Objective Function – A mathematical expression that describes the problem’s objective

Uncontrollable inputs / Parameters – affects both the objective function and the constraints

Controllable inputs/ decision variables – controlled or determined by the decision maker; decision
alternatives specified by the manager; generally unknown

Parameters – known quantities that are part of the model

Controllable factor – Marketing mix, includes product price, place and promotion

Uncontrollable factors – environmental factors which are out of control

Body of knowledge involving quantitative approaches to decision making is referred to as

1. Management Science
2. Operations Research
3. Decision Science

Rooted in World War II and is continue flourishing in business and industry due to

• numerous methodological developments (e.g. simplex method for solving linear

programming problems)

• a virtual explosion in computing power

Quantitative Analysis - a scientific approach to managerial decision making in which raw data are
processed and manipulated to produce meaningful information.
(raw data – quantitative analysis – Meaningful Information)

- Process of developing and solving models

Quantitative Factors – Data that can be Accurately calculated

Qualitative Factors – more difficult to quantify but affect the decision process

The Quantitative Analysis approach

1. Defining the problem – Developing 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
problems is very important
- Specific and measurable objectives may have to be developed

2. Developing a model – Realistic, solvable, and understandable mathematical representations of

a situation

o Iconic models - physical replicas (scalar representations) of real objects

o Analog models - physical in form, but do not physically resemble the object being
modeled
o Mathematical models - represent real world problems through a system of
mathematical formulas and expressions based on key assumptions, estimates, or
statistical analyses

3. Acquiring input data

4. Developing a solution - The best (optimal) solution to a problem is found by manipulating the
model variables until a solution is found that is practical and can be implemented.
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.

5. Testing 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.

6. 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 analysis determines how much the results will change if the model or input data
changes.
 Sensitive models should be very thoroughly tested.
 7. 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.

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.

Expenses can be represented as the sum of fixed and variable costs. Variable costs are the product of
unit costs times the number of units.

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 unitv = variable cost per unit

f = fixed cost X = number of units sold

ADVANTAGES OF MATHEMATICAL MODELING

1. Models can accurately represent reality.

2. Models can help a decision maker formulate problems.

3. Models can give us insight and information.

4. Models can save time and money in decision making and problem solving.

5. A model may be the only way to solve large or complex problems in a timely fashion.

6. A model can be used to communicate problems and solutions to others.

 Mathematical models that do not involve risk are called deterministic models.

- All of the values used in the model are known with complete certainty.

 Mathematical models that involve risk, chance, or uncertainty are called probabilistic/
stochastic models.

 Values used in the model are estimates based on probabilities.

POSSIBLE PROLEMS IN QUANTITATIVE ANALYSIS APPROACH

Defining the problem

 Problems may not be easily identified.

 There may be conflicting viewpoints

 There may be an impact on other departments.

 Beginning assumptions may lead to a particular conclusion.

 The solution may be outdated.

Developing a model

 Manager’s perception may not fit a textbook model.

 There is a trade-off between complexity and ease of understanding.

Acquiring accurate input data

 Accounting data may not be collected for quantitative problems.

 The validity of the data may be suspect.

Developing an appropriate solution

 The mathematics may be hard to understand.

 Having only one answer may be limiting.

Testing the solution for validity

Analyzing the results in terms of the whole organization

IMPLEMENTATION IS NOT JUST THE FINAL STEP

There may be an institutional lack of commitment and resistance to change.

 Management may fear the use of formal analysis processes will reduce their decision-
making power.

 Action-oriented managers may want “quick and dirty” techniques.

 Management support and user involvement are important.

There may be a lack of commitment by quantitative analysts.

 Analysts should be involved with the problem and care about the solution.

 Analysts should work with users and take their feelings into account.
Management science

- Is an approach to decision making based on the scientific method

- Makes extensive use of quantitative analysis

 The body of knowledge involving quantitative approaches to decision making is also referred to
as
 Operations research
 Decision science

 It had its early roots in World War II and is flourishing in business and industry with the aid of
computers

Problem Solving and Decision Making

 7 Steps of Problem Solving

(First 5 steps are the process of decision making)

1. Define the problem.

2. Identify the set of alternative solutions.
3. Determine the criteria for evaluating alternatives.
4. Evaluate the alternatives.
5. Choose an alternative (make a decision).

