Quantitative Analysis for Management

Fourteenth Edition

Chapter 1
Introduction to
Quantitative Analysis

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Learning Objectives (1 of 2)
After completing this chapter, students will be able to:
1.1 Describe the quantitative analysis approach and
understand how to apply it to a real situation.
1.2 Describe the three categories of business analytics.
1.3 Describe the use of modeling in quantitative analysis.
1.4 Prepare a quantitative analysis model.

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Learning Objectives (2 of 2)
After completing this chapter, students will be able to:
1.5 Use computers and spreadsheet models to perform
quantitative analysis.
1.6 Recognize possible problems in using quantitative
analysis.
1.7 Recognize implementation concerns of quantitative
analysis.
1.8 Recognize the employable skill sets that are covered in
this text.

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Chapter Outline
1.1 What Is Quantitative Analysis?
1.2 Business Analytics
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 Analysis Approach
1.7 Implementation—Not Just the Final Step
1.8 Developing Skills for Your Career

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Introduction
• Mathematical tools have been used for thousands of
years
• Quantitative analysis can be applied to a wide variety of
problems
– Not enough to just know the mathematics of a
technique
– Must understand the specific applicability of the
technique, its limitations, and assumptions
– Successful use of quantitative techniques usually
results in a solution that is timely, accurate, flexible,
economical, reliable, and easy to understand and use
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Examples of Quantitative Analyses
• Taco Bell saved over $150 million using forecasting and
employee scheduling quantitative analysis models
• NBC television increased revenues by over $200 million
by using quantitative analysis to develop better sales
plans for advertisers
• Continental Airlines saved over $40 million every year
using quantitative analysis models to quickly recover
from weather delays and other disruptions
• What are some examples of big data use in the
news?

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What is Quantitative Analysis? (1 of 4)
Quantitative analysis is a scientific approach to
managerial decision making in which raw data are
processed and manipulated to produce meaningful
information

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What is Quantitative Analysis? (2 of 4)
• Quantitative factors are data that can be accurately
calculated
– Different investment alternatives
– Interest rates
– Financial ratios
– Cash flows and rates of return
– Flow of materials through a supply chain

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What is Quantitative Analysis? (3 of 4)
• Qualitative factors are more difficult to quantify but
affect the decision process
– The weather
– State and federal legislation
– Technological breakthroughs
– The outcome of an election

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What is Quantitative Analysis? (4 of 4)
• Quantitative and qualitative factors may have different
roles
• Decisions based on quantitative data can be automated
• Generally quantitative analysis will aid the decision-
making process
• Important in many areas of management
– Production/Operations Management
– Supply Chain Management
– Business Analytics

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Business Analytics (1 of 3)
• A data-driven approach to decision making
– Allows better decisions
– Large datasets known as big data
– Information technology is very important
– Statistical and quantitative analysis are used to
analyze the data and provide useful information

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Business Analytics (2 of 3)
• Descriptive analytics—the study and consolidation of
historical data
• Predictive analytics—forecasting future outcomes
based on patterns in the past data
• Prescriptive analytics—the use of optimization methods

Pick any organization and provide examples of how

they might benefit from these three types of analytics.

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Business Analytics (3 of 3)
Table 1.1 Business Analytics and Quantitative Analysis Models
Business Analytics
Category Quantitative Analysis Technique
Descriptive analytics Statistical measures such as means and standard deviations (Chapter 2)
Statistical quality control (Chapter 15)
Predictive analytics Decision analysis and decision trees (Chapter 3)
Regression models (Chapter 4)
Forecasting (Chapter 5)
Project scheduling (Chapter 11)
Waiting line models (Chapter 12)
Simulation (Chapter 13)
Markov analysis (Chapter 14)
Prescriptive analytics Inventory models such as the economic order quantity (Chapter 6)
Linear programming (Chapters 7 , 8)
Transportation and assignment models (Chapter 9)
Integer programming, goal programming, and nonlinear
programming (Chapter 10)
Network models (Chapter 9)

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The Quantitative Analysis Approach
Figure 1.1 The
Quantitative Analysis
Approach

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Defining the Problem
• Develop a clear and concise statement of the problem to
provide direction and meaning
– This may be the most important and difficult step
– Go beyond symptoms, and identify true causes
– Concentrate on only a few of the problems—selecting
the right problems is very important
– Specific and measurable objectives may have to be
developed

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Developing a Model (1 of 2)
• Models are realistic, Mathematical models
solvable, and
understandable
mathematical
representations of a
situation
• Different types of models

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Developing a Model (2 of 2)
• Mathematical model—a set of mathematical
relationships
• Models generally contain variables and parameters
– Controllable variables, decision variables, are
generally unknown
▪ How many items should be ordered for inventory?
– Parameters are known quantities that are a part of
the model
▪ What is the cost of placing an order?
• Required input data must be available

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Acquiring Input Data
• Input data must be accurate—GIGO rule
• Data may come from a variety of sources—company
reports, documents, employee interviews, direct
measurement, or statistical sampling

What is a GIGO example you have experienced?

