Introduction to

Quantitative Business
Analysis (QBA)
 Concept
 QBA is an approach to decision making based on scientific method.
 Its contents and boundaries are not yet fixed.
 Decision making can be either qualitative or quantitative.
 In qualitative decision-making, intution and subjective judgment are used. Past experience
with similar problems is often considered as an important factor in choosing a qualitative
approach. Managers tend to use a qualitative approach to decision making when (i) the
problem is fairly simple, (ii) the problem is familiar, (iii) the cost involved is not that
substantial, and (iv) immediate decisions are needed.
 On the other hand, managers tend to use a quantitative approach for taking decision when
one or more of the following conditions exist: (i) the problem is complex, (ii) the problem
is unfamiliar, (iii) the cost involved is huge, and (iv) enough time is available to analyze the
problem.
 Quantitative techniques basically are those statistical and operation research or
programming techniques which help in the decision making process, especially concerning
business and industry.
S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong
 Objectives of QBA
We can use QBA for the following objectives:
 It enables the management to decide when to buy and how much to
buy;
 It improves the quality of decision making;
 It helps to identify the most appropriate solution;
 It assists to integrate the system as a whole;
 It facilitates in minimizing cost and maximizing profit;
 It helps to improve productivity and efficiency;
 It shows the way to compete with the competitors;
 It ensures optimum allocation of resources.
S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong
 Phases of QBA
 Formulating the problem;
 Constructing a model to represent the system under
study;
 Deriving a solution from the model;
 Testing the model and the solution derived from it;
 Establishing controls over the solution;
 Putting the solution to work, i.e., implementation;

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Phases of QBA (Cont.)
Formulating the Problem: It is very essential that the problem at hand be clearly defined. It is almost impossible to get
the ‘right’ answer from a ‘wrong’ problem. In formulating a problem, analysis must be made of the following four major
components:
 the environment.
 the decision maker or research consumer or system operator.
 the objectives.
 alternative courses of action and constraints.
Out of the four components, environment is most comprehensive since it embraces and provides a setting for the other
three. It is the framework within which a system of organized activity is directed to attain the prescribed objectives and
goals.
Decision maker is the person who is in control of the operation (system) under study.
Objectives are the third component of the problem to which analysis must be made and should be defined by taking into
account the system (problem) as a whole.
The research problem is to determine which alternative course of action is most effective to achieve a certain set of
objectives.

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Phases of QBA (Cont.)
Constructing a Model:
 After formulating the problem, the next step is to construct a
mathematical model which consists of a set equations. These
equations describe the system or problem and represent: (i) the
effectiveness function, and (ii) constraints.
 The effectiveness function, usually called the objective function
which is a mathematical expression of the objectives, i.e.,
mathematical expression of the cost or profit of the operation.
 Constraints or restrictions are mathematical expressions of the
limitations on the fulfilment of the objectives.

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Phases of QBA (Cont.)
Deriving a Solution from the Model:
 A solution may be extracted from a model by using different methods of QBA. It can be
done either by conducting experiments on it, i.e., by simulation or by mathematical
analysis. Some cases may require the use of a combination of simulation and
mathematical analysis. This depends upon the nature and complexity of the system under
study.
 Mathematical analysis for deriving an optimum solution from a model consists of two
types of procedures: (1) analytical, and (2) numerical. Analytical procedures make use of
the various branches of mathematics such as calculus or matrix algebra. Numerical
procedure consists of trying various values of controllable variables in the model,
comparing the results obtained, and selecting that set of values of these variables which
gives the best solution.
 Simulation or Monte-Carlo method is used when the above methods do not help. Here an
experiment is simulated to get the values of a variable which is only probabilistically
known. Statistical sampling techniques are used to obtain a probabilistic approximation of
the solution.
S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong
 Phases of QBA (Cont.)

Testing the Model and the Solution:

 The usefulness of a model is tested by determining how
well it predicts the effect of changes in control variables
on the overall system effectiveness. Such an analysis is
usually called sensitivity analysis.

