SPD4524 Decision Analysis

Lecture 01 - Introduction

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 Learning Objectives
• After completing this chapter, students will be
able to:
– Describe the quantitative analysis approach
– Understand the application of quantitative analysis in
a real situation
– Describe the use of modeling in quantitative analysis
– Use computers and spreadsheet models to perform
quantitative analysis
– Discuss possible problems in using quantitative
analysis
– Perform a break-even analysis

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 Chapter Outline
• Introduction
• What Is Quantitative Analysis?
• The Quantitative Analysis Approach
• How to Develop a Quantitative Analysis Model
• The Role of Computers and Spreadsheet Models
in the Quantitative Analysis Approach
• Possible Problems in the Quantitative Analysis
Approach
• Implementation — Not Just the Final Step

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 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.

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 Examples of Quantitative Analyses
• In the mid 1990s, Taco Bell saved over $150
million using forecasting and scheduling
quantitative analysis models.
• NBC television increased revenues by over $200
million between 1996 and 2000 by using
quantitative analysis to develop better sales plans.
• Continental Airlines saved over $40 million in
2001 using quantitative analysis models to
quickly recover from weather delays and other
disruptions.
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 What is Quantitative Analysis?
• Quantitative analysis is a scientific approach
to managerial decision making in which raw
data are processed and manipulated to
produce meaningful information.

Quantitative Meaningful
Raw Data Analysis Information

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 What is Quantitative Analysis?
• Quantitative factors are data that can be accurately
calculated. Examples include:
– Different investment alternatives
– Interest rates
– Inventory levels
– Demand
– Labor cost
• Qualitative factors are more difficult to quantify but
affect the decision process. Examples include:
– The weather
– State and federal legislation
– Technological breakthroughs (e.q. quantum computing).
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The Quantitative Analysis Approach
Your Integrated Study is following the same steps

Defining the Problem

Developing a Model

Acquiring Input Data

Developing a Solution
Developing and testing Hypothesis
Testing the Solution

Analyzing the Results

Implementing the Results

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 Defining the Problem
• Develop a clear and concise statement that gives
direction and meaning to subsequent steps.
– This may be the most important and difficult step.
– It is essential to go beyond symptoms and identify
true causes.
– It 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.
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 Developing a Model
• Quantitative analysis models are realistic,
solvable, and understandable mathematical
representations of a situation.
$ Sales

$ Advertising

• There are different types of models:

Scale Schematic
models models
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 Developing a Model
Y1+Y2+...=α+aX1+bX2+...
DV IV

• Models generally contain variables

(controllable and uncontrollable) and
parameters.
– Controllable variables are the decision variables
and are generally unknown.
• How many items should be ordered for inventory?
• Parameters are known quantities that are a
part of the model.
– What is the holding cost of the inventory?
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 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.

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 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.

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 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.

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 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 will change if the model or input data
changes.
– Sensitive models should be very thoroughly tested.
– For example: elasticity

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 Implementing the Results
• Implementation incorporates the solution into
the company.
– Implementation can be very difficult.
– People may be resistant to 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.

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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.

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 How To Develop a Quantitative
Analysis Model
• A mathematical model of profit:
• Profit = Revenue – Expenses

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 How To Develop a Quantitative
Analysis Model
• Expenses can be represented as the sum of fixed and
variable costs. Variable costs are the product of unit
costs times the number of units.

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• The parameters of this model are f, v, and s as
these are the inputs inherent in the model
• The decision variable of interest is X

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 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.

• If sales = 0,
– profits = -f = –$1,000.
• If sales = 1,000,
– profits = [(10)(1,000) – 1,000 – (5)(1,000)] = $4,000

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

• Solving for X, we have

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 Pritchett’s Precious Time Pieces

• BEP for Pritchett’s Precious Time Pieces

– BEP = $1,000/($10 – $5) = 200 units
– Sales of less than 200 units of rebuilt springs will
result in a loss.
– Sales of over 200 units of rebuilt springs will result in a
profit.
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Advantages of Mathematical Modeling
• Models can accurately represent reality.
• Models can help a decision maker formulate
problems.
• Models can give us insight and information.
• Models can save time and money in decision
making and problem solving.
• A model may be the only way to solve large or
complex problems in a timely fashion.
• A model can be used to communicate problems
and solutions to others.

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 Models Categorized by Risk
• Mathematical models that do not involve risk
are called deterministic models.
– All of the values used in the model are known
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.

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 Computers and Spreadsheet Models
• QM for Windows
– An easy to use decision support system for use in
Production and Operations Management(POM)
and QM courses
– This is the main menu of quantitative models

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 Computers and Spreadsheet Models
• Excel QM’s Main Menu (2010)
– Works automatically within Excel spreadsheets

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 Selecting Break-Even Analysis in Excel QM

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 Break-Even Analysis in Excel QM

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Using Goal Seek in the Break-Even Problem

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 Possible Problems in the Quantitative
Analysis Approach
• Defining the problem
– Problems may not be easily identified.
– There may be conflicting viewpoints
– There may be an impact on other departments.
– Beginning assumptions may lead to a particular
conclusion.
– The solution may be outdated.
• Developing a model
– Manager’s perception may not fit a textbook model.
– There is a trade-off between complexity and ease of
understanding.

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 Possible Problems in the Quantitative
Analysis Approach
• Acquiring accurate input data
– Accounting data may not be collected for quantitative
problems.
– The validity of the data may be suspect.
• Developing an appropriate solution
– The mathematics may be hard to understand.
– Having only one answer may be limiting.
• Testing the solution for validity
• Analyzing the results in terms of the whole
organization

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 Implementation –
Not Just the Final Step
• There may be an institutional 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.

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 Implementation –
Not Just the Final Step
• There may be a lack of commitment by
quantitative analysts.
– Analysts should be involved with the problem and
care about the solution.
– Analysts should work with users and take their
feelings into account.

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 References
• Render, B., Stair, R. M., & Hanna, M. E. (2012). Quantitative analysis for
management. (12th ed.), Pearson Education.
• Anderson, D., Sweeney, D., Williams, T., Camm, J., & Martin, R. (2011). An
Introduction to Management Science: Quantitative Approaches to
Decision Making, Revised (13th ed.), Cengage Learning.
• Clemen, R., & Reilly, T. (2003). Making hard decisions with decision tools.
(1st ed.), Duxbury.
• Goodwin, P., & Wright, G. (2004). Decision analysis for management
judgment. Wiley.
• Hiller, F., & Lieberman, G. (2010). Introduction to operations reserach. (9th
ed.), McGraw Hill.
• Taha, H. (2010). Operations reserach: An introduction. (9th ed.), Pearson
Education.
• Winston, W., & Albright, S. (2011). Practical management science.(3rd ed.),
Cengage Learning.

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 Dependent
Yes No
Y1+Y2+...=α+aX1+bX2+... Variable (DV)
DV IV DV
No more than Yes
one
DV DV
quantitative or quantitative or Independent
qualitative qualitative Variable (IV)
quantitative or
qualitative
Qualitative Quantitative Quantitative

IV IV IV
quantitative or quantitative or quantitative or
qualitative qualitative qualitative

Qualitative Quantitative Qualitative Quantitative Qualitative Qualitative Quantitative

Discriminant t test/ Cluster analysis/

MANOVA/ Canonical
Conjoint analysis/ ANOVA/ Multiple Conjoint Factor analysis/
Canonical correlation/
analysis Logit/ Multiple regression analysis Multidimensional
correlation SEM
Probit regression scaling analysis/
ꭕ2 test

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