Quantitative Business Analysis (QBA)

Chapter 1: Introduction

Presented by: Dr. Samar Eltanbouly

 What is Quantitative Analysis?

Business Analytics

The Quantitative Analysis Approach

Chapter How to Develop a Quantitative Analysis Model

Outline 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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 Using Mathematical tools for Solving
Business Problems taking in account:
• Limitations
• Assumptions
• Specific applicability of the technique
Introduction
Quantitative Analysis (QA) help
organizations in
• Making better Decisions
• Operate More Efficiently
• Generate more Profit
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Introduction
• QA results in a solutions that is :
• Time Saving
• More accurate
• More Flexible
• More Economical (cost savings)
• More Reliable
• And Ease to Understand and use

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Introduction
Ex: Taco Bell Company has saved $150 million with better forecasting demand and better
scheduling of employees.

Ex: NBC Television Company increased advertising revenue by $200 million by using
model to help develop sales plans for advertisers.

Ex: Continental Airlines Company saves over $40 million per year by using mathematical
models to quickly recover from disruptions caused by weather delays and other factors.

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 Quantitative analysis is the scientific approach
to managerial decision making.

The approach starts with data.

What is
Quantitative
These data are manipulated or processed into
Analysis? information that is valuable to people making
decisions.

Computers have been instrumental in the

increasing use of quantitative analysis.

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 What is Quantitative Analysis?
In solving a problem, managers must consider both qualitative and
quantitative factors.
A Manager wants to consider several different Quantitative investment
alternatives:
✓Certificates of deposit at a Bank → QA determine how much this investment will
be worth in the future given interest rate for certain number of years
✓Investment in the stock market → QA computes financial ratios from the balance
sheets for several companies for stocks to be considered.
✓Investment in real estate → QA analyzes cash flows and rates of return for
investment property.

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• Manager should also consider several
Qualitative different investment
alternatives:
• Qualitative factors should be considered,
such as:
✓Weather
✓Country rules and regulations
✓New technological breakthroughs
✓Trends in the country real estate
extensions
✓Country political system
✓Country economic system
✓And so many factors that are difficult
to quantify

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DR Samar Eltanbouly

• Because of the importance of qualitative factors,

the role of quantitative analysis in the decision-
making process can vary:
✓When there is a lack of qualitative factors
and when the problem, model, and input
What is data remain the same, the results of
quantitative analysis can automate the
Quantitative decision-making process.
Analysis? ✓EX: some companies use quantitative
inventory models to determine automatically
when to order additional new materials.
✓In most cases, however, quantitative analysis
will be an aid to the decision-making process.
✓The results of quantitative analysis will be
combined with other (qualitative)
information in making decisions.
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 • Business analytics is a data-driven approach to
decision making that allows companies to make
better decisions. Business analytics is often broken
into three categories:
1) Descriptive analytics involves the study and
consolidation of historical data for a business
and an industry. It helps a company measure
Business how it has performed in the past and how it is
performing now.
Analytics 2) Predictive analytics is aimed at forecasting
future outcomes based on patterns in the past
data. Statistical and mathematical models are
used extensively for this purpose.
3) Prescriptive analytics involves the use of
optimization methods to provide new and
better ways to operate based on specific
business objectives.

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Business Analytics
Business Analytics Category Quantitative Analysis Technique
Descriptive analytics • Statistical measures such as means and standard
• Statistical quality control
Predictive analytics ▪ Decision analysis and decision trees
▪ Regression models
▪ Forecasting
▪ Project scheduling
▪ Waiting line models
▪ Simulation
▪ Markov analysis
Prescriptive analytics ▪ Inventory models such as the economic order quantity
▪ Linear programming
▪ Transportation and assignment models
▪ Integer programming, goal programming, and nonlinear
programming
▪ Network models

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 The Quantitative
analysis Approach Step1 – Defining the Problem

It consists of 7 main steps Step2 – Developing a Model

Step3– Acquiring Input Data

Step4 – Developing a Solution

Step5 – Testing the Solution

Step6- Analyzing the Results

Step7 – Implementing the Results

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Step 1 – Defining the Problem

• Develop a clear and concise statement of the problem.

