ordered sequence of
2. The forecast should be accurate, and the degree of observations taken at regular intervals over a
accuracy should be stated. It will enable users to plan period of time (e.g. hourly, daily, weekly, monthly,
quarterly, semi-annually, annually, etc).
 MANAGEMENT SCIENCE
2nd SEMESTER | A.Y. 2022-2023
Alyssa Ashley C. Tuballes

 The data may be measurements of demand,  Thus, minor variations are treated as random
earnings, profits, shipments, accidents, output, variations, whereas larger variations as more likely
precipitation, productivity, and the consumer price to reflect "real" changes, although these too are
index. Forecasting techniques based on time smoothed to a certain degree. Averaging
series data are made on the assumption that future techniques generate forecasts that reflect recent
values of the series can be estimated from past values of a time series (e.g. the average value over
values. the last several periods). These techniques work
 Analysis of time series data can require the analyst best when a series tend to vary around an average
to identify the underlying behavior of the series. (ideal), although they can also handle step
 There can be random or irregular variations. These changes or gradual changes (upward or
variations can be described as follows: downward) in the level of the series.
1. Trend. This refers to a gradual, long-term
upward or downward movement in the data. Three Techniques for Averaging
Population shifts, changing incomes and
cultural changes often account for such 1. Naïve forecasts - The forecast for any period equals
movements.) the previous period's actual value.
2. Seasonality. This refers to short-term, regular 2. Moving averages - Technique that averages several
variations generally related to factors such as recent actual values, updated as new values become
weather, holidays, and vacations. available.
(Restaurants, supermarkets, and theaters 3. Exponential smoothing - Weighted average method
experience weekly and even daily "seasonal" based on previous forecast plus a percentage of the
variations.) forecast error.
3. Cycles. These are wavelike variations of
more than one year's duration. These are 4 Formulas in Forecasting
often related to a variety of economic,
political, and even agricultural conditions. 1. Naïve Forecasting
4. Irregular variations. These are due to unusual  Previous actual outcome.
circumstances such as severe weather
conditions, strikes, or a major change in a Example:
product or service. They do not reflect typical Period Actual Forecast
behavior and they should be clearly identified 1 45 -
from the data. 2 43 45
5. Random Variations. These are any residual 3 50 43
variations that remain after all other 4 48 50
behaviors have been accounted for. 5 55 48
6 61 55
 Techniques for Averaging
 Historical data typically contain a certain amount of 2. Moving Average (MAn) – short term period
random variation, or noise, that tends to obscure  n = no. of observation needed to start a forecast
systematic movements in the data. This  Pn = Actual Outcome ÷ n-1 = F
randomness arises from the combined influence of
many relatively unimportant factors, and it cannot Example:
be reliably predicted. Ideally, it would be desirable Period Actual Forecast (MA3)
to completely remove any randomness from the 1 45 -
data and leave only "real" variations, such as 2 43 -
changes in the demand. 3 50 -
 As a practical matter, however, it is usually 4 48 46
impossible to distinguish between these two kinds 5 55 47
of variations, so the best one can hope for is that
6 61 51
the small variations are random, and the large
variations are "real".
P4 = 45 + 43 + 50 ÷ 3 = 46
 Averaging techniques smooth fluctuations in a time
series because the individual highs and lows in the 3. Weighted Moving Average (WMAn)
data offset each other when they are combined  Uses percentages (total of 100%)
into an average. A forecast based on an average  Highest percentage for the most recent data
thus tends to exhibit less variety than the original
data. This can be advantageous because many of Example:
these movements merely reflect random variability WMAn at 60%, 30% and 10% (n = 3)
rather than a true change in level, or trend, in the
Period Actual Forecast
series.
 MANAGEMENT SCIENCE
2nd SEMESTER | A.Y. 2022-2023
Alyssa Ashley C. Tuballes

1 45 - Possible Factors Why There is still a Waiting Line

2 43 -
3 50 - 1. One reason could be that the system is underloaded, yet
4 48 47.40 we must consider the irregularity of arrivals.
5 55 48.10 2. The server may be a person, or it can be a machine.
6 61 52.4 3. The system is overwhelmed by the large demand.
P4 = 50 (60%) = 30 Queuing Theory
43 (30%) = 12.9  refers to the mathematical approach to dealing with
45 (10%) = 4.5 analysis of waiting lines. It may include identifying the
47. 40 – round off to 2 decimal places target population, the frequency of arrivals, the average
time spent on waiting, the length of time the server
4. Exponential Smoothing usually takes to entertain a customer, identifying the
 Uses a smoothing factor (α) alpha ideal number of servers to for efficiency, comparisons
 Αα can be any number from 1-100% on machines and human workforce and any
 Normally used range is 5% to 50% adjustments necessary to minimize the amount of costs
 Lower percentages are used for more stable data, higher and time spent in the system while maximizing the
percentage for erratic data (malikot) number of entertained customers and eventually
 First forecast is naïve maximizing profits.
 Error – Actual - Forecasting
 Pn = last forecast + (α) (last error) A Simple Queuing System

