Chapter 1 Introduction

Traditionally business decisions have been

Introduction to based on subjective factors
Quantitative Analysis Though mathematical tools have been
used for thousands of years, the formal
study of it to make management decisions
began in twentieth century
Quantitative analysis is based on numeric
data analysis, modeling and mathematical
calculations
Quantitative analysis can be used to solve
a wide variety of problems in business,
Quantitative Analysis for Management, Tenth Edition,
by Render, Stair, and Hanna
© 2008 Prentice-Hall, Inc. government, health care, education, …
1–2

Introduction What is Operations Management ?

It’s not enough to just know how the A set of activities that creates value in the
mathematics of a technique (model) works form of goods and services by carefully
One must understand the specific managing the business operations to
applicability of the technique (model), its produce and distribute products and
limitations, and its assumptions services efficiently and effectively
The terms management science, Increase profit …
operations management or research, and Reduce cost …
quantitative analysis are often One of three major functions (marketing,
interchangeable finance, and operations) of any
organization and is integrally related to all
the other business functions
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What is Operations Management ? What is Operations Management ?

Operations Management (OM) is Operations management involves

such a costly part of an organization using quantitative analysis methods
A large percentage of the revenue of to help people analyze complicated
most firms is spent in the OM function business processes and make good
OM provides a major opportunity for an decisions
organization to improve its profitability
and enhance its service to society These techniques are especially
useful for helping understand and
deal with business complexity and
uncertainty

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Examples of Quantitative Analyses What is Quantitative Analysis?

Quantitative analysis (QA) is a scientific

Taco Bell saved over $150 million using approach to managerial decision making – no
demand forecasting and employee whim, emotions and guesswork. The heart of
scheduling quantitative analysis models QA is the processing and manipulating of raw
NBC television increased revenues by over data into meaningful information
$200 million by using quantitative analysis to
develop better sales plans for advertisers Quantitative Meaningful
Raw Data Analysis Information
Continental Airlines saved over $40 million
using quantitative analysis models to quickly
recover from weather delays and other Qualitative analysis involves the investigation
disruptions of factors in a decision-making problem that
cannot be quantified
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 What is Quantitative Analysis? What is Quantitative Analysis?

In solving real problems, both quantitative In most cases quantitative analysis

and qualitative factors must be considered will be an aid to the decision-making
Quantitative factors might be different process.
investment alternatives, interest rates,
inventory levels, demand, or labor cost The results of quantitative analysis
Qualitative factors such as the weather will be combined with other
condition, state and federal legislation, the (qualitative) information in making
outcome of an election, technology the final decisions.
breakthroughs, etc.
may be difficult to quantify but can affect the
decision-making process

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The Quantitative Analysis Approach 1. Defining the Problem

Defining the Problem The first step is to develop a clear and concise
statement of the problem that gives direction
Developing a Model
and meaning to the subsequent steps
This may be the most important and difficult step
Acquiring Input Data
It is essential to go beyond the symptoms of the
problem and identify true causes
Developing a Solution
Several problems may exist. It is necessary to
concentrate on only a few of the problems –
Testing the Solution selecting the right problems is very important
If the problem is difficult to quantify, specific and
Analyzing the Results measurable objectives may have to be developed
(e.g. inadequate hospital health care delivery
Figure 1.1 Implementing the Results raise # of beds, doctors, reduce waiting time …)
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 2. Developing a Model 2. Developing a Model
Quantitative analysis models are realistic,
solvable, and understandable mathematical QA Models generally contain variables
representations of a situation (controllable and uncontrollable) and
parameters
Mathematic Variables are measurable quantities that
$ Sales

models are subject to change and are generally

unknown (e.g. $ sales, $ advertising)
$ Advertising
Controllable variables are generally the
There are other types of models decision variables (e.g. $ advertising)
Parameters are known quantities that are a
Scale Schematic part of the problem (e.g. cost per second
models models rate for the ads)
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3. Acquiring Input Data 4. Developing a Solution

Input data must be obtained for the model to make it The best (optimal) solution to a problem
useful and they must be accurate – GIGO rule is found by manipulating the model until
a solution is found that is practical and
can be implemented
Garbage
In Common techniques are
Solving equations
Process Trial and error – trying various approaches
Garbage and picking the best result
Out Complete enumeration – trying all possible
values
Data may come from a variety of sources such as Using an algorithm – a series of repeating
steps to reach a solution
company reports, company documents, interviews,
on-site direct measurement, or statistical sampling The input data and model determine the
accuracy of the solution
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 5. Testing the Solution 6. Analyzing the Results

