Introduction ToIntroduction To QuaQua T Tat E A Ys .
Chapter 1Introduction toQuantitativeQuat tat e Analysisa ys sQuantitative Analysis for Management, Tenth Edition,by Render, Stair, and Hanna 2008 Prentice-Hall, Inc.
Learning ObjectivesAfter completing this chapter, students will be able to:1. Describe the quantitative analysis approach2 Understand the application of quantitative2.analysis in a real situation3. Describe the use of modeling in quantitativeanalysisl i4. Use computers and spreadsheet models toperform quantitativepqanalysisy5. Discuss possible problems in usingquantitative analysis6 Perform a break6.break-eveneven analysis 2009 Prentice-Hall, Inc.1–2
Chapter Outline1.11.21.31.4IntroductionWhat Is Quantitative Analysis?The Quantitative Analysis ApproachHow to Develop a Quantitative AnalysisModel1.5 The Role of Computers and SpreadsheetModels in the Quantitative AnalysisApproach1 6 Possible Problems in the Quantitative1.6Analysis Approach1.7 Implementation — Not Just the Final Step 2009 Prentice-Hall, Inc.1–3
Introduction Mathematical tools have been used forthousands of years QuantitativeQi i analysisl i can beb appliedli d toa wide variety of problems ItIt’ss not enough to just know themathematics of a technique One must understand the specificapplicability of the technique, itslimitations, and its assumptions 2009 Prentice-Hall, Inc.1–4
Examples of Quantitative Analyses Taco Bell saved over 150 million usingforecasting and scheduling quantitativeanalysis models NBC television increased revenues byover 200 million byy usinggqquantitativeanalysis to develop better sales plans Continental Airlines saved over 40millionilli usingi quantitativetit ti analysisl imodels to quickly recover from weatherdelaysy and other disruptionsp 2009 Prentice-Hall, Inc.1–5
What is Quantitative Analysis?QQuantitativetit ti analysisl i isi a scientifici tifi approachhto managerial decision making whereby rawdata are processed and manipulatedresulting in meaningful informationRaw DataQuantitativeAnalysisMeaningfulInformation 2009 Prentice-Hall, Inc.1–6
What is Quantitative Analysis?Quantitative factors might be differentinvestment alternatives, interest rates,inventory levelslevels, demanddemand, or labor costQualitative factors such as the weather,state and federal legislation,g, andtechnology breakthroughs should also beconsidered Information mayma be difficdifficultlt to quantifyq antif butb tcan affect the decision-making process 2009 Prentice-Hall, Inc.1–7
Thee QuaQuantitativet tat e Analysisa ys s Approachpp oacDefining the ProblemDeveloping a ModelAcquiring Input DataDDevelopingl ia SolutionS l tiTestingg the SolutionAnalyzing the ResultsFigure 1.1Implementing the Results 2009 Prentice-Hall, Inc.1–8
Defining the ProblemNeed to develop a clear and concisestatement that gives direction and meaningto the following steps This may be the most important and difficultstep It is essential to ggo beyondysymptomsy pandidentify true causes May be necessary to concentrate on only a fewof the problems – selecting the right problemsis very important Specific and measurable objectives may haveto be developed 2009 Prentice-Hall, Inc.1–9
Developing a Model SalesQuantitative analysisymodels are realistic,solvable, and understandable mathematicalrepresentations of a situation AdvertisingThere are different types of modelsScalemodelsSchematicmodels 2009 Prentice-Hall, Inc.1 – 10
Developing a Model Models generally contain variables(controllable and uncontrollable) andparameters Controllable variables are generally thedecision variables and are generallyunknown Parameters are known quantities thatare a part of the problem 2009 Prentice-Hall, Inc.1 – 11
Acquiring Input DataInput data must be accurate – GIGO ruleGarbageInProcessGarbageOutData may come from a variety of sources such asp y reports,pcompanyp y documents, interviews,companyon-site direct measurement, or statistical sampling 2009 Prentice-Hall, Inc.1 – 12