Example:
Period Actual F (α=15%) Error
1 45 - -
2 43 45 (-2)
3 50 44.70 5.3
4 48 45.50 3.5
5 55 45.88 9.12
6 61 47.25 13.75
Characteristics of a Queuing System
Pn = 45 + (0.15)(-2) = 44.70
1. Population Source
Mean Average Deviation  This characteristic refers to the possible number of
 MAD = ∑ /e/ people that will pass through the system.
N  There are two basic types of population sources:
 /e/ - difference between actual and forecast  Finite Population Source. The server has a clear
 N – number of /e/ idea of the maximum number of people, items or
customers that will go through the system.
Period Actual Forecast /e/  Infinite Population Source. The population source is
1 45 - either unlimited or indeterminable.
2 43 45 2
3 50 43 7 2. Number of Servers
4 48 50 2  This refers to the number of Channels (people or
5 55 48 7 workstations) that can entertain customers. There may
6 61 55 6 be one or more servers.
∑ = 24  Single Channel, Single Phase.
MAD = ∑ 24
5
= 4.8

Waiting Lines  Single Channel, Multiple Phases.

 A Waiting Line or Queue is an ordered set of people,
items or tasks set to be taken cared of based on a system
of prioritization depending on the server's policies and/or
procedures.
 A Queuing System refers to an organized set of activities,  Multiple Channels, Single Phase.
elements, facilities, workstations and people designed to
handle and satisfy a queue of people, items or tasks.
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2nd SEMESTER | A.Y. 2022-2023
Alyssa Ashley C. Tuballes

 Multiple Channels, Multiple Phases. 1. Single Channel, Exponential Service Time. The server is
human, therefore performs services at an average rate.
2. Single Channel, Constant Service Time. The server is a
machine, therefore performs services at a constant rate.

3. Arrival Patterns
 This refers to the regularity or irregularity of intervals
between the entry of people, items, or tasks into the
queuing system. Some arrivals can be very regular and
controlled while some arrivals may be completely
random or unpredictable.

4. Service Patterns
 Refers to the methodology used by the organization to
entertain customers and the time spent entertaining
each customer.

5. Queue Discipline
 This refers to the order of priority on how people, items
or tasks are entertained.
 First-In, First Out. The most common type, where
people exert more effort to be earlier so that they can
be entertained first.
 First-In, Last Out. More common for items. For
example, the first test paper passed by a student
would likely end in the bottom of the pile, whereas
the last student to pass would have his/her paper
end up on top, making it most likely the first paper to
be checked.
 No particular order. Here, first or last doesn't
necessarily mean the same order but is based more
on special factors.
Inventory Management
Measures of System Performance  An Inventory is a set or collection of items that are
To evaluate a queuing system as to effectiveness and efficiency, consumable through sales (as in goods for sale) or
a manger typically looks at several areas through the regular operations of an organization (as in
office supplies such as pencils and papers).
1. The average number of customers waiting. At any given
time, there should be a reasonable number of people  The usual Inventory is composed of the following
waiting in line. items:
2. The average time customers spend waiting in line and time 1. Raw materials and purchased parts - these includes
spent during servicing. There are lines. where it is easy to bought items that will be part of the finished product
set appointments (waiting time is short) but the service time that the organization has not created itself.
itself is very lengthy and vice-versa.
3. System Utilization. This refers to the efficiency rating of the 2. Partially completed goods, called work in progress -
system based on maximizing its capabilities to entertain these includes items that are already processed but
more people. not yet in its final finished form.
4. The implied cost of a given level of capacity and its related
waiting line. This refers to the financial efficiency of 3. Finished goods inventories (for manufacturing
maintaining a queuing system. organizations) and/or merchandise inventory (for
5. The probability that an arrival will have to wait for service. commerce or retail stores) - these will be the items
This refers the ability of the system to avoid incoming that will be considered as the output of the
customers from being discouraged purchasing upon seeing organization for consumption of its consumers.
long lines.
4. Replacement parts, tools, and supplies
Queuing Models: Infinite Source
There are many queuing models that are available for managers 5. Goods in transit (note that this category varies
and analysts to choose from. They depend on the number of depending on the terms of the company and the
channels and the type of servers (machine vs human). customer, as in F.0.B. etc.)
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Alyssa Ashley C. Tuballes