Both input data and the model should Determine the implications of the solution
be tested for accuracy before the Implementing results often requires actions
and changes in an organization
solution can be analyzed and
The impact of actions or changes needs to
implemented be studied and understood before
Collect additional data from a different implementation
source to validate the accuracy of both
the model and model input data Sensitivity analysis determines how much
Results should be logical, consistent, the results of the analysis will change if
and represent the real situation the model or input data changes
A model is only an approximation of reality
Sensitive models should be very thoroughly
tested to ensure their accuracy and validity
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7. Implementing the Results Modeling in the Real World

Implementation incorporates the solution Quantitative analysis models are used
into the company extensively by real organizations to solve
Implementation can be very difficult real problems
People can resist changes In the real world, quantitative analysis
Many quantitative analysis efforts have failed models can be complex, expensive, and
because a good, workable solution was not difficult to sell
properly implemented Following the steps of quantitative analysis
Changes occur over time, so even is an important component of success, but
successful implementations must be not a guarantee
monitored to determine if modifications are
necessary

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 How To Develop a Quantitative How To Develop a Quantitative
Analysis Model Analysis Model
Expenses can be represented as the sum of fixed and
Developing a model is an important part variable costs and variable costs are the product of
of the quantitative analysis approach unit costs times the number of units
Let’s look at a simple mathematical Profit = Revenue – (Fixed cost + Variable cost)
model of profit Profit = (Selling price per unit)(number of units
sold) – [Fixed cost + (Variable costs per
unit)(Number of units sold)]
Profit = Revenue – Expenses 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 Pritchett’s Precious Time Pieces
Expenses can be represented as the sum of fixed and The company buys, sells, and repairs old clocks and
The parameters
variable costs and variable of this
costs are the model
product of clock parts. Rebuilt springs sell for $10 per unit.
are f, v, and
unit costs times the number of units s as these are the Fixed cost of equipment to build springs is $1,000.
inputs inherent in the model Variable cost for spring material is $5 per unit.
Profit = Revenue – (Fixed costX+are
Profit and Variable cost)
variables
Profit = (Selling price per unit)(number of units s = 10 f = 1,000 v=5
The decision variable of
sold) – [Fixed cost + (Variable costs per Number of spring sets sold = X
interest is X
unit)(Number of units sold)]
Profits = sX – f – vX = 10X – 1000 – 5X
Profit = sX – [f + vX]
Profit = sX – f – vX If sales = 0, profits = –$1,000
where If sales = 1,000, profits = [(10)(1,000) – 1,000 – (5)(1,000)]
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold
= $4,000

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 Pritchett’s Precious Time Pieces Pritchett’s Precious Time Pieces
Companies are often interested in their break
break--even Companies are often interested in their break
break--even
point (BEP). The BEP is the number of units sold point (BEP). The BEP is the number of units sold
BEP for Pritchett’s Precious Time Pieces
that will result in $0 profit. that will result in $0 profit.

0 = sX – f – vX, or 0 = (s – v)X – f BEP

0= sX –= f$1,000/($10
– vX, or – 0$5) = –200
= (s v)Xunits
–f
Solving for X, we have Salesfor
Solving of less
X, wethan
have 200 units of rebuilt springs
f = (s – v)X will result in a loss
f = (s – v)X
f Sales of over 200 unitsfof rebuilt springs will
X= s–v result in a profit X =
s–v

Fixed cost Fixed cost

BEP = (Selling price per unit) – (Variable cost per unit) BEP = (Selling price per unit) – (Variable cost per unit)

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Bagels ‘R Us Bagels ‘R Us
Assume you are the new owner of Bagels R Us and you want to
develop a mathematical model for your daily profits and f = $100, s = $1, v = $.50
breakeven point. Your fixed overhead is $100 per day and your
variable costs are 0.50 per bagel (these are GREAT bagels). You BEP = f / (s – v)
charge $1 per bagel.

