Lecture 1
Introduction to Quantitative Analysis
2008 Prentice-Hall, Inc.
Learning Objectives
After completing this chapter, students will be able to: 1. Describe the quantitative analysis approach 2. Understand the application of quantitative analysis in a real situation 3. Describe the use of modeling in quantitative analysis 4. Use computers and spreadsheet models to perform quantitative analysis 5. Discuss possible problems in using quantitative analysis 6. Perform a break-even analysis
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Lecture Outline
1.1 1.2 1.3 1.4 Introduction What Is Quantitative Analysis? The Quantitative Analysis Approach How to Develop a Quantitative Analysis Model 1.5 The Role of Computers and Spreadsheet Models in the Quantitative Analysis Approach 1.6 Possible Problems in the Quantitative Analysis Approach 1.7 Implementation Not Just the Final Step
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Introduction
Mathematical tools have been used for
thousands of years Quantitative analysis can be applied to a wide variety of problems Its not enough to just know the mathematics of a technique One must understand the specific applicability of the technique, its limitations, and its assumptions
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Examples of Quantitative Analyses
Taco Bell saved over $150 million using
forecasting and scheduling quantitative analysis models NBC television increased revenues by over $200 million by using quantitative analysis to develop better sales plans Continental Airlines saved over $40 million using quantitative analysis models to quickly recover from weather delays and other disruptions
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What is Quantitative Analysis?
Quantitative analysis is a scientific approach to managerial decision making whereby raw data are processed and manipulated resulting in meaningful information
Raw Data
Quantitative Analysis
Meaningful Information
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What is Quantitative Analysis?
Quantitative factors might be different investment alternatives, interest rates, inventory levels, demand, or labor cost Qualitative factors such as the weather, state and federal legislation, and technology breakthroughs should also be considered
Information may be difficult to quantify but
can affect the decision-making process
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The Quantitative Analysis Approach
Defining the Problem Developing a Model Acquiring Input Data Developing a Solution Testing the Solution Analyzing the Results
Figure 1.1
Implementing the Results
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Defining the Problem
Need to develop a clear and concise statement that gives direction and meaning to the following steps
This may be the most important and difficult
step It is essential to go beyond symptoms and identify true causes May be necessary to concentrate on only a few of the problems selecting the right problems is very important Specific and measurable objectives may have to be developed
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Developing a Model
Quantitative analysis models are realistic, solvable, and understandable mathematical representations of a situation
$ Sales
$ Advertising
There are different types of models
Scale models Schematic models
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Developing a Model
Models generally contain variables
(controllable and uncontrollable) and parameters Controllable variables are generally the decision variables and are generally unknown Parameters are known quantities that are a part of the problem
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Acquiring Input Data
Input data must be accurate GIGO rule
Garbage In
Process Garbage Out Data may come from a variety of sources such as company reports, company documents, interviews, on-site direct measurement, or statistical sampling
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Developing a Solution
The best (optimal) solution to a problem
is found by manipulating the model variables until a solution is found that is practical and can be implemented Common techniques are
Solving equations Trial and error trying various approaches
and picking the best result Complete enumeration trying all possible values Using an algorithm a series of repeating steps to reach a solution
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Testing the Solution
Both input data and the model should be tested for accuracy before analysis and implementation
New data can be collected to test the model Results should be logical, consistent, and
represent the real situation
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Analyzing the Results
Determine the implications of the solution
Implementing results often requires change
in an organization The impact of actions or changes needs to be studied and understood before implementation
Sensitivity analysis determines how much the results of the analysis will change if the model or input data changes
Sensitive models should be very thoroughly
tested
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Implementing the Results
Implementation incorporates the solution into the company
Implementation can be very difficult People can resist changes Many quantitative analysis efforts have failed
because a good, workable solution was not properly implemented
Changes occur over time, so even successful implementations must be monitored to determine if modifications are necessary
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Modeling in the Real World
Quantitative analysis models are used extensively by real organizations to solve real problems
In the real world, quantitative analysis
models can be complex, expensive, and difficult to sell Following the steps in the process is an important component of success
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How To Develop a Quantitative Analysis Model
An important part of the quantitative
analysis approach Lets look at a simple mathematical model of profit
Profit = Revenue Expenses
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How To Develop a Quantitative Analysis Model
Expenses can be represented as the sum of fixed and variable costs and variable costs are the product of unit costs times the number of units
Profit = Revenue (Fixed cost + Variable cost) Profit = (Selling price per unit)(number of units sold) [Fixed cost + (Variable costs per unit)(Number of units sold)] Profit = sX [f + vX] Profit = sX f vX
where s = selling price per unit f = fixed cost
v = variable cost per unit X = number of units sold
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How To Develop a Quantitative Analysis Model
Expenses can be represented as the sum of fixed and variable costs and variable costs are the product of The parameters of this model unit costs times the number units are f, v,of and s as these are the inputscost inherent in the cost) model Profit = Revenue (Fixed + Variable The decision variable Profit = (Selling price per unit)(number of of units interest is X sold) [Fixed cost + (Variable costs per unit)(Number of units sold)] Profit = sX [f + vX] Profit = sX f vX
where s = selling price per unit f = fixed cost
v = variable cost per unit X = number of units sold
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Pritchetts Precious Time Pieces
The company buys, sells, and repairs old clocks. Rebuilt springs sell for $10 per unit. Fixed cost of equipment to build springs is $1,000. Variable cost for spring material is $5 per unit. s = 10 f = 1,000 v=5 Number of spring sets sold = X Profits = sX f vX If sales = 0, profits = $1,000 If sales = 1,000, profits = [(10)(1,000) 1,000 (5)(1,000)]
= $4,000
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Pritchetts Precious Time Pieces
Companies are often interested in their break-even point (BEP). The BEP is the number of units sold that will result in $0 profit.