• It is the most difficult step
• Analyze how the effect of the solution to one problem affects other problems
or situation in general.
• It is difficult to deal with all problems at one time. It is necessary to
concentrate on only a few problems.
• Experience has shown that bad problem definition is a major reason for
failure of management science to serve their organizations well.
• Develop specific and measurable objectives.

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Step 2 – Developing a Model

• A model is a representation (usually mathematical) of a situation.

• A mathematical model is a set of mathematical relationships.
• These relationships are expressed in equations and inequalities, as they are in a
spreadsheet model that computes sums, averages, or standard deviations.
• A variable is a measurable quantity that may vary or is subject to change.
Variables can be controllable or uncontrollable.
• A controllable variable is also called a decision variable. Ex, how many inventory
items to order.
• A parameter is a measurable quantity that is inherent in the problem. The cost of
placing an order for more inventory items is an example of a parameter.
• In most cases, variables are unknown quantities, while parameters are known
quantities.
• The model should be solvable, realistic, and easy to understand and modify, and
the required input data should be obtainable.
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 Step 3 – Acquiring Input Data

• Obtaining accurate data for the model is essential; even if the model is a perfect
representation of reality, improper data will result in misleading results. → This situation
is called garbage in, garbage out.
• There are several sources that can be used in collecting data:
✓ Company reports and documents
✓ Employees opinions (Ex: production supervisor can tell you with a great degree of
accuracy the amount of time it takes to produce a particular product)
✓ Sampling and Direct measurement (Ex: You may need to know how many pounds of
raw material are used in producing a new photochemical product. This information
can be obtained by going to the plant and measuring with scales the amount of raw
material that is being used.
✓ Statistical Sampling procedures.

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 Step 4 – Developing a Solution

• Developing a solution involves manipulating the model to arrive at the best (optimal)
solution to the problem. This can be done through any of the following:
✓ An equation to be solved for the best decision.
✓ Trial and error method: trying various approaches and picking the one that results in
the best decision.
✓ Complete enumeration: to try all possible values for the variables in the model to
arrive at the best decision.
✓ Algorithm (named after Algorismus, an Arabic mathematician in 19th century): to
solve very difficult and complex problems by repeating a few simple steps or a
serious of steps until you find the best solution.
• The accuracy of a solution depends on the accuracy of the input data and the model.

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 Step 5 – Testing the Solution
• Before a solution can be analyzed and implemented, it needs to be tested completely
• Testing the input data and the model includes determining the accuracy and completeness
of the data used by the model.
• There are several ways to test input data. One method of testing the data is to collect
additional data from a different source.
✓ (Ex: If the original data were collected using interviews, perhaps some additional data can
be collected by direct measurement or sampling.
✓ These additional data can then be compared with the original data,
✓ Statistical tests can be employed to determine whether there are differences between the
original data and the additional data.)
❖ If there are significant differences, more effort is required to obtain accurate input
data.
❖ If the data are accurate but the results are inconsistent with the problem, the model
may not be appropriate. The model can be checked to make sure that it is logical and
represents the real situation.
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 Step 6 – Analyzing the Results and Sensitivity Analysis
• Analyzing the results starts with determining the implications of the solution.
• In most cases, a solution to a problem will result in some kind of action or change in the
way an organization is operating. The implications of these actions or changes must be
determined and analyzed before the results are implemented.
• Because a model is only an approximation of reality, the sensitivity of the solution to
changes in the model and input data is a very important part of analyzing the results.
• Sensitivity analysis (or post-optimality analysis): determines how the solutions will
change with a different model or input data. (includes in decision-making and problem-
solving process)
✓ When the solution is sensitive to changes in the input data and the model
specification, additional testing should be performed to make sure that the model
and input data are accurate and valid.
✓ If the model or data are wrong, the solution could be wrong, resulting in financial
losses or reduced profits.
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 Step 7 – Implementing the Results
• This is the process of incorporating the solution into the company.
• This can be much more difficult than you would imagine. Even if the solution is optimal
and will result in millions of dollars in additional profits,
✓ if managers resist the new solution, all the efforts of the analysis are of no value.
✓ Experience has shown that many quantitative analysis teams have failed in their
efforts because they have failed to implement a good, workable solution properly.
✓ After the solution has been implemented, it should be closely monitored.
✓ Over time, there may be numerous changes that call for modifications of the original
solution. (A changing economy, fluctuating demand, and model enhancements
requested by managers and decision makers are only a few examples of changes that
might require the analysis to be modified).