Profits = Revenue – Expenses BEP = $100 / ($1 – $.50)

(Price per Unit) × – Fixed Cost BEP = 200 units

(Number Sold) – (Variable Cost/Unit) ×
(Number Sold) When the number of units sold is equal to 200,
the profit is 0.
Profits = $1*Number Sold – $100 – $.50*Number Sold
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 Advantages of Mathematical Modeling Models Categorized by Risk

1. Models can accurately represent reality Mathematical models that do not involve
2. Models can help a decision maker risk are called deterministic models
formulate problems We know all the values used in the model with
3. Models can give us insight and information complete certainty (the outcome is also certain)
E.g. – profit and break-even models
4. Models can save time and money in
decision making and problem solving Mathematical models that involve risk,
chance, or uncertainty are called
5. A model may be the only way to solve large
probabilistic models
or complex problems in a timely fashion
Values used in the model are estimates based
6. A model can be used to communicate on probabilities (the outcome is not certain)
problems and solutions to others E.g. – market for a new product:
good (60%), not good (40%)
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Computers and Spreadsheet Models Computers and Spreadsheet Models

Developing a solution, testing the solution, QM for Windows

and analyzing the results are important An easy to use
decision support
steps in quantitative analysis approach system for use in
Since mathematical models are used, POM and QM
courses
these steps require mathematical
This is the main
calculations. menu of
Two computer programs can be used to quantitative
models
make these steps easier:
1) QM for Windows
2) Excel QM

Program 1.1
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 Computers and Spreadsheet Models Computers and Spreadsheet Models
Excel QM’s Main Menu (2003)
Works automatically within Excel spreadsheets
Excel QM’s
Main Menu
(2007)

Program 1.2A Program 1.2B

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Computers and Spreadsheet Models Computers and Spreadsheet Models

Excel QM Excel QM
for the Solution
Break- to the
Even Break-
Problem Even
Problem

Program 1.3A Program 1.3B

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 Computers and Spreadsheet Models
Possible Problems in the
Quantitative Analysis Approach
Using (Inventory
Inventory analysis example will be used)
used
Goal Seek
in the Defining the problem – problems are not
Break- easily identified
Even
Problem Conflicting viewpoints – financial and
sales people have different view about the
inventory
Impact on other departments – inventory
is tied with cash flows and production
Beginning assumptions – problem implies
solution, e.g. inventory is too low ?
Program 1.4 Solution outdated (the problem changed)
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Possible Problems in the Possible Problems in the

Quantitative Analysis Approach Quantitative Analysis Approach
Developing a model Acquiring input data – not a simple task
Fitting the textbook models – they may Using accounting data – it may not
not fit a manager’s perception of a include holding & ordering costs
problem (e.g. reducing holding & Validity of data – lack of “good & clean”
ordering cost vs. cash flow & customer data
satisfaction)
Developing a solution
Understanding the model – trade-off
between the complexity and ease of Hard-to-understand mathematics –
understanding (e.g. assume the demand managers tend to remain silent instead
is known and constant, o.w. probability of being critical
need to be used) Only one answer is limiting – no options

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 Possible Problems in the Implementation –
Quantitative Analysis Approach Not Just the Final Step
Testing the solution Lack of commitment and resistance to
Complex models tend to give solutions change from management
not so obvious to managers and tend to Management may fear the use of formal
be rejected analysis processes will reduce their
A review process is necessary to decision-making power or just feel
convince the managers and correct any uncomfortable about using them
errors in the models Action-oriented managers may want
Analyzing the results “quick and dirty” techniques
Even small changes in organization are Management support and user
difficult to bring about involvement are critical to the success
(manager: 98%, user: 70%, QA: 40%)
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Implementation –
Not Just the Final Step Summary
Lack of commitment by quantitative Quantitative analysis is a scientific
analysts approach to decision making
Analysts should be involved with the The approach includes
problem and care about the solution
Defining the problem
– be an integral part of the
department facing the problem Developing a model
Analysts should work with users and Acquiring input data
take their feelings into account (e.g. Developing a solution
not insisting on the users to follow Testing the solution
computer-calculated order Analyzing the results
quantities)
Implementing the results
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 Summary Summary
Potential problems include
Conflicting viewpoints
Implementation is not the final step
The impact on other departments Problems can occur because of
Beginning assumptions Lack of commitment to the approach
Outdated solutions Resistance to change
Fitting textbook models
Understanding the model
Acquiring good input data
Hard-to-understand mathematics
Obtaining only one answer (Homework #1: see the course website)
Testing the solution
Analyzing the results
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