Developing a Solution The best (optimal) solution to a problemis found by manipulating the modelvariables until a solution is found that ispractical and can be implemented Common techniques are Solvingg equationsq Trial and error – trying various approachesand picking the best result Complete enumeration – trying all possiblevalues Using an algorithm – a series of repeatingp to reach a solutionsteps 2009 Prentice-Hall, Inc.1 – 13
Testing the SolutionBoth input data and the model should betested for accuracy before analysis andimplementationp New data can be collected to test the model Results should be logical, consistent, andrepresent the real situation 2009 Prentice-Hall, Inc.1 – 14
Analyzing the ResultsDetermine the implications of the solution Implementing results often requires changein an organization TheTh impactit off actionstior changeshneedsd totbe studied and understood beforeimplementationSensitivity analysis determines how muchthe results of the analysis will change ifthe model or input data changes Sensitive models should be very thoroughlyt t dtested 2009 Prentice-Hall, Inc.1 – 15
Implementing the ResultsImplementation incorporates the solutioninto the company Implementation can be very difficult People can resist changes Many quantitative analysis efforts have failedbecause a good, workable solution was notproperly implementedChanges occur over time, so evensuccessfulf l implementationsi lt timustt bebmonitored to determine if modifications arenecessary 2009 Prentice-Hall, Inc.1 – 16
Modeling in the Real WorldQuantitative analysis models are usedextensively by real organizations to solvereal problemsp In the real world, quantitative analysismodels can be complex, expensive, anddifficult to sell Following the steps in the process is animportant component of success 2009 Prentice-Hall, Inc.1 – 17
How To Develop a QuantitativeA l i ModelAnalysisM d l An important part of the quantitativeanalysis approach LetLet’ss look at a simple mathematicalmodel of profitProfit Revenue – Expenses 2009 Prentice-Hall, Inc.1 – 18
How To Develop a QuantitativeA l i ModelAnalysisM d lExpenses can be represented as the sum of fixed andvariablei bl costst andd variablei bl costst are theth productd t offunit costs times the number of unitsProfit Revenue – (Fixed cost Variable cost)Profit (Selling price per unit)(number of unitssold) – [Fixed cost (Variable costs perunit)(Numberi )(Nb off unitsi sold)]ld)]Profit sX – [f vX]Profit sX – f – vXwheres selling price per unitf fixed costv variable cost per unitX number of units sold 2009 Prentice-Hall, Inc.1 – 19
How To Develop a QuantitativeA l i ModelAnalysisM d lExpenses can be represented as the sum of fixed andvariablei bl costst andd variablei bl parameterscostst are thethproductdmodelt offTheof thisunit costs times the numberunitsare f, v,ofands as these are theinputsp costinherentin the cost)modelProfit Revenue – (Fixed VariableThedecisionvariableProfit (Selling priceperunit)(numberof ofunitsinterestXsold) – [Fixedcost is(Variablecosts perunit)(Numberi )(Nb off unitsi sold)]ld)]Profit sX – [f vX]Profit sX – f – vXwheres selling price per unitf fixed costv variable cost per unitX number of units sold 2009 Prentice-Hall, Inc.1 – 20
Pritchett’sPritchetts Precious Time PiecesThe company buys, sells, and repairs old clocks.R b ilt springsRebuiltisellll forf 10 per unit.it FixedFi d costt offequipment to build springs is 1,000. Variable costfor spring material is 5 per unit.s 10f 1,000v 5Number of spring sets sold XProfits sX – f – vXIf salesl 0,0 profitsfit – 1,000 1 000If sales 1,000, profits [(10)(1,000) – 1,000 – (5)(1,000)] 4,000 4 000 2009 Prentice-Hall, Inc.1 – 21
Pritchett’sPritchetts Precious Time PiecesCompanies are often interested in their breakbreak--evenpointi t (BEP).(BEP) ThThe BEP iis ththe numberb off unitsit soldldthat will result in 0 profit.0 sX – f – vX,or0 ((s – v)X) –fSolving for X, we havef (s( – v)X)fX s–vBEP Fixed cost(Selling price per unit) – (Variable cost per unit) 2009 Prentice-Hall, Inc.1 – 22
Pritchett’sPritchetts Precious Time PiecesCompanies are often interested in their breakbreak--evenpointi t (BEP).(BEP) ThThe BEP iis ththe numberb off unitsit soldldBEP for Pritchett’s Precious Time Piecesthat will result in 0 profit. 1,000/( 10000/( 10 –2000 BEP sX – f 1– vX,or – 0 5) ((sv)X) units–fSalesforof less200 units of rebuilt springsSolvingX, wethanhavewill result in a lossf (s( – v)X)Sales of over 200 unitsfof rebuilt springs willresult in a profit X s–vBEP Fixed cost(Selling price per unit) – (Variable cost per unit) 2009 Prentice-Hall, Inc.1 – 23