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 Modeling in the Real World
1) Defining the Problem:
Step1 – Defining the Problem
CSX Transportation, Inc., has 35,000 employees and annual revenue
of $11 billion. It provides rail freight services to 23 states east of the
Step2 – Developing a Model Mississippi River, as well as parts of Canada. CSX receives orders for
rail delivery service and must send empty railcars to customer
locations. Moving these empty railcars results in hundreds of
Step3– Acquiring Input Data thousands of empty-car miles every day. If allocations of railcars to
customers is not done properly, problems arise from excess costs,
wear and tear on the system, and congestion on the tracks and at rail
Step4 – Developing a Solution yards.
2) Developing a Model:
Step5 – Testing the Solution To provide a more efficient scheduling system, CSX spent 2 years and
$5 million developing its Dynamic Car-Planning (DCP) system. This
model will minimize costs, including car travel distance, car handling
Step6- Analyzing the Results costs at the rail yards, car travel time, and costs for being early or
late. It does this while at the same time filling all orders, making sure
the right type of car is assigned to the job, and getting the car to the
Step7– Implementing the Results destination in the allowable time.
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 Modeling in the Real World
3) Acquiring Input Data:
Step1 – Defining the Problem
In developing the model, the company used historical data for testing. In
running the model, the DCP uses three external sources to obtain
Step2 – Developing a Model information on the customer car orders, the available cars of the type
needed, and the transit-time standards. In addition to these, two internal
input sources provide information on customer priorities and preferences
Step3– Acquiring Input Data and on cost parameters.
4) Developing a Solution:
Step4 – Developing a Solution This model takes about 1 minute to load but only 10 seconds to
solve. Because supply and demand are constantly changing, the
Step5 – Testing the Solution model is run about every 15 minutes. This allows final decisions to be
delayed until necessary.
Step6- Analyzing the Results 5) Testing the Solution:
The model was validated and verified using existing data. The
Step7 – Implementing the Results solutions found using the DCP were found to be very good compared
to assignments made without DCP
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 Modeling in the Real World
6) Analyzing the Results:

Step1 – Defining the Problem Since the implementation of DCP in 1997, more than $51 million has been saved annually.
Due to the improved efficiency, it is estimated that CSX avoided spending another $1.4
billion to purchase an additional 18,000 railcars that would have been needed without
DCP. Other benefits include reduced congestion in the rail yards and reduced congestion
Step2 – Developing a Model
on the tracks, which are major concerns. This greater efficiency means that more freight
can ship by rail rather than by truck, resulting in significant public benefits. These benefits
include reduced pollution and greenhouse gases, improved highway safety, and reduced
Step3– Acquiring Input Data road maintenance costs.
7) Implementing the Results:
Step4 – Developing a Solution Both senior-level management who championed DCP and key car-distribution experts
who supported the new approach were instrumental in gaining acceptance of the new
system and overcoming problems during the implementation. The job description of the
Step5 – Testing the Solution car distributors was changed from car allocators to cost technicians. They are responsible
for seeing that accurate cost information is entered into DCP, and they also manage any
exceptions that must be made. They were given extensive training on how DCP works so
Step6- Analyzing the Results they could understand and better accept the new system. Due to the success of DCP,
other railroads have implemented similar systems and achieved similar benefits. CSX
continues to enhance DCP to make DCP even more customer friendly and to improve car-
Step7 – Implementing the Results order forecasts.

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 • 𝑷𝒓𝒐𝒇𝒊𝒕 = 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 − 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔
• Expenses include fixed and variable costs:
✓𝑷𝒓𝒐𝒇𝒊𝒕 = 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 − (𝑭𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕 + 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕)
✓𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑖𝑡𝑠 𝑠𝑜𝑙𝑑 −
[Fixed cost + Variable cost per unit Number of units sold ]
How to ✓𝑷𝒓𝒐𝒇𝒊𝒕 = 𝒔𝑿 − [𝒇 + 𝒗𝑿]
✓𝑷𝒓𝒐𝒇𝒊𝒕 = 𝒔𝑿 − 𝒇 − 𝒗𝑿
Develop a
Quantitative Where: s = selling price per unit
Analysis Model f = fixed cost
v = variable cost per unit
X = number of units sold
•The parameters in this model are f, v, and s, as these are
inputs that are inherent in the model.
•The number of units sold (X) is the decision variable of
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interest.
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 Example: Pritchetts precious TIME pieces
• Bill’s company, Pritchett’s Precious Time Pieces, buys, sells, and repairs old clocks and clock parts.
• Bill sells rebuilt springs for a price per unit of $8.
• The fixed cost of the equipment to build the springs is $1,000.
• The variable cost per unit is $3 for spring material.

