Quantitative Techniques

and Operations Research

MBA (FT) II
Quantitative Techniques
Quantitative Techniques are those statistical
and operations research (programming
techniques) which help in the decision making
process specially concerning business and
industry
Definition
Quantitative Techniques may be defined as
those techniques which provide the decision
maker with a systematic and powerful means
of analysis and help, based on quantitative
data, in explaining policies for achieving pre-
determined goals.
Definition
Quantitative Techniques are the set of
scientific techniques intended to express the
business constraints and the risks underlying a
business operation into measurable terms and
thereby reduce the decision making process to
a more analytical and more objective process.
Quantitative Techniques Classification
Statistical Techniques Programming Techniques
(Statistical methods & (Operations Research)
measures)
1. Methods of collecting 1. Linear Programming
data 2. Decision Theory
2. Classification and 3. Theory of Games
tabulation 4. Simulation
3. Probability theory and i. Montecarlo Technique
sampling analysis ii. Systems Simulation
4. Correlation and 5. Inventory Planning
Regression Analysis
Quantitative Techniques Classification
Statistical Techniques Programming Techniques
(Statistical methods & (Operations Research)
measures)
5. Index Numbers 6. Queuing (Waiting
6. Time Series Analysis Line) Theory
7. Interpolation and 7. Integrated Production
Exptrapolation Models
8. Survey Techniques and 8. Network Analysis
Methodology 9. Others
9. Ratio Analysis i. Non-Linear
Programming
Quantitative Techniques Classification
Statistical Techniques Programming Techniques
(Statistical methods & (Operations Research)
measures)
10. Statistical Quality ii. Dynamic Programming
Control iii. Search Theory
11. Analysis of Variance iv. The theory of
replacement
12. Statistical Inference
v. Integer Programming
and Interpretation
vi. Quadratic
13. Theory of Attributes Programming
vii. Parametric
Programming etc.
Role of Quantitative Techniques in
Business and Industry
 Provide tool for scientific analysis
 Provide solution for various business problems
 Enable proper deployment of resources
 Help in minimizing waiting and servicing costs
 Enable the management to decide when to buy and
how much to buy
 Assist in choosing an optimum strategy
 Render greater help in optimum resource allocation
 Facilitate the process of decision making
Role of Quantitative Techniques in
Business and Industry
 Through various quantitative techniques
management can know the reactions of the
integrated business systems
 Statistical techniques are also of great help to
businessmen in more than one way
Quantitative Techniques and Business
Management
 QT is useful in Production Management in
 Selecting and building site for a plant
 Scheduling and controlling its development and
designing its layout
 Controlling the movements of required production
materials and finished goods inventories
 Scheduling and sequencing production
 Calculating the optimum product mix
Quantitative Techniques and Business
Management
 It is useful in Personnel Management to find
out
 Optimum manpower planning
 Number of persons to be maintained on the roll
 To arrange personnel to manage absenteeism
 Optimum manner of sequencing and routing of
personnel to a variety of jobs
 In studying personnel recruitment procedures,
accident rates and labour turnovers
Quantitative Techniques and Business
Management
 QT helps in Marketing Management to
determine
 Distribution points and locations of warehouses,
their size, stock quantity and choice of customers
 The optimum allocation of sales budget to direct
selling and promotional schemes / expenses
 Choice of media of advertising and bidding
strategies
 Consumer preferences relating to size, colour,
packaging etc.
Quantitative Techniques and Business
Management
 QT also helps in Financial Management in
 Finding long range capital requirement and to
generate such requirement
 Determining optimal replacement policies
 Working out a profit plan for the firm
 Developing capital investment plans
 Estimating credit and investment risks
Limitations of Quantitative Techniques

