Chapter 1

Introduction to
Quantitative Analysis

To accompany
Quantitative Analysis for Management, Tenth Edition,
by Render, Stair, and Hanna © 2008 Prentice-Hall, Inc.
Power Point slides created by Jeff Heyl © 2009 Prentice-Hall, Inc.
 Introduction

 Mathematical tools have been used for

thousands of years
 Quantitative analysis can be applied to
a wide variety of problems
 It’s not enough to just know the
mathematics of a technique
 One must understand the specific
applicability of the technique, its
limitations, and its assumptions

© 2009 Prentice-Hall, Inc. 1–2

 Need for Operations
Management
 The increased complexity of running a successful
business.
 Many large companies with complex business
processes have used OM for years to help executives
and managers make good strategic and operational
decisions.
 American Airlines and IBM have incredibly complex
operations in logistics, customer service and resource
allocation that are built on OM technologies.
 As the trend of increased business complexity moves to
smaller enterprises, OM will play vital operational and
strategic roles.

© 2009 Prentice-Hall, Inc. 1–3

 Need for OM
 Lots of information, but no decisions.
 Enterprise resource planning (ERP) systems and the
Web have contributed to a pervasive information
environment; decision-makers have total access to
every piece of data in the organization.
 The problem is that most people need a way to
transform this wealth of data into actionable information
that helps them make good tactical and strategic
decisions.
 The role of OM decision methods is to help leverage a
company’s investment in information technology
infrastructure by providing a way to convert data into
actions.
© 2009 Prentice-Hall, Inc. 1–4
 Need for OM

 A large nationwide bank is using OM

techniques to configure complicated
financial instruments for their customers.
 A process that previously required a human
agent and took minutes or hours to perform
is now executed automatically in seconds on
the bank’s Intranet.
 The resulting financial products are far
superior to those produced by the manual
process.
© 2009 Prentice-Hall, Inc. 1–5
 Need for OM
 A major retail enterprise is using OM
methodology for making decisions about
customer relationship management
(CRM).
 They are using mathematical optimization to
achieve the most profitable match between a
large number of customer segments, a huge
variety of products and services, and an
expanding number of marketing and sales
channels such
© 2009 Prentice-Hall, Inc. 1–6
 Need for OM
 Sears, Roebuck and Company
 Manages a U.S. fleet of more than 1,000 delivery
vehicles, some company owned and some not.
 The company makes more than 4 million deliveries a
year of 21,000 uniquely different items.
 It has 46 routing offices and provides the largest home
delivery service of furniture and appliances in the
United States.
 The company also operates a U.S. fleet of 12,500
service vehicles, together with an associated staff of
service technicians.
 Service demand is on the order of 15 million calls per
year and revenue generated is approximately $3 billion.
© 2009 Prentice-Hall, Inc. 1–7
 Need for OM
 OM researchers designed a system to deal with such
variables as customer schedules and requested
performance times, time estimates for the required service,
vehicles and personnel available, skills needed, parts and
product availability and so on.
 The system was designed to automatically schedule all
facets of performance in such a way as to
 Provide accurate and convenient time windows for the
Sears customer
 Minimize costs
 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.
© 2009 Prentice-Hall, Inc. 1–8
 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
million using quantitative analysis
models to quickly recover from weather
delays and other disruptions

© 2009 Prentice-Hall, Inc. 1–9

 What is Quantitative Analysis?

Quantitative analysis is a scientific approach

to managerial decision making whereby raw
data are processed and manipulated
resulting in meaningful information

Quantitative Meaningful
Raw Data Analysis Information

© 2009 Prentice-Hall, Inc. 1 – 10

 What is Quantitative Analysis?