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Phases of QBA (Cont.)
Establishing Controls:
 A solution derived from a model remains a solution only
so long as the uncontrolled variables retain their values
and the relationship between the variables does not
change. Therefore, control must be established to
indicate the limits within which the model and its
solution can be considered as reliable.

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Phases of QBA (Cont.)

Putting the Solution to Work:

 Finally, the results of the research must be implemented.
The success of a study depends upon the co-operation
received from the management at the implementation
stage. It is also necessary to monitor the environment
within which a system operates.

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Scope of QBA
 National plans and budget;
 Defense services operations;
 Government developments and public sectors units;
 Industrial establishments;
 Research and development division;
 Project management;
 Business management;
 Agriculture and irrigation projects;
 Education and training;
 Transportation and communication;
 Home management and personal budgeting.
S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong
 QBA and Business Management
Allocation & Distribution:
 Optimal allocation of limited resources;
 Location and size of warehouses, distribution centers, etc.;
 Distribution policy.
Production:
 Selection, location and design of production plants;
 Evaluation of machine performance;
 Inventory management and quality control;
 Maintenance policy;
 Scheduling and sequencing of production runs.
Procurement:
 What, how and when to purchase at the minimum procurement cost;
 Bidding and replacement policies.

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 QBA and Business Management
Marketing:
 Product selection and timing;
 Selection of advertising media;
 Demand forecasts and stock levels;
 Customer preference for size, colour and packing of various products.
Finance:
 Capital requirements and cash flow analysis;
 Selection of securities;
 Credit policies and credit risk analysis;
 Investment and profit plan.
Personnel:
 Selection of personnel and incentive plan;
 Assignment of jobs and performance appraisal.
Research & Development:
 Development of new product lines;
 Evaluation of exiting products and optimal use of resources.

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Advantages of QBA/Advantages of Model
 Through a model, the problem under consideration becomes controllable;
 It provides logical and systematic approach to the problem;
 It indicates the limitations and scope of an activity;
 Models help incorporating useful tools that eliminate duplication of methods
applied to solve any specific problem;
 Models help in finding avenues for new research and development in a system;
 Models are often most economical and safest way to test alternative actions;
 Models, if properly constructed, can suggest whether the available information is
sufficient or not;
 Models provide a framework for decision maker;
 Models determine the extent of risk and uncertainties involved among
alternatives.
S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong
 Disadvantages of QBA/Advantages of Model
 Models do not consider the qualitative aspects;
 It is often difficult to define all the important elements of a model in
mathematical terms and set them down on paper;
 Models may inaccurately reflect the real situation and one may fail to take into
account all variables and expectations;
 It is very difficult to build representative models;
 It requires adequate knowledge and experience in model building as well as in
using models;
 Models may sometime be very expensive in relation to the expected returns from
their use;
 In many occasions, it is difficult to communicate with management about the
solutions derived from the model.

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Models of QBA
Criterion of Classification Categories of Models
Degree of Abstraction (a) Physical/Iconic, (b) Analogue and (c)
Mathematical
Purpose (a) Descriptive, (b) Explanatory, (c) Predictive
and (d) Perspectives
Special Behavioral/Characteristics (a) Static, (b) Dynamic, (c) Linear and (d) Non-
Linear
Degree of Certainty (a) Deterministic and (b) Probabilistic
Procedure or Method of Solution (a) Analytical and (b) Simulation
From of Structure (a) Allocation, (b) Inventory, (c) Queuing, (d)
Replacement and (e) Competitive

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Models of QBA (Cont.)
Models Brief Description
Physical/Iconic This is the representation of the real object or solution. For example, model of an
airplane, photograph of a machine, layout drawing of a factory, etc. are the examples
of such model.
Analogue These are abstract models mostly showing inter and intra relationships between two
or more parameters. Some examples are histogram, frequency table, price-demand
graph, etc.
Mathematical Here sets of relations are represented in the form of mathematical equations, using
symbols to present various parameters.
Descriptive The model that explains the situation under study is called descriptive model. For
example, a table showing various demand levels and their corresponding frequencies
is a descriptive model.
Explanatory A model that describes the behavior of various components of the system under
study is called explanatory model. For instance, correlation between share price and
earnings per share may be termed as explanatory model.
Predictive Prediction of future behavior of various variables on the basis of their present
relationships. For example, predicting future demand at a given price level of a good
or service.