0 = sX f vX,
or
0 = (s v)X f
Solving for X, we have f = (s v) X
f X= sv
Fixed cost BEP = (Selling price per unit) (Variable cost per unit)
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Pritchetts Precious Time Pieces
Companies are often interested in their break-even point (BEP). The BEP is the number of units sold BEP for Pritchetts Precious Time Pieces that will result in $0 profit. = f$1,000/($10 $5) 200 units 0 BEP = sX vX, or 0 = (= s v) X f
Salesfor of less than 200 units of rebuilt springs Solving X, we have will result in a loss f = (s v) X Sales of over 200 unitsfof rebuilt springs will result in a profit X = sv
Fixed cost BEP = (Selling price per unit) (Variable cost per unit)
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Advantages of Mathematical Modeling
1. Models can accurately represent reality 2. Models can help a decision maker formulate problems 3. Models can give us insight and information 4. Models can save time and money in decision making and problem solving 5. A model may be the only way to solve large or complex problems in a timely fashion 6. A model can be used to communicate problems and solutions to others
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Models Categorized by Risk
Mathematical models that do not involve
risk are called deterministic models
We know all the values used in the model
with complete certainty
Mathematical models that involve risk,
chance, or uncertainty are called probabilistic models
Values used in the model are estimates
based on probabilities
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Computers and Spreadsheet Models
QM for Windows
An easy to use
decision support system for use in POM and QM courses
This is the main
menu of quantitative models
Program 1.1
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Computers and Spreadsheet Models
Excel QMs Main Menu (2003)
Works automatically within Excel spreadsheets
Program 1.2A
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Computers and Spreadsheet Models
Excel QMs Main Menu (2007)
Program 1.2B
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Computers and Spreadsheet Models
Excel QM for the BreakEven Problem
Priteg
Program 1.3A
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Computers and Spreadsheet Models
Excel QM Solution to the BreakEven Problem
Program 1.3B
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Computers and Spreadsheet Models
Using Goal Seek in the BreakEven Problem
Program 1.4
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Possible Problems in the Quantitative Analysis Approach
Defining the problem
Problems are not easily identified Conflicting viewpoints
Impact on other departments
Beginning assumptions Solution outdated
Developing a model
Fitting the textbook models Understanding the model
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Possible Problems in the Quantitative Analysis Approach
Acquiring input data
Using accounting data Validity of data
Developing a solution
Hard-to-understand mathematics Only one answer is limiting
Testing the solution Analyzing the results
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Implementation Not Just the Final Step
Lack of commitment and resistance to change
Management may fear the use of
formal analysis processes will reduce their decision-making power Action-oriented managers may want quick and dirty techniques Management support and user involvement are important
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Implementation Not Just the Final Step
Lack of commitment by quantitative analysts
An analysts should be involved with
the problem and care about the solution Analysts should work with users and take their feelings into account
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Summary
Quantitative analysis is a scientific
approach to decision making The approach includes
Defining the problem Acquiring input data Developing a solution Testing the solution Analyzing the results Implementing the results
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Summary
Potential problems include Conflicting viewpoints The impact on other departments Beginning assumptions Outdated solutions Fitting textbook models Understanding the model Acquiring good input data Hard-to-understand mathematics Obtaining only one answer Testing the solution Analyzing the results
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Summary
Implementation is not the final step Problems can occur because of Lack of commitment to the approach Resistance to change
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End of Lecture 1
2008 Prentice-Hall, Inc.