transaction instantaneously, allowing quick and

Functions of Inventory accurate information about the available
 Inventories serve several functions, depending on the inventory on hand. This system uses universal
nature of the organization. You can imagine what product codes, more popularly known as bar
comprises the inventory of a restaurant and compare that codes.
to the inventory kept by a hospital, an appliance store, an c. Multiple Bin System - the organization keeps at
RTW factory and others. However, the important least two containers or batches of inventory
functions are the following: items. Once the first container is emptied, the
organization places orders and uses the second
1. To meet anticipated demand container as inventory while the organization
2. To smooth production requirements waits for the next batch to arrive.
3. To simplify the distribution system (as in Coca-Cola
warehouses all over the country) 2. A reliable forecast of demand that includes that
4. To protect against items going out of stock (not only indication of level of accuracy and possibility of
for your loyal customers but also as an advantage forecasting errors. - As discussed earlier, forecasting
over your competitors with under-stocked inventories) is necessary for us to have an idea on how much will
5. To take advantage of order cycles (an order cycle will be needed for us to meet demand and also indicate
be discussed later, for now, this means that the important factors such as Mean Average Deviation to
organization can minimize expenses incurred during avoid very high forecasting errors.
orders and setting up multiple batches of production
runs). 3. Knowledge of lead times and lead time variability. -
6. To hedge against sudden price increases (as in oil Lead time refers to the length of time that an order or
companies' inventories priced over a constantly process usually requires to be accomplished. Most
changing SRP) orders are not instantly sent upon order placement.
7. To permit operations and earn profit (this means Most will require an allowance of time to finish the
minimum required units by the government or order. In some cases, different suppliers would have
minimum units required in order to generate profit) different lead times, and each would have variations
or averages on their respective lead times.
 To summarize the stated reasons, a well-maintained
inventory is needed so that whenever the need arises, 4. Reasonable estimates of inventory holding costs,
the organization will have available resources. ordering costs and setup costs. -Some goods, when
Inadequate control of inventory can result to either kept for a period, incur expenses to maintain. These
understocking or overstocking of items that can result to includes electricity, manpower related expenses,
unmet demand, losses and damaged reputation not only watering, feeding, etc. These are Holding Costs.
towards consumers but also towards suppliers and even Some orders require a fixed charge per order, or
among personnel. Ordering Cost, while Set Up Costs refer to expenses
incurred in connection with preparing resources
Requirements for Effective Inventory Management before creating a batch of items (as in production).
 An organization needs to have a basis for evaluating their
respective inventory systems. To check the effectiveness 5. A classification system for inventory items. -A vast
of your Inventory Management Systems, the following collection of items that a company keeps should be
areas for evaluation are given: well organized and classified so that the operations
will go smoothly. Examples of classification methods
1. A system to keep track of the inventory on hand, for are the following:
order (next order's projected size) and in transit. -
Ideally, the organization should have a recorded a. A-B-C Approach - here, the organization assigns
system, preferably computerized, that can quickly groups into categories based on the importance
monitor the amount of inventory at any given time, for of the item or cost of the item.
better and accurate information to be used by the - For example, A items (very important), B items
managers in decision making. Here, the organization (moderately important), C items(average), D
may create an Inventory Counting System such as: items (less than average important) and E items
(expendable). This system is just the same as
a. Periodic Inventory System - the organization classifying by First Class, Second class, Third
checks inventory periodically (weekly, monthly, Class; Economy, Cabin, Executive; XQ, Premium,
semi-annually, etc) and creates the next order Fancy; etc.
based on the information derived. Examples of
these include restocking your sari-sari store or b. Alphabetical Approach - simply put the items are
semi-monthly restocking your groceries. named and arranged alphabetically.
b. Perpetual Inventory System - the organization
uses computers to check and record every
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Alyssa Ashley C. Tuballes

c. Numerical Approach - Different from the ABC

Approach, this system can simply put numbers o
represent groups in no order of importance.
- For example, a shoe store may categorize at 1 =
ladies' shoes, 2 men's shoes, 3= socks etc.,
under which 2.1 can represent men's formal
shoes, 2.2 = men's flat shoes, etc.

d. Mnemonic Approach - Same as Numerical

Approach, but instead uses symbols such as
shapes, Greek characters, etc.
e. Combination Approach - Combines any of the
aforementioned techniques.

How Much To Order: Inventory Replenishment Where:

 Replenishment refers to the activities of the organization  A = The Y axis represents the Quantity of items under
connected to restocking their inventory. consideration
 B = Usage rate, the speed of how many items are being
 Under this, there are two types of replenishment: consumed periodically
1. Instantaneous Replenishment - From the word  C = The Quantity of goods on hand. Notice that as Time
"instant", this type of replenishment refers to the passes, this amount decreases
restocking of inventory through ordering a batch of  D = The point in time when the order is received
items from an external source. For example, an  E = The point in time when orders will be placed
organization may need tires for the motorcycle that  F =The point in time when the next order is received
they manufacture. Here, they order tires from a  G = The EOQ, the ideal amount to be ordered per period
separate supplier.  H = The Lead Time, the allowance needed by the supplier
to send their items
2. Incremental Replenishment - Increment here means  I = The X axis represents the Time
gradual or step by step. Here, the organization  J= The Order Cycle. The length of time between orders.
restocks its inventory by creating the demanded Note that this is just the same as the length of time between
items itself. For example, the motorcycle receiving orders
organization also has a separate division that
creates tire. This division is a part of the Formulas:
organization itself.  Annual Carrying Cost =(Q/2)H
 Annual Order Cost =(D/Q)S
Economic Order Quantity Model (EOQ)  Qo = √(2DS)/H
 We have mentioned that keeping an inventory also has its  TC = Annual Carrying Cost + Ordering Cost
costs. An organization aims to maximize profit by = (Q/2)H + (D/Q)S
maximizing revenue yet minimizing costs and this area is  Length of Order Cycle: OC = (Qo/ D) (number of work days
no exemption. We can identify the ideal amount to be per year
ordered that will al. meet demand and b). minimize all  Number of Order per Year: TO = D/Q
connected costs. We call this ideal amount as Economic
Order Quantity. For each type of replenishment, we have a
model for solving this amount. Where:
 Q = Ordering Quantity in units
 Before using this model, several assumptions must be met:  H = Holding or Carrying Cost per unit
1. Only one product is involved.  S = Ordering Cost per batch/delivery
2. Annual demand requirements are known.  TC = Total Cost
3. Demand is spread evenly throughout the year so that  OC = Order Cycle
the demand rate is reasonably constant.  TO = Total Orders
4. Lead time does not vary.  Qo = Economic Order Quantity
5. Each order is received in a single delivery.  D = Annual Demand
6. There are no quantity discounts.
7. Ordering cost is constant, regardless of the ordered
amount of units. Important points to remember:
1. The units of D and H must be the same (e.g. months, years,
Instantaneous Replenishment days, etc). Depending on the problem's given units,
conversion might be necessary so that both notations would
have the same units.
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Alyssa Ashley C. Tuballes

