OPERATIONS

REASEARCH
Professor: Mark Frederick V. Salonga

COURSE REQUIREMENTS
CLASS PARTICIPATION 10%
EXERCISES AND RECITATION 20%
RESEARCH PAPER 30%
MAJOR EXAMINATION 40%

TOPICS PRELIM
LESSON 1: Introduction to Quantitative
Techniques
LESSON 2: Probability Concepts and
Application
LESSON 3: DECISION THEORY MODELS
LESSON 4: DECISION TREES

TOPICS MIDTERM
LESSON

5:Forecasting
LESSON 6:Inventory Control
LESSON 7: Linear Programming

TOPICS PRE - FINALS

LESSON 8: TRANSPORTATION MODEL
LESSON 9: PROJECT MANAGEMENT
LESSON 10: WAITING IN LINE QUEUING

TOPICS FINALS

Group Operations Research

Introduction to
Quantitative
Techniques
Professor: Mark Frederick V. Salonga

INTRODUCTION TO QUANTITATIVE
ANALYSIS
What

is Quantitative Analysis

The use of Quantitative methods in solving problems has been in

existence since the early 1600s with Frederic W. Taylor developing
the scientific approach to decision making.
It is only during the world wars and afterwards that the formalization
and the refinements of the tools and techniques in scientific methods
have occurred. During the World War II, Quantitative Analysis or
known as Operations Research or OR on that time, was intensified
and popularized by the military. It was so called as OR because the
study teams were assigned to field commanders to solve problems
involving actual operations in the war effort.
After the war, OR or now known as Management Science or
Quantitative Approach has found increasing applications in industrial
enterprises in the US and Britain.

Evolution of Quantitative Analysis

1990: Expert System and Artificial Intelligence
1980: Decision Support Information System
1980: Goal Programming
1960: Decision Analysis
1960: Network Models
1950: Linear Programming
1940:Game Theory
1930: Transportation Model
1920: Assignment Technique
1920 : Inventory Control
1910 : Queuing Theory
1900 : Markov Analysis

The Decision Making Process

Quantitative Analysis
Logic
Historic Data
Marketing Research
Scientific Analysis

Problem

Quanlitative Analysis
Weather

State and Federal

Legislation

New Technological
Breakthroughs
Election outcome

Decision

The Quantitative Analysis Approach

QA is a step-by-step process that allows decision makers to investigate

problems using quantitative techniques.

The Quantitative Analysis Process includes the following:

1. Define the Problem - In all cases, defining the problem is the first
step. The problem could be too many stockouts, too many bad debts,
or determining the products to produce that will result in the
maximum profit for the organization.
2. Develop a Model - After the problems have been defined, the next
step is to develop one or more models. These models could be
inventory control models, models that describe the debt situation in
the organization, and so on.
3. Acquire Data - Once the models have been developed, the next
step is to acquire input data. In the inventory problem, for example,
factors such as the annual demand, the ordering cost, and the
carrying cost are the input data that are used by the model developed
in the preceding step.
4. Develop a Solution - The next step is developing the solution. This
requires manipulation of the model in order to determine the best
solution
5. Test the Solution
6. Analyze the Results and Perform Sensitivity Analysis
7. Implement the Results

Mathematical Models
Deterministic models - Knowing all values used in
the model with certainty
Examples:

Breakeven Quantity model, financial ratio

formulas, Moving Averages, regression analysis, etc
Probabilistic models - Knowing the probability that
parameters in the model will take on a specific value. These
models consider risk or chance. Risk, expressed by a
probability value maybe a market condition, say 50% chance of
a good market or 50% chance the market for a product is
unfavorable
Examples: Decision Tree Models, Decision making
techniques under risks, etc

Advantages of Using Models

Accurately represent reality
Help a decision maker understand the
problem
Save time and money in problem solving and
decision making
Help communicate problems and solutions to
others
In general, models can help managers

Disadvantages of Using Models

Models may be expensive and timeconsuming to develop and test.
Models are often misused and
misunderstood (and feared) because of their
mathematical complexity.
Tend to downplay the role and value of nonquantifiable information
Models often have assumptions that
oversimplify the variables of the real world.

Break even Analysis

Break-even is the point of zero loss or profit. At break-even point, the
revenues of the business are equal its total costs and its contribution margin
equals its total fixed costs. Break-even point can be calculated by equation
method, contribution method or graphical method. The equation method is
based on the cost-volume-profit (CVP) formula:
The Formula for finding the break even point is
Q = FC / (UP - VC)

where:
Q = Break-even Point, i.e., Units of production (Q),
FC = Fixed Costs,
VC = Variable Costs per Unit
UP = Unit Price
Therefore,
Break-Even Point Q = Fixed Cost / (Unit Price - Variable Unit Cost)
Break-even Sales in Pesos = Price per Unit Break-even point

Sample Problem #1

Calculate break-even point in sales units and sales dollars from

following information:

Price per Unit : P15

Variable Cost per Unit: P7
Total Fixed Cost: P 9,000
Solution
Substituting the known values into the formula for breakeven point in sales units, we
get:

Breakeven Point in Sales Units (Q)

= 9,000 (15 7)
= 9,000 8
= 1,125 units
Break-even Point in Sales Pesos = P15 1,125 = P16,875

Sample Problem # 2

A service business
Lets take a barbershop and lets suppose the overheads of the business are something like this:
Owners salary
P15 000
Rental
P7 500
Fixed wages
P7 000
Cleaning services
P750
Electricity
P450
Telephone
P500
Magazine subscriptions
P90
Repairs and maintenance
P250
Security
P450
Bookkeeping
P650
Total overheads
P32 640
In other words, the fixed costs or indirect costs are P32 640 per month. The business will spend this
amount even if it doesnt get a single client.
What about the direct costs (variable costs or cost-of-sales)? How much does the business spend
every time a client walks in an has his hair cut? Its a service business, so direct costs are usually low.
Lets say it looks like this:
Consumables (hair gel etc) P10
Barbers commission
P10
Total direct cost per sale P15
The going rate for a hair-cut in the area is P70, and the business owner decides, wisely, to stick to
the going rate.

Sample Problem # 2

What is his break-even point?

Solution:
Step 1:
Breakeven Point in Sales Units (Q)
= P32 640 (P70 P15)
= P32 640 P55
= 594 units

Break-even Point in Sales Pesos = P15 594= P8910

The barbershop therefore has to do P8910 worth of hair-cuts a

month to break even. That represents about 594 clients a month,
or 20 clients a day