Advantagesg of Mathematical Modelingg1. Models can accurately represent reality12. Models can help a decision makerformulate problems3. Models can give us insight and informationy in4. Models can save time and moneydecision making and problem solving5. A model may be the only way to solve largeor complexl problemsblini a timelyti l fashionf hi6. A model can be used to communicateproblems and solutions to others 2009 Prentice-Hall, Inc.1 – 24
Models Categorized by Risk Mathematical models that do not involverisk are called deterministic models We know all the values used in the modelwith complete certainty Mathematical models that involve risk,chance, or uncertainty are calledprobabilistic models Values used in the model are estimatesbased on probabilities 2009 Prentice-Hall, Inc.1 – 25
Computers and Spreadsheet ModelsQM for Windows An easy to usedecision supportsystem for use inPOM and QMcourses This is the mainmenu ofquantitativemodelsProgram 1.1 2009 Prentice-Hall, Inc.1 – 26
Computers and Spreadsheet ModelsExcel QM’s Main Menu (2003) Works automatically within Excel spreadsheetsProgram 1.2A 2009 Prentice-Hall, Inc.1 – 27
Computers and Spreadsheet ModelsExcel QM’sQM sMain Menu(2007)Program 1.2B 2009 Prentice-Hall, Inc.1 – 28
Computers and Spreadsheet ModelsExcel QMfor theBreakEvenProblemProgram 1.3A 2009 Prentice-Hall, Inc.1 – 29
Computers and Spreadsheet ModelsExcel QMSolutionto theBreakBreakEvenProblemProgram 1.3B 2009 Prentice-Hall, Inc.1 – 30
Computers and Spreadsheet ModelsUsingGoal Seekin theBreakBreakEvenProblemProgram 1.4 2009 Prentice-Hall, Inc.1 – 31
Possible Problems in theQQuantitativetit ti AnalysisA l i ApproachAhDefining the problem Problems are not easily identified Conflicting viewpoints Impact on other departments Beginning assumptions Solution outdatedDeveloping a model Fitting the textbook models Understanding the model 2009 Prentice-Hall, Inc.1 – 32
Possible Problems in theQQuantitativetit ti AnalysisA l i ApproachAhAcquiring input data Using accounting data Validity of dataDeveloping a solution Hard-to-understand mathematics Only one answer is limitingTesting the solutionAnalyzing the results 2009 Prentice-Hall, Inc.1 – 33
Implementation –N tJNotJustt ththe FiFinall StepStLack of commitment and resistanceto change Management may fear the use offormal analysis processes willreduce their decision-making power Action-oriented managers may want“quick and dirty” techniques ManagementMt supportt andd userinvolvement are important 2009 Prentice-Hall, Inc.1 – 34
Implementation –N tJNotJustt ththe FiFinall StepStLack of commitment by quantitativeanalysts An analysts should be involved withthe problem and care about thesolution Analysts should work with users andtake their feelings into account 2009 Prentice-Hall, Inc.1 – 35
Summary Quantitative analysis is a scientificapproach to decision making The approach includes Defining the problem Acquiring input data Developing a solution Testing the solution Analyzing the results Implementing the results 2009 Prentice-Hall, Inc.1 – 36
Summary Potential pproblems include Conflicting viewpoints The impact on other departments BeginningB i i assumptionsti Outdated solutions Fitting textbook models Understanding the model Acquiring good input data Hard-to-understand mathematics Obtaining only one answer Testing the solution Analyzing the results 2009 Prentice-Hall, Inc.1 – 37
Summary Implementation is not the final step Problems can occur because of LackL k off commitmentito theh approachh Resistance to change 2009 Prentice-Hall, Inc.1 – 38
1. Describe the quantitative analysis approach 2 Understand the application of quantitative After completing this chapter, students will be able to:. Understand the application of quantitative analysis in a real situation 3. Describe the use of modeling in quantitative analilysis 4. Use computers and spreadsheet models to ppq yerform .
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