2. Ordering Cost is represented by "S" and not "o" because, takes significant investment and establishing there will
under incremental replenishment, the equivalent of ordering affect both short term operations and long-term growth.
cost is "Setup Costs”, hence "S".
3. Total cost here covers only the total ordering cost and The main aim of choosing a business location is to achieve a
carrying cost. balance between three related objectives:
4. At Qo, the total cost is at its lowest  The costs of the operation
5. At Qo, annual carrying cost should be equal to the annual  The customer service that the business wants to provide
ordering cost.  The potential revenues that can be achieved from the
6. The number of operating days varies from organization to location
organization
The Five Dimensions of Environmental Scanning
1. Socio-Cultural Environment. The decision - maker has to be
aware of the personality of the people. He /she has to be
aware of the following:
a. The values and beliefs practiced by the community
b. The influence of religion in the area
Incremental Replenishment c. The history of the area
d. The traditions being celebrated by the locals
e. The mentality of the locals
2. Economic Environment. The decision-maker also has to be
aware of the balance in the trade market of the area.
He/she should be aware of the following aspects:
a. Which commodities are popular in the area
b. Which commodities have failed in the area
c. Which commodities are yet to be offered in the area
d. Which commodities are requested by the locals but
yet to be offered
e. The presence of competitors and / or substitute
commodities
f. The standard of living of the average citizen 8. The
g. Population size
h. The purchasing power and spending habits of the
citizens
i. The degree of influence of middlemen

3. Legal - Political Environment. This refers to the influence of

the government over businesses in the area. Here, the
decision -maker has to consider the following:
a. Local government requirements for building and
operating businesses
b. Minimum wage rates of the locality
c. Tariffs and taxes on the different types of businesses
d. Local and national laws governing your chosen type of
business
e. Zoning if applicable (industrial zone, residential zone
and commercial zone)
Environmental Scanning and Location Decisions
Environmental Scanning 4. Technological Environment. The presence or absence of
 This refers to the study of an area under consideration. necessary technology and resources in the area. Some
There are several important aspects that the decision - areas are the following:
makers must look at before choosing a particular location. a. Availability of sufficient water
One must gather all the necessary and available b. Availability of adequate electricity
information to be aware of the advantages and c. Modes of communication
disadvantages of each optional location to identify the d. Modes of transportation
optimal location. e. Availability of equipment and parts when needed
f. Availability of raw materials
Location Decision g. Availability of suitable manpower
 This refers to the process of choosing the best location for
the establishment. This is important since choosing a site 5. Geographical Environment. The physical characteristics of
the environment. Here, factors that can be considered are:
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Alyssa Ashley C. Tuballes

a. Climate conditions
b. Earthquake potential 2. Threat of established Rivals. The level of competition
c. Distance between the establishment and its between you and your competitor/s.
customers  For example, coke and pepsi, globe and smart, google
d. Distance between the establishment and its personnel and yahoo, shell / caltex and petron. However, there
e. Distance between the establishment and its sources can be a high level of market sharing but a low level of
of raw materials / suppliers competition, such as common sellers of rice,
f. Difficulty in transporting resources from one location vegetables, purified water stations, hardware items,
to another bond paper, etc.
g. Distance of the establishment from significant
landmarks 3. Threat of New Entrants. This refers to how easy or difficult it
is for new players to enter the competition.
Factors to be Considered in Choosing the Proper Location  For example, it is difficult for a new telecommunications
1. National Level refers to choosing the country on where to company to join Smart and Globe. But it would be easy
set up your establishment. The concerns are usually the for a new internet café, parlor or restaurant to open in
following: an area.
a. Laws on foreign investors. Ex. tariffs, legal and illegal
commodities, salary concerns, etc. 4. Bargaining Power of Suppliers. This involves how influential
b. Language Barrier. Difficulty in communicating with the the suppliers are in pricing decisions. There are some
locals. companies that are at the mercy of their supplier's
c. Cultural Barriers. Differences in beliefs and practices. demands. They have no choice but to follow the prices set
2. Regional Level refers to the particular area of the country by the suppliers, or else settle for lesser quality. However,
wherein the establishment is to be created. The usual there are businesses that dictate the prices that suppliers
concerns are: should set, such as rice grains, vegetables, or fish sold in
a. Safety issues. (Is the area free from crime, rebels and the market.
others?)
b. Political issues (What is the political environment in 5. Bargaining Power of Customers. The ability of customers to
the area?) affect the selling price of the establishment. Haggling can
c. Local laws (Are there city ordinances that might be done not only in a small scale but also in a community
concern your establishment?) level. If the public shows its intent to demand lower prices
d. Degree of development (Are there amenities such as or else go to another seller, then the business should
hospitals, schools, fire departments? Is there sufficient consider lowering their prices. On the other hand, there are
electricity and water in the area?) businesses whose buyers have no say in how high or low
e. Availability of Manpower (Can we hire qualified prices will be set.
personnel from the area?)
f. Economic Status. (Do the locals have the purchasing Forward -Looking Location Decisions:
power suited to your commodities?)  An organization will rarely stay the same forever. There
will be changes, both internal and external, that will force
3. Site Level refers to the main area or lot wherein the a reorganization of the business structure and operations.
establishment will be built. The usual concerns are: In tune with the changes and adjustments, the location of
a. Transportation Costs (How difficult is it to transfer the establishment is not excused to change. Here are
resources and outputs from one area to another?) some of the major decisions in line with the future of the
b. Exposure to traffic. (Is your establishment accessible company.
or in constant view of the public?)
c. Nearness to Suppliers. (Do you have a speedy and 1. Expanding the establishment but within the same
steady source of inputs?) site / lot. Some establishments have large considered.
d. Nearness to Consumers. (How near / far is your Additional amenities and facilities are easier to build if
establishment from the intended customers?) the lot is still lot sizes yet small structures. This can be
e. Nearness to Competitors. (How near / far is your advisable since the possibility of growth should also
nearest competitor?) be underdeveloped. However, if the lot size capacity
f. Maintenance expenses. (Are occupancy costs is already maximized, the company must create
reasonable?) significant decisions if they plan on expanding further.

