QUANTITATIVE METHODS

CHAPTER 1
Problem Solving and Decision Making

Problem solving can be defined as the process of identifying a difference between the actual
and the desired state of affairs and then taking action to resolve the difference.

7 steps:

(STRUCTURING THE PROBLEM):

1. Identify and define the problem.

2. Determine the set of alternative solutions.

3. Determine the criterion or criteria that will be used to evaluate the alternatives.

4. Evaluate the alternatives.

5. Choose an alternative.

(ANALYZING THE PROBLEM):

6. Implement the selected alternative.

7. Evaluate the results to determine whether a satisfactory solution has been obtained.

Decision making is the term generally associated with the first five steps of the problem solving
process.

Problems in which the objective is to find the best solution with respect to one criterion are
referred to as single-criterion decision problems. Problems that involve more than one
criterion are referred to as multicriteria decision problems.

Quantitative Analysis and Decision Making

Qualitative analysis is based primarily on the manager’s judgment and experience; it includes
the manager’s intuitive “feel” for the problem and is more an art than a science.

Quantitative analysis: the problem is complex (mathematical expressions), the problem is

new, very important and repetitive.

Quantitative analysis process:

1. Model development

Models are representations of real objects or situations and can be presented in various forms.
Iconic, analog and mathematical models. Experimenting with models requires less time, is less
expensive and less risky.

Mathematical models: Objective function and constraints. Uncontrollable inputs are

environmental factors which can affect both the objective function and the constraints.

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Controllable inputs are the decision alternatives specified by the manager and thus are also
referred to as the decision variables of the model.

If all uncontrollable inputs to a model are known and cannot vary, the model is referred to as a
deterministic model. If any of the uncontrollable inputs are uncertain and subject to variation,
the model is referred to as a stochastic or probabilistic model.

The “best” output will be referred to as the optimal solution. If a particular decision
alternative does not satisfy one or more of the model constraints, the decision alternative is
rejected as being infeasible, regardless of the objective function value. If all constraints are
satisfied, the decision alternative is feasible and a candidate for the “best” solution or
recommended decision.

An important part of the quantitative analysis process is the preparation of managerial reports
based on the model’s solution.

Models of cost, revenue and profit

Fixed cost is the portion of the total cost that does not depend on the production volume; this
cost remains the same no matter how much is produced. Variable cost is the portion of the
total cost that is dependent on and varies with the production volume. Marginal cost is
defined as the rate of change of the total cost with respect to production volume. That is, it is
the cost increase associated with a one-unit increase in the production volume. Marginal
revenue is defined as the rate of change of total revenue with respect to sales volume. That is,
it is the increase in total revenue resulting from a one-unit increase in sales volume. The
volume that results in total revenue equaling total cost (providing $0 profit) is called the
breakeven point.

Management science techniques

Linear Programming is a problem-solving approach developed for situations involving

maximizing or minimizing a linear function subject to linear constraints that limit the degree to
which the objective can be pursued.

Integer Linear Programming is an approach used for problems that can be set up as linear
programs, with the additional requirement that some or all of the decision variables be integer
values.

Distribution and Network Models A network is a graphical description of a problem consisting

of circles called nodes that are interconnected by lines called arcs. Specialized solution
procedures exist for these types of problems, enabling us to quickly solve problems in such
areas as transportation system design, information system design, and project scheduling.

Nonlinear Programming Many business processes behave in a nonlinear manner. For example,
the price of a bond is a nonlinear function of interest rates; the quantity demanded for a
product is usually a nonlinear function of the price. Nonlinear programming is a technique that
allows for maximizing or minimizing a nonlinear function subject to nonlinear constraints.

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Inventory Models are used by managers faced with the dual problems of maintaining
sufficient inventories to meet demand for goods and, at the same time, incurring the lowest
possible inventory holding costs.

Waiting-Line or Queueing Models have been developed to help managers understand and
make better decisions concerning the operation of systems involving waiting lines.

Simulation is a technique used to model the operation of a system. This technique employs a
computer program to model the operation and perform simulation computations.

Decision Analysis can be used to determine optimal strategies in situations involving several
decision alternatives and an uncertain or risk-filled pattern of events.

Goal Programming is a technique for solving multicriteria decision problems, usually within the
framework of linear programming.

Analytic Hierarchy Process permits the inclusion of subjective factors in arriving at a

recommended decision.