Quantitative factors might be different

investment alternatives, interest rates,
inventory levels, demand, or labor cost
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

© 2009 Prentice-Hall, Inc. 1 – 11

 The Quantitative Analysis Approach

Defining the Problem

Developing a Model

Acquiring Input Data

Developing a Solution

Testing the Solution

Analyzing the Results

Figure 1.1 Implementing the Results

© 2009 Prentice-Hall, Inc. 1 – 12
 Defining the Problem
Need to develop a clear and concise
statement that gives direction and meaning
to the following steps
 This may be the most important and difficult
step
 It is essential to go beyond symptoms and
identify true causes
 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

© 2009 Prentice-Hall, Inc. 1 – 13

 Developing a Model
Quantitative analysis models are realistic,
solvable, and understandable mathematical
representations of a situation

+ b 1X
$ Sales

b
Y= 0

$ Advertising

There are different types of models

Scale Schematic
models models
© 2009 Prentice-Hall, Inc. 1 – 14
 Developing a Model

 Models generally contain variables

(controllable and uncontrollable) and
parameters
 Controllable variables are generally the
decision variables and are generally
unknown
 Parameters are known quantities that
are a part of the problem

© 2009 Prentice-Hall, Inc. 1 – 15

 Acquiring Input Data

Input data must be accurate – GIGO rule

Garbage
In
Process
Garbage
Out

Data may come from a variety of sources such as

company reports, company documents, interviews,
on-site direct measurement, or statistical sampling
© 2009 Prentice-Hall, Inc. 1 – 16
 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

© 2009 Prentice-Hall, Inc. 1 – 17

 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

© 2009 Prentice-Hall, Inc. 1 – 18

 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 of the analysis will change if
the model or input data changes
 Sensitive models should be very thoroughly
tested

© 2009 Prentice-Hall, Inc. 1 – 19

 Implementing the Results
Implementation incorporates the solution
into the company
 Implementation can be very difficult
 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

© 2009 Prentice-Hall, Inc. 1 – 20

 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

© 2009 Prentice-Hall, Inc. 1 – 21

 How To Develop a Quantitative
Analysis Model

 An important part of the quantitative

analysis approach
 Let’s look at a simple mathematical
model of profit

Profit = Revenue – Expenses

© 2009 Prentice-Hall, Inc. 1 – 22

 How To Develop a Quantitative
Analysis Model
Expenses can be represented as the sum of fixed and
variable costs and 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 unit v = variable cost per
unit
f = fixed cost X = number of units
sold © 2009 Prentice-Hall, Inc. 1 – 23
 How To Develop a Quantitative
Analysis Model
Expenses can be represented as the sum of fixed and
variable costs and variable costs are the
The parameters product
of this modelof
unit costs times the number
are f, v,of units
and s as these are the
inputscost
Profit = Revenue – (Fixed inherent in the cost)
+ Variable model
Profit = (Selling priceThe
perdecision variable
unit)(number of of
units
sold) – [Fixedinterest
cost +is(Variable
X costs per
unit)(Number of units sold)]
Profit = sX – [f + vX]
Profit = sX – f – vX
where
s = selling price per unit v = variable cost per
unit
f = fixed cost X = number of units
sold © 2009 Prentice-Hall, Inc. 1 – 24
 Bagels ‘R Us
Assume you are the new owner of Bagels R Us and you want to
develop a mathematical model for your daily profits and
breakeven point. Your fixed overhead is $100 per day and your
variable costs are 0.50 per bagel (these are GREAT bagels). You
charge $1 per bagel.
Profits = Revenue - Expenses
(Price per Unit)  - Fixed Cost
(Number Sold) - (Variable Cost/Unit) 
(Number Sold)

Profits = $1*Number Sold - $100 - $.50*Number Sold

© 2009 Prentice-Hall, Inc. 1 – 25

 Breakeven Example
f=$100, s=$1, v=$.50

X=f/(s-v)

X=100/(1-.5)

X=200

At this point, Profits are 0

© 2009 Prentice-Hall, Inc. 1 – 26
 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.

s = 10 f = 1,000 v=5
Number of spring sets sold = X
Profits = sX – f – vX

If sales = 0, profits = –$1,000

If sales = 1,000, profits = [(10)(1,000) – 1,000 – (5)(1,000)]
= $4,000

© 2009 Prentice-Hall, Inc. 1 – 27

 Pritchett’s Precious Time Pieces
Companies are often interested in their break-even
point (BEP). The BEP is the number of units sold
that will result in $0 profit.