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Models of QBA (Cont.)
Models Brief Description
Prescriptive These models suggest the preferred course of action in a given situation such as linear
programming model or inventory model.
Static Static models are concerned with determining an answer for a particular set of fixed
conditions that will probably not change significantly in the short run.
Dynamic Dynamic models take account of time factor and admit the impact of changes
generated by time.
Linear A linear model is one where each of its components is related to other variables
linearly.
Non-Linear A non-linear model is one in which one or more components of the model exhibit
non-linear behavior.
Deterministic Under this model, variables and their relationships are stated exactly and conditions of
certainty and perfect knowledge are presumed to exist.
Probabilistic Probabilistic models are used to deal with those situations in which outcomes of
managerial actions cannot be predicted with certainty.

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Models of QBA (Cont.)
Models Brief Description
Allocation The problem of allocation can arise whenever one must select the level of certain
activities which must compete for certain scarce resources necessary to perform those
activities. Examples include linear programming, transportation problem, assignment
problem, etc.
Inventory Inventory model deals with a class of problems involving the storage of resources
until they are needed.
Queuing The objective of this type of model is to allow one to determine the optimum number
of personnel or facilities necessary to provide services to customers who arrive at
some random rate when considering the cost of service and the cost of waiting.
Replacement Replacement models serve to solve a class of problems in which equipment or other
assets must be replaced because of deterioration or complete failure.
Competitive Competitive situations are characterized by the fact that two or more individuals are
making decisions in situations that involve conflicting interests and in which the
outcome is controlled by the decisions of all parties involved. Example includes game
theory.

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Origin and Development of QBA

 Pre-World War II
 World War II
 Post-World War II

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Origin and Development of QBA (Cont.)
 In 1885, Ferderick W. Taylor conducted scientific experiments in connection
with a simple shovel. His aim was to find that weight load of material moved
by shovel which would result in maximum of material moved with minimum
of fatigue. After many experiments with varying weights, he obtained the
optimum weight load.
 Another man of early scientific management era was Henry L. Gantt who
conducted experiments for minimizing the delay in processing of the jobs on
various machines.
 During 1930s H. C. Levinson applied scientific analysis to the problems of
merchandising. His work included scientific study of consumer’s buying
habits, response to advertising, and relation of environment to the type of
article sold.

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Origin and Development of QBA (Cont.)
 However, it was the First Industrial Revolution which contributed mainly towards
the development of QBA. Before this revolution, most of the industries were small
and a single man performed all the managerial functions. As a result of the
revolution division and subdivision of management functions took place. For
example, production department was sub-divided into sections like maintenance,
quality control, procurement, production planning , etc.
 All these departments needed QBA as a result of the following:
 The production department wants to have maximum production with the
lowest possible cost.
 The marketing department wants a large but diverse inventory for immediate
delivery.
 The finance department wants to minimize inventory to minimize the
unproductive investments ‘tied-up’ in it.
 The personnel department wants to hire good labor and to retain it.
S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong
 Origin and Development of QBA (Cont.)

 During World War II, the military management in England

called on a team of scientists to study the strategic and
tactical problems of air and land defense with a view to
determining the most effective utilization of limited military
resources.
 The encouraging results of these efforts led to the formation
of more such teams in the United States, Canada, and France.

S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong

 Origin and Development of QBA (Cont.)
 Immediately after the war, the success of military teams
attracted the attention of industrial managers who were
seeking solutions to their problems in UK and USA.
QBA soon spread from military to government,
industrial, social, and economic planning.
 During 1940s electronic computers became
commercially available. These electronic brains
enhanced computational speed and information storage.
This innovation speed up the development of QBA.
S. M. Sohrab Uddin, Professor, Department of Finance, University of Chittagong