Forecasting are techniques that can be used to predict future aspects of a business operation.

Markov Process Models are useful in studying the evolution of certain systems over repeated
trials. For example, Markov processes have been used to describe the probability that a
machine, functioning in one period, will function or break down in another period.

MULTIPLE CHOICE

1. The field of management science

a. concentrates on the use of quantitative methods to assist in decision making.

b. approaches decision making rationally, with techniques based on the scientific method.

c. is another name for decision science and for operations research.

d. each of the above is true.

2. Identification and definition of a problem

a. cannot be done until alternatives are proposed.

b. is the first step of decision making.

c. is the final step of problem solving.

d. requires consideration of multiple criteria.

3. Decision alternatives

a. should be identified before decision criteria are established.

b. are limited to quantitative solutions

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c. are evaluated as a part of the problem definition stage.

d. are best generated by brain-storming.

4. Decision criteria

a. are the choices faced by the decision maker.

b. are the problems faced by the decision maker.

c. are the ways to evaluate the choices faced by the decision maker.

d. must be unique for a problem.

5. In a multicriteria decision problem

a. it is impossible to select a single decision alternative.

b. the decision maker must evaluate each alternative with respect to each criterion.

c. successive decisions must be made over time.

d. each of the above is true.

6. The quantitative analysis approach requires

a. the manager's prior experience with a similar problem.

b. a relatively uncomplicated problem.

c. mathematical expressions for the relationships.

d. each of the above is true.

7. A physical model that does not have the same physical appearance as the object being
modeled is

a. an analog model.

b. an iconic model.

c. a mathematical model.

d. a qualitative model.

8. Inputs to a quantitative model

a. are a trivial part of the problem solving process.

b. are uncertain for a stochastic model.

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c. are uncontrollable for the decision variables.

d. must all be deterministic if the problem is to have a solution.

9. When the value of the output cannot be determined even if the value of the controllable
input is

known, the model is

a. analog.

b. digital.

c. stochastic.

d. deterministic.

10. The volume that results in total revenue being equal to total cost is the

a. break-even point.

b. marginal volume.

c. marginal cost.

d. profit mix.

11. Management science and operations research both involve

a. qualitative managerial skills.

b. quantitative approaches to decision making.

c. operational management skills.

d. scientific research as opposed to applications.

12. George Dantzig is important in the history of management science because he developed

a. the scientific management revolution.

b. World War II operations research teams.

c. the simplex method for linear programming.

d. powerful digital computers.

13. The first step in problem solving is

a. determination of the correct analytical solution procedure.

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b. definition of decision variables.

c. the identification of a difference between the actual and desired state of affairs.

d. implementation.

14. Problem definition

a. includes specific objectives and operating constraints.

b. must occur prior to the quantitative analysis process.

c. must involve the analyst and the user of the results.

d. each of the above is true.

15. A model that uses a system of symbols to represent a problem is called

a. mathematical.

b. iconic.

c. analog.

d. constrained.

1. The process of decision making is more limited than that of problem solving. TRUE

2. The terms 'stochastic' and 'deterministic' have the same meaning in quantitative analysis.
FALSE

3. The volume that results in marginal revenue equaling marginal cost is called the break-even
point. FALSE

4. Problem solving encompasses both the identification of a problem and the action to resolve
it. TRUE

5. The decision making process includes implementation and evaluation of the decision. FALSE

6. The most successful quantitative analysis will separate the analyst from the managerial
team until after the problem is fully structured. FALSE

7. The value of any model is that it enables the user to make inferences about the real
situation. TRUE

8. Uncontrollable inputs are the decision variables for a model. FALSE

9. The feasible solution is the best solution possible for a mathematical model. FALSE

10. A company seeks to maximize profit subject to limited availability of man-hours. Man-
hours is a controllable input. FALSE

11. Frederick Taylor is credited with forming the first MS/OR interdisciplinary teams in the
1940's. FALSE

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12. To find the choice that provides the highest profit and the fewest employees, apply a
single-criterion decision process. FALSE

13. The most critical component in determining the success or failure of any quantitative
approach to decision making is problem definition. TRUE

14. The first step in the decision making process is to identify the problem. TRUE

15. All uncontrollable inputs or data must be specified before we can analyze the model and
recommend a decision or solution for the problem. TRUE