The number of springs sold is X, and our profit model becomes

Solution:
• s=8 Profit = $8X − $1,000 − $3X

• f = 1,000
If sales are 0, Bill will realize a $1,000 loss.
• v=3

If sales are 1,000 units, Profit = ($8)(1,000) − $1,000 − ($3)(1,000)= $4000

See if you can determine the profit for other values of units sold.
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 • In addition to the profit models shown here, decision makers are often
interested in the break-even point (BEP).
• The BEP is the number of units sold that will result in $0 profits.
Example: • We set profits equal to $0 and solve for X, the number of units at the
BEP: 𝟎 = 𝒔𝑿 − 𝒇 − 𝒗𝑿
Pritchetts • This can be written as: 𝟎 = 𝒔 − 𝒗 𝑿 − 𝒇
precious • Solving for X, we have: 𝒇 = 𝒔 − 𝒗 𝑿 , Therefore, 𝑿 =
𝒇
𝒔−𝒗
TIME pieces • This quantity (X) that results in a profit of zero is the BEP, and we now
have this model for the BEP:
𝑭𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕 𝒇
• 𝑩𝑬𝑷 = =
𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝒑𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 −(𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕) 𝒔−𝒗

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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.
• Models is the best way to quickly solve large or
complex problems.
• Models can be used to communicate problems and
solutions to others.

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Mathematical Models
Categorized by Risk
• Some mathematical models, like the profit and
break-even models previously discussed, do not
involve risk or chance.
• Deterministic models: A model in which all values
used in the model are known with complete
certainty..
• Probabilistic models: A model in which all values
used in the model are not known with certainty but
rather involve some chance or risk, often measured
as a probability value.

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Possible Problems in the Quantitative Analysis
Approach
• QA must consider conflicting
All viewpoints should be viewpoints
considered before formally
defining the problem. • QA must consider the impact on
other departments

• QA must not be based on biased

An optimal solution to the assumptions
wrong problem leaves the • QA must provide solutions in a
real problem unsolved. timely manner and not solutions
that are outdated

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Possible Problems in the Quantitative Analysis
Approach
• Manager’s perception of a problem won’t
always match the textbook approach
Developing a model that
fit the real-world problem • Solving the trade off between the
complexity of the model and ease of
understanding.

• QA uses accounting data that do not provide

all the input data needed
Obtaining accurate input
data can be very difficult. • A lack of “good, clean data”. Data must be
prepared or validated for being used in a
model.

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Possible Problems in the Quantitative Analysis
Approach
Hard-to-understand • Although the mathematical models we use may be
mathematics and one complex and powerful, they may not be completely
answer can be a understood.
problem in developing a • QA usually give just one answer to a problem. Most
solution managers would like to have a range of options.

• Managers are often asked how good the solution looks

to them. In the process of convincing the manager, the
Assumptions should be analyst will have to review every assumption that went
reviewed. into the model
• If the results indicate large changes in organization
policy, QA results is expected to face resistance.

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Possible Problems in the Quantitative Analysis
Approach
• Some managers, however, fear that the use of a formal analysis
Lack of Commitment process will reduce their decision-making power and feel
and Resistance to uncomfortable to reverse their thinking patterns with formal
Change during decision making.
implementation. • Many action-oriented managers do not like the lengthy formal
decision-making process and prefer to get things done quickly.

• Some analysts do not care whether these results help make the
Lack of Commitment final decision.
by QA during • Successful implementation requires that the analyst not tell the
implementation. users what to do but work with them and take their feelings into
account.

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Chapter Outline
• What is Quantitative Analysis?
• Business Analytics
• 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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