Chapter 1: Introduction to Quantitative infrastructure by providing a

Analysis way to convert data into actions.

 A large nationwide bank is using OM
Introduction techniques to configure complicated
 Mathematical tools have been used for financial instruments for their customers.
thousands of years o A process that previously
 Quantitative analysis can be applied to a required a human agent and took
wide variety of problems minutes or hours to perform is
 It’s not enough to just know the now executed automatically in
mathematics of a technique seconds on the bank’s Intranet.
 One must understand the specific o The resulting financial products
applicability of the technique, its are far superior to those
limitations, and its assumptions produced by the manual process.
 A major retail enterprise is using OM
Need for Operations Management methodology for making decisions about
 The increased complexity of running a customer relationship management
successful business. (CRM).
o Many large companies with o They are using mathematical
complex business processes optimization to achieve the most
have used OM for years to help profitable match between a large
executives and managers make number of customer segments, a
good strategic and operational huge variety of products and
decisions. services, and an expanding
o American Airlines and IBM number of marketing and sales
have incredibly complex channels such
operations in logistics, customer  Sears, Roebuck and Company
service and resource allocation o Manages a U.S. fleet of more
that are built on OM than 1,000 delivery vehicles,
technologies. some company owned and some
o As the trend of increased not.
business complexity moves to o The company makes more than
smaller enterprises, OM will 4 million deliveries a year of
play vital operational and 21,000 uniquely different items.
strategic roles. o It has 46 routing offices and
provides the largest home
Need for OM delivery service of furniture and
 Lots of information, but no decisions. appliances in the United States.
o Enterprise resource planning o The company also operates a
(ERP) systems and the Web U.S. fleet of 12,500 service
have contributed to a pervasive vehicles, together with an
information environment; associated staff of service
decision-makers have total technicians.
access to every piece of data in o Service demand is on the order
the organization. of 15 million calls per year and
o The problem is that most people revenue generated is
need a way to transform this approximately $3 billion.
wealth of data into actionable  OM researchers designed a system to
information that helps them deal with such variables as customer
make good tactical and strategic schedules and requested performance
decisions. times, time estimates for the required
o The role of OM decision service, vehicles and personnel available,
methods is to help leverage a skills needed, parts and product
company’s investment in availability and so on.
information technology
  The system was designed to
automatically schedule all facets of
performance in such a way as to
o Provide accurate and convenient The Quantitative Analysis Approach
time windows for the Sears
customer
o Minimize costs
o Maximize certain objective
measures of task performance,
including customer satisfaction.
 This effort generated a one-time cost
reduction of $9 million as well as
ongoing savings of $42 million per year.

Examples of Quantitative Analyses

 Taco Bell saved over $150 million using
forecasting and scheduling quantitative
analysis models
 NBC television increased revenues by
over $200 million by using quantitative
analysis to develop better sales plans
 Continental Airlines saved over $40 Defining the Problem
million using quantitative analysis Need to develop a clear and concise statement that
models to quickly recover from weather gives direction and meaning to the following steps
delays and other disruptions
 This may be the most important and
difficult step
What is Quantitative Analysis?
 It is essential to go beyond symptoms and
Quantitative analysis is a scientific approach to
identify true causes
managerial decision making whereby raw data are
 May be necessary to concentrate on only
processed and manipulated resulting in
a few of the problems – selecting the
meaningful information
right problems is very important
 Specific and measurable objectives may
have to be developed

Developing a Model
Quantitative factors might be different investment Quantitative analysis models are realistic,
alternatives, interest rates, inventory levels, solvable, and understandable mathematical
demand, or labor cost representations of a situation

Qualitative factors such as the weather, state and

federal legislation, and technology breakthroughs
should also be considered
 Information may be difficult to quantify
but can affect the decision-making
process

There are different types of models:

1. Scale models
2. Schematic models

 Models generally contain variables

(controllable and uncontrollable) and
parameters
  Controllable variables are generally the  Sensitive models should be very
decision variables and are generally thoroughly tested
unknown
 Parameters are known quantities that are Implementing the Results
a part of the problem Implementation incorporates the solution into the
company
Acquiring Input Data  Implementation can be very difficult
Input data must be accurate – GIGO rule  People can resist 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

Data may come from a variety of sources such as Quantitative analysis models are used extensively
company reports, company documents, interviews, by real organizations to solve real problems
on-site direct measurement, or statistical sampling.  In the real world, quantitative analysis
models can be complex, expensive, and
Developing a Solution difficult to sell
 The best (optimal) solution to a problem  Following the steps in the process is an
is found by manipulating the model important component of success
variables until a solution is found that is
practical and can be implemented How To Develop a Quantitative Analysis Model
 Common techniques are  An important part of the quantitative
o Solving equations analysis approach
o Trial and error – trying various  Let’s look at a simple mathematical
approaches and picking the best model of profit
result o Profit = Revenue – Expenses
o Complete enumeration – trying
all possible values Expenses can be represented as the sum of fixed
o Using an algorithm – a series of and variable costs and variable costs are the
repeating steps to reach a product of unit costs times the number of units
solution

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

Analyzing the Results

Determine the implications of the solution The parameters of this model are f, v, and s as
 Implementing results often requires these are the inputs inherent in the model
change in an organization
 The impact of actions or changes needs The decision variable of interest is X
to be studied and understood before
implementation Bagels ‘R Us
Assume you are the new owner of Bagels R Us
Sensitivity analysis determines how much the and you want to develop a mathematical model for
results of the analysis will change if the model or your daily profits and breakeven point. Your fixed
input data changes overhead is $100 per day and your variable costs
are 0.50 per bagel (these are GREAT bagels). You
charge $1 per bagel.

Breakeven Example:
Examples:
Seeing a need for childcare in her community, Sue
decided to launch her own daycare service. Her
service needed to be affordable, so she decided to
watch each child for $12 a day. After doing her
homework, Sue came up with the following
financial information:
Selling Price (per child per day) $12
Operating Expenses (per month)
Insurance 400 + Rent 200 = Total OE
$600
Costs of goods sold $4.00 per unit
Meals 2 @ $1.50 (breakfast & lunch)
Snacks 2 @ $0.50
How many children will she need to watch on a
monthly basis to breakeven?

Pritchett’s Precious Time Pieces

The company buys, sells, and repairs old clocks.
Rebuilt springs sell for $10 per unit. Fixed cost of
equipment to build springs is $1,000. Variable cost
for spring material is $5 per unit.

Companies are often interested in their break-even

point (BEP). The BEP is the number of units sold
that will result in $0 profit.