Chapter 1

Introduction to
Quantitative
Qua t tat e Analysis
a ys s

Quantitative Analysis for Management, Tenth Edition,

by Render, Stair, and Hanna 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
2.
analysis in a real situation
3. Describe the use of modeling in quantitative
analysis
l i
4. Use computers and spreadsheet models to
perform quantitative
p q analysis
y
5. Discuss possible problems in using
quantitative analysis
6 Perform a break
6. break-even
even analysis

2009 Prentice-Hall, Inc. 12

 Chapter Outline
1.1 Introduction
1.2 What Is Quantitative Analysis?
1.3 The Quantitative Analysis Approach
1.4 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
1.6
Analysis Approach
1.7 Implementation Not Just the Final Step

2009 Prentice-Hall, Inc. 13

 Introduction

Mathematical tools have been used for

thousands of years
Quantitative
Q i i analysis
l i can be
b appliedli d to
a wide variety of problems
It
Its
s not enough to just know the
mathematics of a technique
One must understand the specific
applicability of the technique, its
limitations, and its assumptions

2009 Prentice-Hall, Inc. 14

 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 byy using
gqquantitative
analysis to develop better sales plans
Continental Airlines saved over $40
million
illi using
i quantitative
tit ti analysis
l i
models to quickly recover from weather
delaysy and other disruptions
p

2009 Prentice-Hall, Inc. 15

 What is Quantitative Analysis?

Q
Quantitative
tit ti analysis
l i is
i a scientific
i tifi approach
h
to managerial decision making whereby raw
data are processed and manipulated
resulting in meaningful information

Quantitative Meaningful
Raw Data Analysis Information

2009 Prentice-Hall, Inc. 16

 What is Quantitative Analysis?

Quantitative factors might be different

investment alternatives, interest rates,
inventory levels
levels, demand
demand, or labor cost
Qualitative factors such as the weather,
state and federal legislation,
g , and
technology breakthroughs should also be
considered
Information may
ma be diffic
difficult
lt to quantify
q antif but
b t
can affect the decision-making process

2009 Prentice-Hall, Inc. 17

 The
e Qua
Quantitative
t tat e Analysis
a ys s Approach
pp oac

Defining the Problem

Developing a Model

Acquiring Input Data

D
Developing
l i a Solution
S l ti

Testing
g the Solution

Analyzing the Results

Figure 1.1 Implementing the Results

2009 Prentice-Hall, Inc. 18
 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 g
go beyond
y symptoms
y p 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

2009 Prentice-Hall, Inc. 19

 Developing a Model
Quantitative analysis
y models are realistic,
solvable, and understandable mathematical
representations of a situation
$ Sales

$ Advertising

There are different types of models

Scale Schematic
models models
2009 Prentice-Hall, Inc. 1 10
 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

2009 Prentice-Hall, Inc. 1 11

 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

p y reports,
company p company
p y documents, interviews,
on-site direct measurement, or statistical sampling
2009 Prentice-Hall, Inc. 1 12
 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
Solvingg equations
q
Trial and error trying various approaches
and picking the best result
Complete enumeration trying all possible
values
Using an algorithm a series of repeating
p to reach a solution
steps

2009 Prentice-Hall, Inc. 1 13

 Testing the Solution

Both input data and the model should be

tested for accuracy before analysis and
implementation
p
New data can be collected to test the model
Results should be logical, consistent, and
represent the real situation

2009 Prentice-Hall, Inc. 1 14

 Analyzing the Results
Determine the implications of the solution
Implementing results often requires change
in an organization
The
Th impact
i t off actions
ti or changes
h needs
d to
t
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
t t d
tested

2009 Prentice-Hall, Inc. 1 15

 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
f l implementations
i l t ti mustt be
b
monitored to determine if modifications are
necessary

2009 Prentice-Hall, Inc. 1 16

 Modeling in the Real World

Quantitative analysis models are used

extensively by real organizations to solve
real problems
p
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

2009 Prentice-Hall, Inc. 1 17

 How To Develop a Quantitative
A l i Model
Analysis M d l

An important part of the quantitative

analysis approach
Let
Lets
s look at a simple mathematical
model of profit

Profit = Revenue Expenses

2009 Prentice-Hall, Inc. 1 18

 How To Develop a Quantitative
A l i Model
Analysis M d l
Expenses can be represented as the sum of fixed and
variable
i bl costst andd variable
i bl costs
t are the
th product
d t off
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
i )(N b off units
i sold)]
ld)]
Profit = sX [f + vX]
Profit = sX f vX
where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold

