Lesson 1.

Quantitative Analysis and

Decision Making
Lesson Summary

This lesson discusses the role of quantitative analysis

in decision-making.
It also presents the importance of applying quantitative
approaches to solving problems.
Learning Outcomes

1. Discuss the importance of quantitative analysis in

decision-making.
2. Determine when to apply qualitative analysis and
quantitative analysis.
 Some of the reasons why a quantitative method might be
used in the decision-making process:

1. The problem is complex. The problem is multifaceted, and

the manager cannot develop a suitable solution without the
help of quantitative analysis. Ex. Choosing a new location for a
company; introducing a new product; diversification

2. The costs involved are substantial. The problem is

especially imperative (e.g., a great deal of money is
involved), and the manager needs a thorough analysis
before trying to make a decision.

3. The problem is not familiar. The problem is different, and the

manager has no prior experience from which to draw.
Quantitative Approach

The quantitative approach is to make an

optimal decision by using mathematical and statistical
models in a situation when the probability of all
outcomes is uncertain.
- in decision-making it helps managers solve complex
problems.
1. Defining the Problem
Develop a clear and concise statement that gives direction
and meaning to subsequent steps.
 This may be the most important and difficult step.
 It is essential to go beyond symptoms and identify true
causes.
 It may be necessary to concentrate on only a few of the
problems – selecting the right problem is very
important
 Specific and measurable objectives may have to be
developed.
2. Develop the Model
• Quantitative Analysis Model -A realistic, solvable, and understandable
mathematical statement showing the relationship between variables.
• Models generally contain variables (controllable and uncontrollable) and
parameters.
 Controllable variables are the decision variables and are generally
known. These can be controlled by the decision maker and can be set
at a desired level
Ex. How many items should be ordered for inventory?

Uncontrollable variables – beyond the control of the mgr. but has a

bearing on profit. Ex. Covid-19 pandemic; weather; gov’t. legislation

 Parameters (constants) are known quantities that are part of the model.
• What is the holding cost of the inventory?
Mathematical Model
Ex: Simple Mathematical Model -
Profit =5x where x is a variable In this example
a controllable variable.
- 5 is a parameter

Another Example:
Profit = 5x1 + 8x2 + 4x3
where X1, X2, X3 are variables ; in this example
are decision or controllable variables
3. Acquire Data

Model Data:
Accurate input data that may come from a variety of sources
such as company reports, company documents, interviews,
on-site direct measurement, or statistical sampling.
4. Develop a Solution

Model Solution:
 The best model solution is found by manipulating the model
variables until a practical and implemental solution is obtained.

 Manipulation:
 solving the equation(s)
 trial and error (trying various approaches and picking the
best result
 trying all possible variables (complete enumeration)
 implementing an algorithm (repeating a series of steps)
5. Test 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.
 Test the Solution

Testing the Solution or Model Testing:

• Both input data and the model should be tested for
accuracy and completeness before analysis and
implementation

• Inaccurate data will lead to an inaccurate solution.

- New data can be collected to test the model
- Results should be logical, consistent and
represent the real situation.
 6. Analyze the Results
• Analyzing the results starts with determining the
implications of the solution.
• A solution to a problem often results in some kind of
action or change in the way an organization is operating.
• The implications of these actions or changes must be
determined and analyzed before the results are
implemented.
• Because a model is only an approximation of reality, the
sensitivity of the solution to changes in the model and
input data is a very important part of analyzing the results
• Sensitivity analysis or post optimality analysis allow the
“what-ifs” to be answered. It determines how much the
results will change if the model or input data changes.
 7. Implementing the Results
• The incorporation of the solution into the company and the
monitoring of the results.

• Implementation can be very difficult; even if the solution is

optimal and will result in millions of pesos in additional profits,
if managers resist the new solution or people may be resistant to
changes all of the efforts of the analysis are of no value.

• Many quantitative analysis efforts have failed because a good,

workable solution was not properly implemented.

• After successful implementation, the solution should be closely

monitored. Changes occur over time, so monitoring is important
to determine if modifications are necessary.
Modelling in the Real World