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6. Implement the chosen alternative.

7. Evaluate the results.

Quantitative Analysis and Decision Making

 Potential Reasons for a Quantitative Analysis Approach to Decision Making

1. The problem is complex.
2. The problem is very important.
3. The problem is new.
4. The problem is repetitive.

Quantitative Analysis

 Quantitative Analysis Process

 1. Model Development
2. Data Preparation
3. Model Solution
4. Report Generation

Model Development

Models are representations of real objects or situations

 Three forms of models are:

1. Iconic models - physical replicas (scalar representations) of real objects
2. Analog models - physical in form, but do not physically resemble the object being modeled
3. Mathematical models - represent real world problems through a system of mathematical
formulas and expressions based on key assumptions, estimates, or statistical analyses
4. Verbal Model - Involves a verbal description of real situations. Language, written or spoken, is
employed to abstract the relevant factors or characteristics.

Advantages of Models

 Generally, experimenting with models (compared to experimenting with the real situation):
1. requires less time
2. is less expensive
3. involves less risk

Mathematical Models

1. Cost/benefit considerations must be made in selecting an appropriate mathematical model.

- Frequently a less complicated (and perhaps less precise) model is more appropriate than a more
complex and accurate one due to cost and ease of solution considerations.

2. Relate decision variables (controllable inputs) with fixed or variable parameters (uncontrollable
inputs).
3. Frequently seek to maximize or minimize some objective function subject to constraints.
4. Are said to be stochastic if any of the uncontrollable inputs is subject to variation, otherwise are
said to be deterministic.
- Generally, stochastic models are more difficult to analyze.
5. The values of the decision variables that provide the mathematically-best output are referred to
as the optimal solution for the model.

Data Preparation

- Data preparation is not a trivial step, due to the time required and the possibility of data
collection errors.

- A model with 50 decision variables and 25 constraints could have over 1300 data elements!

- Often, a fairly large data base is needed.

- Information systems specialists might be needed.

Model Solution

- The analyst attempts to identify the alternative (the set of decision variable values) that
provides the “best” output for the model.
- The “best” output is the optimal solution.
- If the alternative does not satisfy all of the model constraints, it is rejected as being infeasible,
regardless of the objective function value.
- If the alternative satisfies all of the model constraints, it is feasible and a candidate for the
“best” solution.

1. One solution approach is trial-and-error.

o Might not provide the best solution
o Inefficient (numerous calculations required)

2. Special solution procedures have been developed for specific mathematical models.
o Some small models/problems can be solved by hand calculations
o Most practical applications require using a computer
6 STEPS IN DECISION MAKING

1. Clearly define the problem at hand.

2. List the possible alternatives.

3. Identify the possible outcomes or states of nature.

4. List the payoff (typically profit) of each combination of alternatives and outcomes.

5. Select one of the mathematical decision theory models.

6. Apply the model and make your decision.

TYPES OF DECISION MAKING ENVIRONMENTS

Type 1: Decision making under certainty

 The decision maker knows with certainty the consequences of every alternative or
decision choice.

Type 2: Decision making under uncertainty

 The decision maker does not know the probabilities of the various outcomes.

Type 3: Decision making under risk

 The decision maker knows the probabilities of the various outcomes.

Maximax - Used to find the alternative that maximizes the maximum payoff.

Maximin - Used to find the alternative that maximizes the minimum payoff.

Criterion of Realism - This is a weighted average compromise between optimism and pessimism

Weighted average = (maximum in row)

+ (1 – )(minimum in row)

Equally Likely (Laplace) - Considers all the payoffs for each alternative – average rajud

Minimax Regret - Based on opportunity loss or regret, this is the difference between the optimal profit
and actual payoff for a decision.