2009 Prentice-Hall, Inc. 1 19

 How To Develop a Quantitative
A l i Model
Analysis M d l
Expenses can be represented as the sum of fixed and
variable
i bl costst and d variable
i bl parameters
The costst are the
th product
of this dmodel
t off
unit costs times the number
are f, v,of units
and s as these are the
inputs
Profit = Revenue (Fixedp cost inherent in the cost)
+ Variable model
Profit = (Selling priceThe
perdecision variable
unit)(number of of
units
sold) [Fixedinterest
cost +is(Variable
X costs per
unit)(Number
i )(N b off units i sold)]
ld)]
Profit = sX [f + vX]
Profit = sX f vX
where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold

2009 Prentice-Hall, Inc. 1 20

 Pritchetts
Pritchett s Precious Time Pieces
The company buys, sells, and repairs old clocks.
R b ilt springs
Rebuilt i sell
ll for
f $10 per unit.
it Fixed
Fi d costt off
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
l = 0,
0 profits
fit = $1,000
$1 000
If sales = 1,000, profits = [(10)(1,000) 1,000 (5)(1,000)]
= $4,000
$4 000

2009 Prentice-Hall, Inc. 1 21

 Pritchetts
Pritchett s Precious Time Pieces
Companies are often interested in their break
break--even
point
i t (BEP).
(BEP) ThThe BEP iis th
the number
b off units
it soldld
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)

2009 Prentice-Hall, Inc. 1 22

 Pritchetts
Pritchett s Precious Time Pieces
Companies are often interested in their break
break--even
point
i t (BEP).
(BEP) ThThe BEP iis th
the number
b off units
it soldld
BEP for Pritchetts Precious Time Pieces
that will result in $0 profit.

0 BEP
= sX = f$1
$1,000/($10
000/($10
vX, or 0$5) = 200
= ((s ) units
v)X f
Salesfor
Solving of less
X, wethan
have 200 units of rebuilt springs
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)

2009 Prentice-Hall, Inc. 1 23

 Advantages
g of Mathematical Modeling
g

1. Models can accurately represent reality

1
2. Models can help a decision maker
formulate problems
3. Models can give us insight and information
4. Models can save time and money y in
decision making and problem solving
5. A model may be the only way to solve large
or complex
l problems
bl in
i a timely
ti l fashion
f hi
6. A model can be used to communicate
problems and solutions to others
2009 Prentice-Hall, Inc. 1 24
 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

2009 Prentice-Hall, Inc. 1 25

 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
2009 Prentice-Hall, Inc. 1 26
 Computers and Spreadsheet Models
Excel QMs Main Menu (2003)
Works automatically within Excel spreadsheets

Program 1.2A
2009 Prentice-Hall, Inc. 1 27
 Computers and Spreadsheet Models

Excel QMs
QM s
Main Menu
(2007)

Program 1.2B
2009 Prentice-Hall, Inc. 1 28
 Computers and Spreadsheet Models

Excel QM
for the
Break-
Even
Problem

Program 1.3A
2009 Prentice-Hall, Inc. 1 29
 Computers and Spreadsheet Models

Excel QM
Solution
to the
Break
Break-
Even
Problem

Program 1.3B
2009 Prentice-Hall, Inc. 1 30
 Computers and Spreadsheet Models

Using
Goal Seek
in the
Break
Break-
Even
Problem

Program 1.4
2009 Prentice-Hall, Inc. 1 31
 Possible Problems in the
Q
Quantitative
tit ti Analysis
A l i Approach
A h
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

2009 Prentice-Hall, Inc. 1 32

 Possible Problems in the
Q
Quantitative
tit ti Analysis
A l i Approach
A h
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

2009 Prentice-Hall, Inc. 1 33

 Implementation
N tJ
Not Justt th
the Fi
Finall Step
St
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
M t supportt and
d user
involvement are important

2009 Prentice-Hall, Inc. 1 34

 Implementation
N tJ
Not Justt th
the Fi
Finall Step
St
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

2009 Prentice-Hall, Inc. 1 35

 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

2009 Prentice-Hall, Inc. 1 36

 Summary
Potential p problems include
Conflicting viewpoints
The impact on other departments
Beginning
B i i assumptions ti
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
2009 Prentice-Hall, Inc. 1 37
 Summary

Implementation is not the final step

Problems can occur because of
Lack
L k off commitment
i to the
h approach
h
Resistance to change

2009 Prentice-Hall, Inc. 1 38