MICHAEL PORTER'S FIVE FORCES MODEL 2. Expanding the establishment by adding branches. An
1. Threat of Substitute Products and Services. There can be establishment that should be small on average can
commodities (especially cheaper ones) that can be used in expand further by adding more of these structures
lieu of our commodity. across strategic locations. Reasons for adding
 For example, beer drinkers unable to find beer now can branches can be:
buy brandy instead. Softdrink buyers can settle for iced a. Trying to reach a bigger market
tea. Chao Long customers can also buy batchoy. b. Accommodating an increasing market
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Alyssa Ashley C. Tuballes

c. Competitive advantage / blocking

d. Offsetting losses from other branches Leasing Commercial Space
 Advantages
 However, consider the following: 1. No down payment. While a lease may require a
a. You will have at least twice the managerial deposit, the cash outlay is significantly less than a
decisions to worry about typical down payment requirement for financing a
b. The market increase may only be temporary purchase. That can have a positive impact on your
c. You will incur significant expenses in the building cash flow, and the amount of money in your
and operating aspects company.

3. Moving from one location to another. There are many 2. Tax deduction. Each of your lease payments is a
possible reasons for leaving you previous site and business expense that will reduce your taxable
moving to another: income and lower your tax payments.
a. Population shifts. The target market has moved
from one location to another. 3. No repairs, maintenance costs. Depending on your
b. Increase in expenses. The previous site might lease terms, you may not have to spend money
have gotten too expensive to keep in terms of repairing and maintaining it. Those can require
rent and / or taxes significant time and expenses.
c. Need for a bigger facility. The previous site might
be too small to house your establishment's 4. Easier to qualify. Many times, obtaining a lease
growth does not require a credit report. This makes
d. Need for a smaller facility. The previous site qualifying for a lease easier.
might be sufficient before but decrease in
demand may have made it too big for your liking.
 However, consider the following: 5. Quicker, with more choices. In most markets, there
a. You might need to let go of your present employees are more leasable commercial sites than buildings
b. There will be significant losses between transitions for sale. Plus, the leasing process takes less time
from one location to another than purchasing, so you can move your business
c. There will be significant expenses associated with the more quickly.
transition
d. Because of uncertainty, the new location may not  Disadvantages
yield the expected effects 1. Lease increases. Many leases are set up to allow
e. There will be adjustments, both professional and annual rent increases, while others often increase
personal, when moving. costs when your lease expires and needs to be
renewed.
4. The option of doing nothing. In any form of decision - making,
there is always that option of doing nothing. Some of the reasons 2. Lease renewal ends - change of business location.
are: The owner of the building may decide- for various
a. Sudden business growth may only be temporary reasons -not to let your business renew your lease
b. Sudden business losses may also be temporary when it expires. This will force your company to move
c. Some problems may go away on its own to a new location. This can be costly to your business
d. The option of doing the first three options may not be and may impact your customers.
worth the effort
3. No equity in building. By not owning the building you
Leasing VS Owning Commercial Space lease, you have no equity in it. As the value of the
 The overall goal of most businesses is to grow and building increases, there is no capital growth benefit to
prosper. As your business gets bigger, at some point you your company.
may need to expand your space and choose the best way
for your company to accomplish that growth. 4. Little control. With many leases, you have little control
over needed property improvements, maintenance,
 There are two main approaches: leasing space or repairs, and other factors. In such cases, you must
purchasing a building. Either method may be a good way rely on the building owner to make the decisions.
to go about getting commercial space. The right choice
ultimately depends on your current business and finances 5. Less space for growth. The space you lease is a
combined with where you want to take your company in specific square footage, and usually cannot be
the future. To make your best decision, it is helpful to expanded because of other companies leasing space
consider the advantages and disadvantages each in the building. Therefore, it is important to lease
approach offers and relate them to your business enough space and/or get an option to lease additional
situation. Here are some of the advantages and space that allows for future growth.
disadvantages to consider.
Buying Commercial Space
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Alyssa Ashley C. Tuballes

