Quantitative Approach to

Management
Quantitative School of Thought
• During World War II, mathematicians, physicists, and other scientists joined
together to solve military problems. The quantitative school of management is a
result of the research conducted during World War II
• Central to the quantitative approach is the principle that organizations are
decision-making units. These decision-making units can be made more efficiently
using mathematical models that place relevant factors into numerical terms.
• The quantitative approach to management involves the use of quantitative
techniques, such as statistics, information models, and computer simulations, to
improve decision making.
• This view encourages managers to use mathematics, statistics, and other
quantitative techniques to make management decisions.
• Managers can use computer models to figure out the best way to do
something — saving both money and time
• Mathematical forecasting helps make projections that are useful in
the planning process.
• Inventory modeling helps control inventories by mathematically
establishing how and when to order a product.
• Queuing theory helps allocate service personnel or workstations to
minimize customer waiting and service cost.
Various theories in Quantitative Approach
• Decision Theory :
• Decision theory looks at the various factor influences management decision making.
• It views decision making is a continuous process within the organization.
• The organizations success will depend upon the quality of the decisions made.
• This requires the use or quantitative methods in evaluating options.
• Inventory Theory - Economic lot size and inventory control
• Game Theory - Timing and pricing in a competitive market
• Linear Programming - Assignment of equipment and personnel scheduling, input-output analysis,
product mix.
• Sampling Theory - Quality control, Simplified accounting and auditing, consumer surveys and product
preferences in marketing research
• Probability Theory - Almost all areas of application
• Statistical Decision Theory - Estimation of model parameters in probabilistic models
• Some of the primary techniques applicable to Quantitative Management include:

• Theory of Probability,
• Sampling Analysis,
• Correlation / Regression Analysis,
• Time Series Analysis,
• Ratio Analysis,
• Variance Analysis,
• Statistical Quality Control,
• Linear Programming,
• Game Theory,
• Network Analysis,
• Break-Even Analysis,
• Waiting Line or Queuing Theory,
• Cash-Benefit Analysis, etc.
• The primary branches of quantitative management include:
• Management Science
• Operations Management
• Management Information Systems
• Total Quality Management
Management Science
• This branch of management theory focuses on the development of
mathematical and statistical models as a simplified representation of
a system, process, or relationship as models, formula, and equations.
• These techniques help managers make maximum use of
organizational resources to produce goods and services.
• This field of management has grown significantly with the
development of computer systems and computational abilities.
What is Operations Management?

• Operations management is a field of management focusing on efficiency, effectiveness, and producing or

organizational systems, process, and functions used in the manufacture of goods or provision of services.
• It focuses on the operation and control of the production process (such as the use of resources) that
transform resources into finished goods and services.
• It also looks at the extent to which the functional processes satisfy the needs and wants of the consumer.
• Operations management is a derivative of the mathematical models in which specified measurement
systems are applied to operational scenarios.
• These methods are used to achieve a higher level of efficiency in operational tasks, such as plant layout,
plant location, inventory control, and product distribution.
• Major areas of study within operations management include a product or process design, capacity
planning, facilities location, facilities layout, materials requirement planning, and handling, scheduling,
purchasing and inventory control, quality control, maintenance management, computer integrated
manufacturing, just-in-time inventory systems, and flexible manufacturing systems.
• Types of operations management techniques include queuing theory, breakeven analysis, and simulation.
Total Quality Management (TQM)
• Total Quality Management (TQM) is a management theory developed following WWII during the reconstruction of Japan. Perhaps
the best-known proponent of this school of management was W. Edwards Deming. Total quality management (TQM) is a
management approach that focuses on the following elements of operations:
• Customer Focus
• Value Improvement
• Employee Empowerment
• Synergy of Teams
• Final Product Quality
• Preventing rather than detecting defects
• Universal quality responsibility
• Continuous Improvement
• Statistical measurement
• Process Focused
• Constant refinement and learning
• Training and Learning
• Accurate Measurement
• There are four phases of total quality management:

• Planning Phase: Employees discover the problems in regular operations and their
root-causes. Employees conduct comprehensive research and collect relevant
data. The objective is to identify potential solutions to their problems.
• Doing Phase: Employees develop and execute strategies and plan to address
identified problems.
• Checking Phase: Data is collected to analyze performance to validate the
effectiveness of the processes and measuring the outcome.
• Acting Phase: Outcomes are documented and employees begin addressing
resulting challenges.
Lean Management
• Lean management is an approach to management focusing on maximizing
customer value while reducing processes waste without compromising
quality. This is done through incremental improvement.
• The principles of lean management include:
• Value Identification - Focus on the customers point of view.
• Value Mapping - Eliminate all of the unnecessary steps in the value delivery
process.
• Operational Mapping - Focus on sequencing value-providing activities.
• Value Pull - Identify the point at which customers pull value from the process.
• Efficiency - Continue to seek increased efficiency with less waste.
Management Information Systems:
• Information systems allow for more efficient creation, management,
and communication of information across the organization as well as
in the outside environment.
• The information allows for more efficient management decision
making by providing information in a more timely manner and in a
more useful format.
• Notably, Decision Support Systems (DSS) integrate decision models
and data to this end.
Benefits of Quantitative Approach include:

• It establishes relationships amongst quantifiable variables of decision-

making situations and facilitates disciplined thinking.
• Mathematical models help to derive precise and accurate results by
analyzing complex statistical data.
• It is useful in areas of planning and control where data is available in
quantitative terms. Decisions are based on data and logic rather than
intuition and judgment.
• Computer-based Statistical packages are available which facilitate
analysis of qualitative data also
Disadvantages:
• Mathematical models cannot fully account for individual behaviors and attitudes.
• The time needed to develop competence in quantitative techniques may delay the
development of other managerial skills.
• Mathematical models typically require a set of assumptions that may not be
realistic in an industrial setting.
• Among the different functions of management, its use is limited in organizing,
staffing and directing. It applies more in planning and control functions.
• It does not eliminate risk but only attempts to reduce it.
• It assumes that all the variables affecting the problem can be quantified in
numerical terms which is not always true.
• Decisions are often based on the availability of limited information.
Break Even Analysis or Cost Analysis
• A break-even analysis is a financial tool which helps a company to determine the stage at which the company, or a
new service or a product, will be profitable. In other words, it is a financial calculation for determining the number
of products or services a company should sell or provide to cover its costs (particularly fixed costs).
• Managers want to make money. The objective of the break-even analysis is to decide the optimum break-even
point, that is, where profits will be highest. In making decisions, managers must pay a great deal of attention to the
profit opportunities of alternative courses of action.
• This obviously requires that the cost implications of those alternatives are assessed.
• An important aspect of such cost analysis is that made between fixed and variable costs.
• A cost can be classified as being fixed or variable in relation to changes in the level of activity within a given period.
• Fixed costs are those which remain fixed irrespective of the volume of production or sales. For example, a managing
director’s salary will not vary (change) with the volume of goods produced during any year. Insurance premiums,
rent charges, R&D costs are a few other typical examples of fixed costs.
• Variable costs vary or change in response to changes in, say, volume of production or sales or any other similar
activity.
• The total cost at any level of operations is the sum of a fixed cost component and a variable cost component.
• By adding graphically variable cost to the fixed cost for different levels of activity
(e.g. number of goods produced), a total cost curve can be drawn.
• If a revenue curve is super-imposed on the same graph (Fig. 18.2) the result is the
break-even chart which depicts the profits/loss picture for several possible cost-
revenue situations at different levels of activity.
• In particular, break-even analysis is useful as a background information device for
reviewing overall cost and profit levels, but it can also be used in connection with
special decisions such as selecting a channel of distribution or make or buy
decisions.
• Decision: How many units should we produce so that we can cover
our costs?
• Break even analysis
• Calculation of Break Even Point:
• Contribution per unit = Selling price per unit – Variable cost per unit
• Break Even Quantity= Fixed cost / Contribution per unit
Or Fixed cost / (P-VC)
Example:
• Variable costs per unit: Rs. 400
• Sale price per unit: Rs. 600
• Total fixed costs: Rs. 10,00,000
• Contribution: Sales price – VC = Rs 600 – Rs 400 = Rs. 200
• To calculate the break-even point per unit, so we will divide the Rs.10,00,000 of fixed costs by the Rs. 200
which is the contribution per unit (Rs. 600 – Rs. 200).
• Break-Even Point = Rs. 10,00,000/ Rs. 200 = 5000 units
• Next, this number of units can be shown in rupees by multiplying the 5,000 units with the selling price of Rs.
600 per unit. We get Break-Even Sales at 5000 units x Rs. 600 = Rs. 30,00,000. (Break-even point in rupees)
Cost Benefit Analysis
• Cost-benefit analysis is a mathematical technique for decision-
making.
• It is a quantitative technique used to evaluate the economic costs and
the social benefits associated with a particular course of action.
• In this technique, an effort is made to identify all costs and benefits,
not only those that may be expressed in rupees, but also the less
easily calculated effects of a given decision.
Decision: Should we
purchase the new
machinery?

Total cost: $31876

Total Benefits: $ 47591
Benefit/Cost: 1.49
Decision: Purchase the new machine
Using Quantitative Approach in Marketing
• Generally, a company produces many new product ideas.
• How can a manager decide which new product idea to select?
• This required screening various ideas.
• The decision on whether a new product idea should be developed
further can be made by the following quantitative analysis:
• Overall Success Probability= (Probability of technical completion) X
(Probability of Commercialization given technical completion) X
(Probability of Economic Success given Commercialization)
• A product idea can be rated as below:
PRODUCT SUCCESS RELATIVE WEIGHT PRODUCT IDEA PRODUCT IDEA
REQUIREMENT SCORE RATING
Unique or superior 0.40 0.8 0.32
product
High performance 0.30 0.60 0.18
to cost ratio
Lack of strong 0.10 0.50 0.05
competition
Meets customer 0.20 0.70 0.14
preference
TOTAL 1 0.69

Rating Scale: 0.00-0.30: poor; 0.31-0.60-Fair; 0.61-0.80: Good. Minimum acceptance rate: 0.61