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Developing a Solution
• Manipulating the model to arrive at the best (optimal)
solution
• Common techniques are
– Solving equations
– Trial and error—trying various approaches and
picking the best result
– Complete enumeration—trying all possible values
– Using an algorithm—a series of repeating steps to
reach a solution

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Testing the Solution
• Both input data and the model should be tested for
accuracy and completeness before analysis and
implementation
– New data can be collected to test the model
– Results should be logical, consistent, and represent
the real situation

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Analyzing the Results
• Determine the implications of the solution
– Implementing results often requires change in an
organization
– The impact of actions or changes needs to be studied
and understood before implementation
• Sensitivity (postoptimality) analysis determines how
much the results will change if the model or input data
changes
– Sensitive models should be thoroughly tested

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Implementing the Results
• Implementation incorporates the solution into the
company
– Implementation can be very difficult
– People may be resistant to changes
– Many quantitative analysis efforts have failed because
a good, workable solution was not properly
implemented
• Changes occur over time, so even successful
implementations must be monitored to determine if
modifications are necessary

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Modeling in the Real World
• Quantitative analysis models are used extensively by real
organizations to solve real problems
– 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

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How to Develop a Quantitative Analysis
Model (1 of 3)
A mathematical model of profit:
Profit  Revenue  Expenses

• Revenue and expenses can be expressed in different

ways
– Revenue = selling price per unit (s) times the number
of units sold (X)
– Expenses are the sum of the fixed cost (f) and the
variable cost per unit (v) times the number of units
sold (X)

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How to Develop a Quantitative Analysis
Model (2 of 3)
Profit Revenue  (Fixed cost  Variable cost)
Profit Selling price per unit Number of units sold 
 Fixed cost  Variable costs per unit Number of
units sold

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

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How to Develop a Quantitative Analysis
Model (3 of 3)
Profit  sX  f  vX

The parameters of this model are f, v, and s as these are

the inputs inherent in the model.
The decision variable of interest is X, the number of
units sold.

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Pritchett’s Precious Time Pieces (1 of 3)

• The company buys, sells, and repairs old clocks

– Rebuilt springs sell for $8 per unit
– Fixed cost of equipment to build springs is $1,000
– Variable cost for spring material is $3 per unit
s=8 f = 1,000 v=3
Number of spring sets sold = X
Profits  $8 X  $1,000  $3 X
If sales = 0, profits  f   $1,000
If sales = 1,000, profits   $8 1,000   $1,000  $3 1,000 
 $4,000
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Pritchett’s Precious Time Pieces (2 of 3)

• Companies are often interested in the break-even point

(BEP), the BEP is the number of units sold 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

X f  s  v 
Fixed cost
BEP 
Selling price per unit  Variable cost per unit
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Pritchett’s Precious Time Pieces (3 of 3)

BEP for Pritchett’s Precious Time Pieces

Fixed cost
BEP 
Selling price per unit  Variable cost per unit

BEP  $1,000  $8  $3  200 units

• Sales < 200 units of rebuilt springs will result in a loss

• Sales > 200 units of rebuilt springs will result in a profit

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The Advantages of Mathematical
Modeling
1. Accurately represent reality
2. Help a decision maker formulate problems
3. Give us insight and information
4. Save time and money
5. Solve large or complex problems in a timely fashion
6. Communicate problems and solutions to others

What mathematical models have you used recently?

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Mathematical Models Categorized by
Risk
• Deterministic models do not involve risk or chance
– All in the model are known with complete certainty
• Probabilistic models involve risk or chance
– Values used in the model are estimates based on
probabilities

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Computers and Spreadsheet Models (1 of 6)
QM for Windows
• A decision support system for use in production and operations
management (POM) and quantitative methods
(QM) courses
• An Excel add-in
Program 1.1 The QM for
Windows Main Menu

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Computers and Spreadsheet Models (2 of 6)
Program 1.2A Entering the Data for Pritchett’s Precious
Time Pieces Example into QM for Windows

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Computers and Spreadsheet Models (3 of 6)
Program 1.2B QM for Windows Solution Screen for
Pritchett’s Precious Time Pieces Example

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Computers and Spreadsheet Models (4 of 6)
Program 1.3 Excel QM in Excel 2016 Ribbon and Menu of
Techniques

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Computers and Spreadsheet Models (5 of 6)
Program 1.4
Entering the Data
for Pritchett’s
Precious Time
Pieces Example
into Excel QM in
Excel 2016

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Computers and Spreadsheet Models (6 of 6)
Program 1.5 Using Goal Seek in the Break-Even Problem to Achieve a
Specified Profit

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Possible Problems in the Quantitative
Analysis Approach (1 of 2)
• Defining the problem
– Conflicting viewpoints
– Impact on other departments
– Beginning assumptions
– Solution outdated
• Developing a model
– Fitting the textbook models
– Understanding the model

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Possible Problems in the Quantitative
Analysis Approach (2 of 2)
• Acquiring accurate input data
– Using accounting data
– Validity of the data
• Developing a solution
– Hard-to-understand mathematics
– Only one answer is limiting
• Testing the solution
– Solutions not always intuitively obvious
• Analyzing the results
– How will it affect the total organization

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Implementation—Not Just the Final Step
• Lack of commitment by end users
– Loss of power
– Resistance to change
– Modeling slows down process
• Lack of commitment by quantitative analysts
– Analysis doesn’t end when model is done
– Work with end-users and consider feelings

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Developing Skills for Your Career
This course will help you develop and practice these skills:
• Communication
• Critical thinking
• Knowledge application and analysis
• Information technology skills
• Data literacy

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