 Advantages traffic and thus, negatively impacted sales. It is

1. More potential fixed costs/no rent. By purchasing a important to choose your building in an area you feel
building, you don't pay increasing rent, and you may confident will continue to do well in the future.
be able to get a fixed-rate on up to 80 percent of the
mortgage loan (USDA, SBA guaranteed loans) so that 5. Finding the right building. One of the biggest
most of your monthly payment doesn't go up. Also, challenges is finding a building that fits your company
you can sometimes refinance at a lower rate and and future plans and is located where you want to be.
reduce the cost. Finally, when the mortgage is paid It can take a long time to find the right building, and
off, you eliminate its monthly payment. that can create a lengthy delay in moving and growing
your company.
2. Tax deductions. As an owner, you can usually deduct
depreciation and the mortgage interest payments,  As you can see, there are significant advantages and
which reduce your tax liability. In addition, you can disadvantages to both leasing and buying commercial
write off repairs, maintenance, taxes and many other property for your business. However, by understanding and
costs. For improvements, you also gain depreciation evaluating them based on your specific business, you'll be
tax advantages. able to make a better choice.

3. More space, more income. Purchasing a building DECISION THEORY

tends to give you more space for future growth and
can provide your business with a permanent location. Decision Making
This helps your company build its location value to its  In the practice of management, it is very common to
customers. Plus, there may be additional space encounter problems or goals that can be achieved through
available you can lease to other companies, which many ways. It is our task to choose the most viable solution
generates income and may even cover your full to these problems. The process of choosing from among
mortgage costs. alternatives the best solution to achieve a goal or objective
is called Decision – Making.
4. Investment/capital gain. Chances are, over time the
value of your building will grow. This adds to your  The decision – making process is a logical way of analyzing
company's capital valuation. And should you choose the situation and coming up with feasible soultions. The
to sell the building you could realize that gain as traditional way is usually consisted of the following steps:
income.
Steps in the Decision – Making Process
5. Total control. As the building owner, you can make the 1. Identify and Define the Problem
decisions on how to improve, alter, expand and
enhance the building. This control can have a positive 2. Generate and Evaluate Alternative Courses of Action
impact on enhancing the building to improve the  Evaluating the Alternative may be done through
reputation and customer viewpoint of your business. consideration of the following:
a. advantages and disadvantages of each
 Disadvantages b. conducting a SWOT analysis of each
1. Initial costs. Buying a building cost substantially more c. Meeting the following criteria:
initially than leasing space. You have to pay for 1. Benefits
property appraisal and make a large down payment 2. Costs
for the mortgage. As a result, it is important for your 3. Timeliness
company to have sufficient excess cash on hand and 4. Acceptability / Feasibility
not use cash required for operations for this 5. Ethical Soundness
investment.
3. Decide on a preferred Course of Action
2. More responsibility. When you own a building, you're
responsible for all aspects, including financial 4. Implement the Decision
management, repairs and maintenance. This can take
a great deal of extra time from you and reduce your 5. Evaluate the Results
focus on your business.
The Role of Information in Decision – Making
3. Cost increases. You can expect your building's  The best alternative will be the one that yields the best
property taxes and insurance costs to rise each year. results. However, each alternative will have its strengths,
This adds to your company's expenses and can have weaknesses, opportunities and threats. Knowing everything
an impact on your cash flow. there is to know about the possibilities and consequences
of each option can give a manager the best insight into the
4. Location downgrades. Over the years, commercial most viable solution.
property areas have in certain instances declined in
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Alyssa Ashley C. Tuballes

 The manager has to gather the necessary data on the  If an event has several possible outcomes with probability
options if he / she wishes to get a positive result. For P1 , P2 , P3 , …. Pn and if X denotes a discrete variable
information to be considered as “good”, the following criteria which can assume the values X1 , X2 , X3 , …. Xn then
has to be met:
EV = P1 (X1) + P2 (X2) + P3 (X3) + … + Pn (xn)
Characteristics of “Good” Information
1. Timely – the data should be in tune with the present  Expected value is sometimes negative, that is, if the person
situation. There should also be enough time to utilize the will tend to lose instead of gain. This is normal if the event
data fails and incurs losses instead of profits.
2. High – Quality – the data should be accurate, especially
when dealing with numerical figures. Example 1:
3. Complete – the data should contain all the pertinent  A coin is tossed. If the coin lands heads, Mr. A will receive
information that is needed. P6.00, and pay P4.00 if it lands tails. Find the EV.
4. Relevant – the data should have a logical connection with
the task at hand Solution:
5. Understandable – the data should be comprehensive,  There are only 2 possible outcomes, heads or tails, the
especially to the decision – maker. probability of heads is ½ , and that of the tails is also ½ , so
6. Reliable – the data should come from a legitimate source.
Let P1 = heads P1 = ½ X1 = 6
Types of Decision – Making Approaches P2 = tails P2 = ½ X2 = - 4
1. Programmed Decision – an automatic choice, usually
because of repetitive scenarios. Then EV = ½ (6) + ½ (-4)
2. Non-programmed Decision – a choice that takes longer to = 3 + (-2)
make, due to unfamiliar situations. EV = P1.00
3. Classical Decision – Model – making a decision by
performing the decision – making process discussed  Since the EV is positive, it means that the game would be
earlier. favorable to Mr. A if he decides to play it. Now if he is
4. Optimizing Decision – choosing the best alternative that will supposed to choose among this game and several games,
yield the best results. just solve for the EV of each game and choose the highest
5. Satisficing Decision – choosing the first satisfying and EV value, since it has the best possibility of returns.
sufficient option that comes.
6. Behavioral Decision – the decision is influenced by the Example 2:
mental status or personality of the decision – maker.  The PSA construction operations manager has to decide
whether to accept a bid or not. If the manager accepts the
DECISION THEORY bid, the construction company may gain P3.5 million if it
 Mathematical Expectation (ME) or Expected Value (EV) succeeds, or lose P2.5 million if it fails. The probability that
it will succeed is 30%. Find the expected value if the
 Mathematical Expectation or Expected Value is the product company accepts the bid.
of the probability that an event will occur and the amount to
be received upon such an occurrence. Solution:
 Note that the only probability given is 30%, which
The Concept of Probability represents the probability of success. This means that the
 It is more often that we are compelled to predict the probability of failure is 70%.
outcome of future events based on the repeated
experiments of observations of the same events under the Let P1 = success P1 = .30 X1 = 3.5 million
same conditions. The probability of occurrence of the event P2 = failure P2 = .70 X2 = - 2.5
(called success) and the probability of non-occurrence of million
the event (called failure) is equal to 1 or 100%. The
probability of an event ranges from 0 to 1, the probability of Then EV = .30 (3.5) + .70 (-2.5)
success is 1 or 100%; if the event cannot occur, its = 1.05 + (-1.75)
probability is 0. EV = - P 0.7 million or – P700,000 (mine)

