Introduction to the Quantitative Analysis

Instructor: Md. Aftab Anwar Lecture 3 & 4

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 Body of Knowledge Problem Solving and Decision Making Quantitative Analysis and Decision Making Quantitative Analysis

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 Management science, an approach to decision making

based on the scientific method, makes extensive use of quantitative analysis.

Today, many use the terms management science,

operations research, and decision science interchangeably.

The scientific management revolution of the early

1900s, initiated by Frederic W. Taylor, provided the foundation for the use of quantitative methods in management.
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It had its early roots in World War II and is flourishing in business and industry due, in part, to:

numerous methodological developments (e.g.

simplex method for solving linear programming problems)

a virtual explosion in computing power

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Definition: Problem solving can be defined as the process of identifying a difference between the actual and the desired state of affairs and then taking action to resolve the difference.

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7 Steps of Problem Solving

(First 5 steps are the process of decision making) 1. Identify and define the problem. 2. Determine the set of alternative solutions. 3. Determine the criteria for evaluating alternatives. 4. Evaluate the alternatives. 5. Choose an alternative (make a decision). ------------------------------------------------------------------6. Implement the selected alternative. 7. Evaluate the results.
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 Suppose Mr. Andy currently unemployed and would

like a position that will lead to a satisfying career.

Suppose that your job search has resulted in offers

from companies in
Rochester, New York; Dallas, Texas; Greensboro, North Carolina; and Pittsburgh, Pennsylvania.
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 Thus, the alternatives for your decision problem can be

stated as follows:

1. Accept the position in Rochester. 2. Accept the position in Dallas. 3. Accept the position in Greensboro. 4. Accept the position in Pittsburgh.

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Quantitative Analysis and Decision Making

Decision-Making Process
Structuring the Problem Analyzing the Problem
Identify the Alternatives Choose an Alternative

Define the Problem

Identify the Alternatives

Determine the Criteria

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 THE ROLE OF QUALITATIVE AND QUANTITATIVE ANALYSIS

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Quantitative Analysis and Decision Making

Qualitative Analysis
based largely on the managers judgment and experience includes the managers intuitive feel for the problem is more of an art than a science Quantitative Analysis concentrate on the quantitative facts or data associated with the problem develop mathematical expressions that describe the objectives, constraints, and other relationships that exist in the problem use one or more quantitative methods to make a recommendation
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 Potential Reasons for a Quantitative Analysis

Approach to Decision Making

The problem is complex. The problem is very important. The problem is new. The problem is repetitive.

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 Quantitative Analysis Process

Model Development Data Preparation Model Solution

Report Generation

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 Models are representations of real objects or

situations Three forms of models are:

Iconic models - physical replicas (scalar

representations) of real objects (Model of an Airplane) Analog models - physical in form, but do not physically resemble the object being modeled (e.g. Speedometer) Mathematical models - represent real world problems through a system of mathematical formulas and expressions based on key assumptions, estimates, or statistical analyses
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 Generally, experimenting with models (compared to

experimenting with the real situation):

requires less time is less expensive involves less risk

The more closely the model represents the real

situation, the accurate the conclusions and predictions will be.

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 Objective Function a mathematical expression

that describes the problems objective, such as maximizing profit or minimizing cost Constraints a set of restrictions or limitations, such as production capacities Uncontrollable Inputs environmental factors that are not under the control of the decision maker Decision Variables controllable inputs; decision alternatives specified by the decision maker, such as the number of units of Product X to produce
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Mathematical Models

Deterministic Model if all uncontrollable inputs to the model are known and cannot vary. (e.g. Tax rate) Stochastic (or Probabilistic) Model if any uncontrollable are uncertain and subject to variation. (e.g. demand for the product) Stochastic models are often more difficult to analyze.

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Mathematical Models

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.

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Uncontrollable Inputs (Environmental Factors)

Controllable Inputs (Decision Variables)

Mathematical Model

Output (Projected Results)

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For Example: Each unit profit = $ 10 Profit equation: P = 10x (x= unit of product) Objective function of a firm is to maximize profit Constraints: 5 hrs to produce each unit and maximum 40 hrs are available per week, Thus the production time constraints 5x 40 ------------------------- (1) So, how many units of the product should be scheduled each week to maximize profit? P = 10x Objective function 5x 40 Constraints X 0 Constraints

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FLOWCHART FOR THE PRODUCTION MODEL

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 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.
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 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.
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Model Solution

Trial-and-Error Solution for Production Problem

Production Quantity 0 2 4 6 10 12 Projected Profit 0 20 40 60 100 120 Total Hours of Production 0 10 20 30 50 60 Feasible Solution Yes Yes Yes Yes No No

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 One solution approach is trial-and-error. Might not provide the best solution Inefficient (numerous calculations

required) Special solution procedures have been developed for specific mathematical models. Some small models/problems can be solved by hand calculations Most practical applications require using a computer
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 A variety of software packages are available

for solving mathematical models. Microsoft Excel The Management Scientist LINGO

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 Often, goodness/accuracy of a model cannot be

assessed until solutions are generated. Small test problems having known, or at least expected, solutions can be used for model testing and validation. If the model generates expected solutions, use the model on the full-scale problem. If inaccuracies or potential shortcomings inherent in the model are identified, take corrective action such as:
Collection of more-accurate input data Modification of the model
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 A managerial report, based on the results of the

model, should be prepared. The report should be easily understood by the decision maker. The report should include: the recommended decision other pertinent information about the results (for example, how sensitive the model solution is to the assumptions and data used in the model)
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 Successful implementation of model results

is of critical importance. Secure as much user involvement as possible throughout the modeling process. Continue to monitor the contribution of the model. It might be necessary to refine or expand the model.
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 Recall the production model from previous slide:

Suppose the firm in this example considers a second

product that has a unit profit of $5 and requires 2 hours of production time for each unit produced. Use y as the number of units of product 2 produced.

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a. Show the mathematical model when both products are considered simultaneously. b. Identify the controllable and uncontrollable inputs for this model. c. Draw the flowchart of the input-output process for this model (see Figure ). d. What are the optimal solution values of x and y? e. Is the model developed in part (a) a deterministic or a stochastic model? Explain.

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 Identify an organizational problem,

Justify the problem from its financial and operational

perspective, Describe it by following all the steps of Problem solving Justify your answer (Not more than 10 pages) Use your own opinion and recommendation. Individual submission Typed (hardcopy) Date of submission: 8th October, 2013
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 Chapter 01 and 02 Date: 10th October, 2013

Duration: 30 Minutes

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