1

Introduction
to
Quantitative
Analysis
 LEARNING OBJECTIVES
After completing this chapter, students will be able to:
1. Describe the quantitative analysis approach
2. Understand the application of quantitative analysis
in a real situation
3. Describe the three categories of business analytics
4. Describe the use of modeling in quantitative
analysis
5. Use computers and spreadsheet models to perform
quantitative analysis
6. Discuss possible problems in using quantitative
analysis
7. Perform a break-even analysis
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 CHAPTER OUTLINE
1.1 Introduction
1.2 What Is Quantitative Analysis?
1.3 Business Analytics
1.4 The Quantitative Analysis Approach
1.5 How to Develop a Quantitative Analysis Model
1.6 The Role of Computers and Spreadsheet
Models in the Quantitative Analysis Approach
1.7 Possible Problems in the Quantitative Analysis
Approach
1.8 Implementation — Not Just the Final Step

1–3
 Introduction
• Mathematical tools have been used for
thousands of years
• Quantitative analysis can be applied to a
wide variety of problems
– Not enough to just know the mathematics of a
technique
– Must understand the specific applicability of
the technique, its limitations, and assumptions
– Successful use of quantitative techniques
usually results in a solution that is timely,
accurate, flexible, economical, reliable, and
easy to understand and use

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 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 between 1996 and 2000 by using
quantitative analysis to develop better sales plans
• Continental Airlines saves over $40 million every
year 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

Raw Data Quantitative Meaningful

Analysis Information

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 What is Quantitative Analysis?
• Quantitative factors are data that can be
accurately calculated
– Different investment alternatives
– Interest rates
– Inventory levels
– Demand
– Labor cost
• Qualitative factors are more difficult to
quantify but affect the decision process
– The weather
– State and federal legislation
– Technological breakthroughs
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 What is Quantitative Analysis?
• Quantitative and qualitative factors may have
different roles
• Decisions based on quantitative data can be
automated
• Generally quantitative analysis will aid the
decision-making process
• Important in many areas of management
– Production/Operations Management
– Supply Chain Management
– Business Analytics

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 Business Analytics
• A data-driven approach to decision making
– Large amounts of data
– Information technology is very important
– Statistical and quantitative analysis are used to
analyze the data and provide useful information
• Descriptive analytics – the study and
consolidation of historical data
• Predictive analytics – forecasting future
outcomes based on patterns in the past data
• Prescriptive analytics – the use of
optimization methods
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 The Quantitative Analysis Approach
FIGURE 1.1
Defining the Problem

Developing a Model

Acquiring Input Data

Developing a Solution

Testing the Solution

Analyzing the Results

Implementing the Results

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 Defining the Problem
• Develop a clear and concise statement of
the problem to provide direction and
meaning
– This may be the most important and difficult
step
– Go beyond symptoms and identify true causes
– 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
• Models are realistic,
solvable, and

$ Sales
understandable
mathematical
representations of a
situation $ Advertising

• Different types of models

Physical Scale Schematic
models models models

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 Developing a Model
• Mathematical model – a set of mathematical
relationships
• Models generally contain variables and
parameters
– Controllable variables, decision variables, 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 cost of placing an order?
• Required input data must be available

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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 – company

reports, documents, employee interviews, direct
measurement, or statistical sampling
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 Developing a Solution
• Manipulating the model to arrive at the best
(optimal) solution
• 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

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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

• Revenue and expenses can be

expressed in different ways

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How To Develop a Quantitative Analysis
Model

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

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How To Develop a Quantitative Analysis
Model

Profit = Revenue – (Fixed cost

The + Variable cost)
parameters of this
Profit = (Selling price permodel are f, v,ofand
unit)(Number as
unitsssold)
– [Fixed cost + (Variable
these are coststheper
inputs
unit)(Number of inherent
units sold)]in the model
Profit = sX – [f + vX] The decision variable of
Profit = sX – f – vX interest is X
where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold

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 Pritchett’s Precious Time Pieces
• The company buys, sells, and repairs old clocks
• Rebuilt springs sell for $8 per unit
• Fixed cost of equipment to build springs is $1,000
• Variable cost for spring material is $3 per unit
s=8 f = 1,000 v=3
Number of spring sets sold = X

Profits = $8X – $1,000 – $3X

If sales = 0, profits = –f = –$1,000

If sales = 1,000, profits = [($8)(1,000) – $1,000 – ($3)(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
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)

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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
BEP for Pritchett’s Precious Time Pieces
that will result in $0 profit
0 BEP
= sX = f – vX, or – $3)
– $1,000/($8 – v)X
0 ==(s200 –f
units

Solving
• Salesfor of we have
X, less than 200 units of rebuilt springs
f = (s – v)X
will result in a loss
• Sales of over 200 units f of rebuilt springs will
result in a profitX = s – v

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

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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

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 Models Categorized by Risk

• Mathematical models that do not involve

risk or chance are called deterministic
models
– All of the values used in the model are known
with complete certainty
• Mathematical models that involve risk or
chance are called probabilistic models
– Values used in the model are estimates based
on probabilities

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Possible Problems in the Quantitative
Analysis Approach

• Defining the problem

– Problems may not be easily identified
– Conflicting viewpoints
– Impact on other departments
– Beginning assumptions
– Solution outdated
• Developing a model
– Fitting the textbook models
– Understanding the model

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Possible Problems in the Quantitative
Analysis Approach
• Acquiring accurate input data
– Using accounting data
– Validity of the data
• Developing a solution
– Hard-to-understand mathematics
– Only one answer is limiting
• Testing the solution
• Solutions not always intuitively obvious
• Analyzing the results
• How will it affect the total organization

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 Implementation –
Not Just the Final Step
• Lack of commitment and resistance to
change
– Fear formal analysis processes will reduce
management’s decision-making power
– Fear previous intuitive decisions exposed as
inadequate
– Uncomfortable with new thinking patterns
– 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
• 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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