Computation of Mathematical Expectation or Expected Value  A negative EV means that it would be a bad decision to try
 Let P represent the probability value and X represent the to bid, since there is a much larger possibility of losses and
amount of money. The Mathematical expectation is virtually no pay off. If there are other projects to bid for, just
computed as solve for the EV of each and choose the highest value,
EV = P(X) provided it is positive. If all projects yield a negative EV,
then do not bid on any of them.

The Decision – Making Environments

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Alyssa Ashley C. Tuballes

 In any managerial situation, the most important factor is

information. We have already discussed how factors under Solution:
consideration affect our decision – making. Companies a. Maximax.
spend a significant amount of money to invest in data  The decision – maker sees that the most optimistic
gathering, just so they have a higher probability of success. payoff is 900 thousand. He/she will choose to build a
In management, there are three kinds of decision – making large capacity facility.
environments: Decision – Making under Certainty,
Uncertainty and Risk. b. Maximin.
 The decision – maker sees that there are two worst
Decision – Making Under Certainty case scenarios (low demand): 300 thousand for small
 This decision – making environment occurs when the capacity and 180 thousand for large capacity. He/she
manager or decision – maker is aware of all the necessary would prefer the best of the worst, therefore choose a
information. This is the easiest situation for decision – small capacity facility.
making. For example, lending money at a fixed interest rate
will clearly state the income, whether the amount will be c. Laplace.
paid in full or in annuities.  Using Laplace, the decision – maker will assign
“weights” for each value. There are no given
Decision – Making Under Uncertainty probabilities for low or high demand, therefore he/she
 This decision – making environment happens when some will just assume they have equal probabilities of
information is not present. We assume that the managers occurring, and assign a 50 – 50 possibility. Using the
can list the possible events but cannot estimate their same concept as EV, we have:
probabilities. Perhaps a lack of experience makes it difficult
for the firm to estimate probabilities. The following Alternative Weighted Payoff Expected Value
conditions will be used in decision rules: Small Facility (Income) 0.5 (300) + 0.5 (370) 335
Large Facility (Income) 0.5 (180) + 0.5 (900) 540
 Depending on the philosophy of the manager, he can
choose from the following approaches:  Since P540 thousand is the higher weighed payoff, the
a. Maximax – choose the alternative that is the “best of decision – maker will choose to have a large capacity
the best”. Look at the highest possible yield from all facility.
the options and choose that alternative. This is the
most optimistic approach. d. Minimax Regret.
b. Maximin – choose the alternative that is the “best of  To solve this problem, find the difference between a given
the worst”. Look at the best of the worst possible payoff and the best payoff in its column.
payoffs. Regret
c. Laplace – choose the alternative with the “best Alternative Low Demand High Demand Maximum
weighted payoff”. Compute the expected value based Regret
Small Facility (Income) 300 – 300 = 0 900 – 370 = 530 530
on equal probabilities (averaged). Large Facility (Income) 300 – 180 = 900 – 900 = 0 120
d. Minimax regret – choose the alternative with the 120
“best worst regret”. This approach seeks to minimize
the difference between the given payoff and the best  The highest regret happens when you build a small
payoff for each state of nature. capacity facility, but demand becomes high. The decision
maker would choose a large capacity facility because it has
Example: the lowest regret.
 Let’s say that a firm produced the following table on
capacity planning. It plans to choose which alternative is the Decision – Making Under Risk
better one:  This decision – making environment occurs when there are
probabilities involved for each alternative. This situation
Possible Future Demand uses the EV approach on each alternative.
Alternative Low High
Small Capacity (Income) 300k 370k Example:
Large Capacity (Income) 180k 900k  Using the same table as above, find the better alternative if
the company determines that there is a 40% probability of
 The firm is trying to choose from building a small capacity low demand and a 60% probability of high demand for both
facility or a large capacity facility. In any case, market small and large facilities. (Note that in some problems, each
demand can vary from low to high. If the firm chooses to alternative can have a different set of probabilities for each
build a small capacity facility, payoff can be 300 to 370 respective option).
thousand pesos. While a large capacity facility can range
from 180 to 900 thousand pesos. Determine the best Solution:
alternative, based on maximax, maximin, laplace or Possible Future Demand
Alternative Low High Expected Value
minimax regret.
Small Facility 300 370 0.4 (300) + 0.6 (370) =
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Alyssa Ashley C. Tuballes

