Chapter 1
Introduction to Quantitative Analysis
Quantitative Analysis:
Quantitative Analysis is the scientific approach to managerial decision making. This
field of studies has several different names as
Quantitative Analysis
Management Science
Operation Research
This approach starts with data as row materials of a factory, these data are
processed into information that is valuable to people making decision. This
processing and manipulating of row data into meaningful information is the heart of
Quantitative Analysis.
Example 1: we might consider several different investment alternatives as
Certificates of deposit at a bank
Investment in the stock market
An investment in real estate
We can use Quantitative Analysis to determine how much our investment will be
worth in future when deposited at bank at a given interest rate for a certain number
of years.
Example 2: Quantitative Analysis can also be used in computing financial ratios
from the balance sheet for several companies whose stock we are considering.
Quantitative Analysis Approach:
Quantitative Analysis Approach consists of seven steps as
1. Defining a problem
2. Developing a model
3. Acquiring input data
4. Developing a solution
5. Testing the solution
6. Analyzing the result and
7. Implementing the result.
1.Defining a problem
This statement will give direction and meaning to the following steps.
The first step in the quantitative approach is to develop a clear, concise
statement of the problem.
In many cases, defining the problem is the most important and the most
difficult step.
It is essential to go beyond the symptoms of the problem and identify the true
causes.
One problem may be related to other problem; solving one problem without
regard to other related problems can make the entire situation worse.
Thus, it is important to analyze how the solution to one problem affects other
problems or the situation in general.
2.Developing a model
Once we select the problem to be analyzed, the next step is to develop a model.
Simply stated, A model is the mathematical representation of a situation.
Of course, there are many other types of model as
Architects use a physical model of a building
Engineers develop scale model of chemical plants
A schematic model is a picture, drawing, or chart of reality
A Mathematical Model is a set of mathematical relationship. In most cases, these
relationships are expressed in
equation and inequalities
In spreadsheet model that computes sums, average, or standard
deviation
Most of the models contain one or more variable and parameter
A variable is a measurable quantity that may vary. Example: How many inventory
items would be ordered?
Variable may be controllable or uncontrollable. A controllable variable is called
decision variable.
A parameter is a measurable quantity that is inherent in the problem. Example: the
cost of placing an order for more inventory item.
In most cases, variables are unknown quantities, while parameter that is already
known.
3.Acquiring input data:
Once we have developed a model, we must obtain the data that are used in model.
Obtaining accurate data for the is essential because improper data will result
in misleading result.
There are a number of sources that can be used in collecting data.
Example 1: Company reports and documents can be used to obtain the
necessary data
Example 2: Another source is interviews with employees or other persons
related to the firm.
These individuals can sometimes provide excellent information, and their
experience and judgement can be invaluable. For instance, a production
supervisor might be able to tell a great degree of accuracy the amount of time
it takes to produce a product.
4.Developing a solution:
Developing a solution involves manipulating the model to arrive at the best/optimal
solution to the problem.
This requires that an equation be solved for the best decision
We can use trial and error method, trying various approaches and picking the
one that results in the best decision.
The complete enumeration method can be used as to try all possible values for
the variables in the model to arrive at best decision.
The input data and model determine the accuracy of the solution.
5.Testing the solution:
Testing the data and model is done before the result are analyzed
Testing the input data and the model includes determining the accuracy and
completeness of the data used by model
Inaccurate data will lead to an inaccurate solution
One method of testing the data is to collect additional data from different
sources.
If the original data were collected using interviews, perhaps some additional
data can be collected by direct measurement or sampling.
This additional data can be compared with the original data and statistical
tests can be employed to determine whether there is difference in original data
and additional data
If there are significant differences, more effort is required to obtain accurate
input data.
6. Analyzing the result and sensitivity analysis:
Analyzing the result starts with determining the implication of the solution
The sensitivity of the solution to changes in the model and input data is very
important part of analyzing the result
Sensitivity analysis determines how much the solution will change if there are
changes in the model and input data
When the solution is sensitive to changes in the input data and model
specification, additional testing should be performed to make sure that the
model and input data is accurate and valid.
If the model and input data are wrong, the solution could be wrong, resulting
financial losses.
7. Implementing the result:
The final step is to implement the result.
This is the process of incorporating the solution in to the company’s
operations.
This can be the much difficult because experience has shown that a large
number of quantitative analysis teams failed in their effort for failing to
implement a good, workable solution properly.
Assignment (Mid) Topic 1
Develop an example by using Quantitative Analysis Approach
(Hint: follow the example of [page 25] and try to develop a Quantitative analysis
model according to your own practical experience with precise explanation)