0 = sX – f – vX, or 0 = (s – v)X – f
Solving for X, we have
f = (s – v)X
f
X=
s–v

Fixed cost
BEP =
(Selling price per unit) – (Variable cost per unit)

© 2009 Prentice-Hall, Inc. 1 – 28

 Pritchett’s Precious Time Pieces
Companies are often interested in their break-even
point (BEP). The BEP is the number of units sold
BEP for Pritchett’s Precious Time Pieces
that will result in $0 profit.
BEP
0= sX –= f$1,000/($10
– vX, or – 0$5) = –200
= (s v)Xunits
–f
Salesfor
Solving of less
X, wethan
have 200 units of rebuilt springs
will result in a loss
f = (s – v)X
Sales of over 200 units of rebuilt springs will
result in a profit X = f
s–v

Fixed cost
BEP =
(Selling price per unit) – (Variable cost per unit)

© 2009 Prentice-Hall, Inc. 1 – 29

 Examples

1. Selling price $1.50, cost/bagel $.80,

fixed cost $250 Breakeven point?
2. Seeking a profit of $1,000, selling
price $1.25, cost/bagel $.50, 100
sold/day. What is fixed cost?
3. What selling price is needed to
achieve a profit of $750 with a fixed
cost of $75 and variable cost of $.50

© 2009 Prentice-Hall, Inc. 1 – 30

 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
© 2009 Prentice-Hall, Inc. 1 – 31
 Models Categorized by Risk

 Mathematical models that do not involve

risk are called deterministic models
 We know all the values used in the model
with complete certainty
 Mathematical models that involve risk,
chance, or uncertainty are called
probabilistic models
 Values used in the model are estimates
based on probabilities

© 2009 Prentice-Hall, Inc. 1 – 32

 Computers and Spreadsheet Models

QM for Windows
 An easy to use
decision support
system for use in
POM and QM
courses
 This is the main
menu of
quantitative
models

Program 1.1
© 2009 Prentice-Hall, Inc. 1 – 33
 Computers and Spreadsheet Models
Excel QM’s Main Menu (2003)
 Works automatically within Excel spreadsheets

Program 1.2A
© 2009 Prentice-Hall, Inc. 1 – 34
 Computers and Spreadsheet Models

Excel QM’s
Main Menu
(2007)

Program 1.2B
© 2009 Prentice-Hall, Inc. 1 – 35
 Computers and Spreadsheet Models

Excel QM
for the
Break-
Even
Problem

Program 1.3A
© 2009 Prentice-Hall, Inc. 1 – 36
 Computers and Spreadsheet Models

Excel QM
Solution
to the
Break-
Even
Problem

Program 1.3B
© 2009 Prentice-Hall, Inc. 1 – 37
 Computers and Spreadsheet Models

Using
Goal Seek
in the
Break-
Even
Problem

Program 1.4
© 2009 Prentice-Hall, Inc. 1 – 38
 Possible Problems in the
Quantitative Analysis Approach
Defining the problem
 Problems are not easily identified
 Conflicting viewpoints
 Impact on other departments
 Beginning assumptions
 Solution outdated
Developing a model
 Fitting the textbook models
 Understanding the model

© 2009 Prentice-Hall, Inc. 1 – 39

 Possible Problems in the
Quantitative Analysis Approach
Acquiring input data
 Using accounting data
 Validity of data
Developing a solution
 Hard-to-understand mathematics
 Only one answer is limiting
Testing the solution
Analyzing the results

© 2009 Prentice-Hall, Inc. 1 – 40

 Implementation –
Not Just the Final Step
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

© 2009 Prentice-Hall, Inc. 1 – 41

 Implementation –
Not Just the Final Step
Lack of commitment by quantitative
analysts
 An analysts should be involved with
the problem and care about the
solution
 Analysts should work with users and
take their feelings into account

© 2009 Prentice-Hall, Inc. 1 – 42