(Income) 342
Large Facility 180 900 0.4 (180) + 0.6 (900) = Drawing a Decision Tree
(Income) 612
 You start a Decision Tree with a decision that you need to
make. Draw a small square to represent this towards the
 The decision maker would prefer to have a large facility
left of a large piece of paper.
since it has the higher expected value.

DECISION TREE ANALYSIS

 A decision tree is a decision support tool that uses a tree-
like graph or model of decisions and their possible
consequences, including chance event outcomes, resource  From this box draw out lines towards the right for each
costs, and utility. It is one way to display an algorithm. possible solution, and write that solution along the line.
Keep the lines apart as far as possible so that you can
 Decision trees are commonly used in operations research, expand your thoughts.
specifically in decision analysis, to help identify a strategy
Amusement Booth
most likely to reach a goal, but are also a popular tool in
machine learning.
Snack Kiosk
A decision tree consists of 2 types of nodes:
1. Decision nodes - commonly represented by squares or
rectangles  At the end of each line, consider the results. If the
2. Chance nodes - represented by circles result of taking that decision is uncertain, draw a small
circle. If the result is another decision that you need to
 Decision Trees are excellent tools for helping you to choose make, draw another square. Squares represent
between several courses of action. They provide a highly decisions, and circles represent uncertain outcomes.
effective structure within which you can lay out options and Write the decision or factor above the square or circle.
investigate the possible outcomes of choosing those If you have completed the solution at the end of the
options. They also help you to form a balanced picture of line, just leave it blank.
the risks and rewards associated with each possible course
of action.
Amusement Booth
Both options would result to an uncertainty, there is a
possibility of low or high output. Since there are
probabilities, we shall use a circle. Use a square if
Snack Kiosk the options will require another choice (i.e. if you
choose to build an amusement booth, you need to
decide among three types of games).

Let’s take the following example:  Starting from the new decision squares on your
 A student is considering on either opening an amusement diagram, draw out lines representing the options that
booth or a snack kiosk during the Intramural Meet. If she you could select. From the circles draw lines
opens a kiosk, there is a 70% chance of success which can representing possible outcomes. Again make a brief
earn her maximum revenues of P5,000. However, she note on the line saying what it means. Keep on doing
expects to spend P3,000 in goods and other expenses. If this until you have drawn out as many of the possible
she opens an amusement booth, there is a 50% chance of outcomes and decisions as you can see leading on
success which can earn her P4,000 and she only has to from the original decisions.
spend P1,000 on investment. If the worst-case scenario is
zero customers, which is the better option?
Amusement Booth Low (failure)
 To better see the problem, it would be easier to create a
table listing all values: Snack Kiosk High (success)

Payoff Low (failure)

Alternatives Low High

Amusement Booth -P1,000.00 P4,000.00  Once you have done this, review your tree diagram.
50% 50% Challenge each square and circle to see if there are
Snack Kiosk -P3,000 P5,000.00 any solutions or outcomes you have not considered. If
30% 70% there are, draw them in. If necessary, redraft your tree
if parts of it are too congested or untidy. You should
 Note that the probabilities for zero customers (therefore now have a good understanding of the range of
incurring losses from the investment) are not given. The possible outcomes of your decisions.
values 50% and 30 % are derived from the possibility of
success (as discussed earlier, each event should have a Evaluating Your Decision Tree
total of 100% probability).
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Alyssa Ashley C. Tuballes

 Now you are ready to evaluate the decision tree. This is

where you can work out which option has the greatest
worth to you. Start by assigning a cash value or score to
each possible outcome. Estimate how much you think it
would be worth to you if that outcome came about.

 Next look at each circle (representing an uncertainty point)

and estimate the probability of each outcome. If you use
percentages, the total must come to 100% at each circle. If
you use fractions, these must add up to 1. If you have data
on past events you may be able to make rigorous estimates
of the probabilities. Otherwise write down your best guess.

Calculating Tree Values

 Once you have worked out the value of the outcomes, and
have assessed the probability of the outcomes of
uncertainty, it is time to start calculating the values that will
help you make your decision.
 Start on the right hand side of the decision tree, and work
back towards the left. As you complete a set of calculations
on a node (decision square or uncertainty circle), all you
need to do is to record the result.
High (success)
P4,000.00
50%
Amusement Booth Low (failure)
1,500 (- P1,000.00)
50%
2,600
Snack Kiosk High (success)
2,600 P5,000.00
70%
Low (failure)
Conclusion 30%
(-P3,000.00)

 Choosing a snack kiosk is the better alternative since it

provides a better Expected Value (EV).

Computation
P4,000(0.50) + (-P1,000)(0.50) = 2,000 – 500 = P1,500.00
P5,000(0.70) + (-P3,000)(0.30) = 3,500 – 900 = P2,600.00