 The inherent limitation is concerning

mathematical expression
 High costs are involved in the use of QT
 Does not take into consideration the intangible
factors i.e. non-measurable human factors
 QT is just the tool of analysis and not the
complete decision making process
Management and Decision Making
 Functions of a manager: planning, organizing,
directing and controlling
 Traditionally decision-making was
 An art
 A talent that is acquired over a period of time though
experience
 In current scenario, environment in which
management is operating is
 Complex
 Fast changing
Management and Decision Making
 Decision-making, these days, to a great extent
needs to be supplemented by systematic and
scientific methods
 Which ultimately calls for a decision maker to
 Define the problem in a clear manner
 Collect pertinent facts
 Analyze the facts thoroughly, and
 Derive and implement the solution
Decision Making and Quantitative
Techniques
 Various types of decision-making situations
that a manager might encounter can be listed
as follows:
 Decision under certainty or uncertainty
 Static decision (decision for one time only)
 Dynamic decision (a sequence of interrelated
decisions made either simultaneously or over
several time periods)
 Decisions where opponent is nature or rational
opponent
Elements of decision
 A decision-maker (individual, a group,
organization or a society)
 A set of possible actions that may be taken to
solve the decision problem
 A set of possible states that might occur
 A set of consequences (pay-off) associated
with various combination of courses of action
and the states that may occur
Complexities in decision making
Complexities in decision making arise due to several
factors which include the complicated manner of
interaction of-
 Economical
 Political
 Technological
 Environmental and competitive forces in society
 Limited resources of an organization
 The values
 The risk attitudes and knowledge of the decision-
maker
Complexities in decision making
 The essential idea of the quantitative approach to
decision-making is that of the factors that influence
the decisions can be identified and quantified then it
becomes easier to resolve the complexity of the tools
of quantitative analysis
 A large number of business problems have been
given a quantitative representation with varying
degrees of success and it has led to a general
approach which is variedly designated as
OPERATIONS RESEARCH, management science,
systematic analysis, decision science and so on.
Historical development of OR
 Born during II world war
 QTs were developed to assist Military
Operations
 OR, the name derived from the context in
which it was used –research activity on
operational areas of the armed forces
 After the war, OR was adopted by the industry
 Techniques developed dramatically and were
refined further
Historical development of OR
 Advent of digital computers contributed to the
growth and application of OR in the post-war
period
 OR spread from military to government,
industrial, social and economic planning
 Second Industrial Revolution was one of the
important reasons for the progress of industrial
operations research in U.S.A.
Historical development of OR
 Resulted in automation (replacement of man
by machine)
 In 1950, OR was introduced as a subject for
academic study in American Universities
 Formation of Operations Research Society in
1950 increased the impact of OR
 Increasing number of educational institutions
offering OR at degree level shows the impact
of OR
Historical development of OR
 OR activities have spread to diverse fields
such as hospitals, libraries, city planning,
transportation systems, crime investigation,
etc.
 Indian organizations using OR techniques are:
Indian Airlines, Railways, Defense
Organizations, Fertilizer Corporation of India,
Delhi Cloth Mills, Tata Iron and Steel Co., etc.
Development of OR in India
 OR in India came into existence with the opening of
an OR unit in 1949 at the Regional Research Lab at
Hyderabad
 Prof. P.C. Mahalonobis established an OR unit in
1953 in the Indian Statistical Institute, Kolkata to
apply OR methods in national planning survey
 In 1957 Operations Research Society of India was
formed, with its first conference in 1959 at Delhi
Development of OR in India
 Prof. Mahalonobis made the first important
application of OR in India in preparing the
draft of the Second Five Year Plan
 For academic studies, the first M.Sc. Course
on OR was started by Delhi University in
1963. At the same time, Institute of
Management at Kolkata and Ahmadabad
introduced OR in their MBA courses
Development of OR in India
 At present, OR has been introduced in almost all
institutes and universities for the students of
mathematics, statistics, commerce, economics,
management and engineering
 In the industrial sector a good number of organised
industries in India have well-trained OR teams
 So as to maximize the profit, Kirloskar Company is
using Assignment Models for allocation of their
salesmen to different areas. LP models are also used
by the company to assemble various diesel engines at
the lowest possible cost
Development of OR in India
 D.C.M., Calico and Binny’s are using LP techniques
for cotton blending
 PERT/CPM techniques are used by a number of
organizations for effective management and control
of their construction projects
 OR techniques are utilised for solving problems
relating to staffing, production planning, blending,
product mix, maintenance, inspection, advertising,
capital budgeting, investment etc. by a number of
organizations
Operations Research
 Operations Research (often referred to as
management science) is simply a scientific
approach to decision making that seeks to best
design and operate a system, usually under
conditions requiring the allocation of scarce
resources.
 By a system, we mean an organization of
interdependent components that work together
to accomplish the goal of the system
Operations Research
 A mathematical model is a mathematical
representation of an actual situation that may
be used to make better decisions or simply to
understand the actual situation better
Definitions of Operations Research
 Simply it can be defined as the research of
operations. An operations may be called a set
of acts required for the achievement of a
desired outcome. OR is concerned with the
operations of complex and inter-related acts
which can be performed by any organization
of men, machines and man-machine units.
Definitions of Operations Research
 OR is a scientific method of providing
executive departments with quantitative basis
for decisions regarding the operations under
their control

-Morse and Kimball

Definitions of Operations Research
 OR, in the most general sense, can be
characterized as the application of scientific
methods, tools and techniques to problems
involving the operations of systems so as to
provide those in control of the operations with
optimum solutions to the problem

-Churchman, Acknoff, Arnoff

Definitions of Operations Research
 OR is applied decision theory. It uses any
scientific, mathematical or logical means to
attempt to cope with the problems that
confront the executive when he tries to achieve
a thorough going rationality in dealing with his
decision problem

-Miller and Star

Definitions of Operations Research
 OR is a scientific approach to problem soling
for executive management
-H. M. Wagner

 OR is an art of giving bad answers to

problems, to which otherwise, worse answers
are given
-Thomas L. Saaty
Definitions of Operations Research
 OR is the systematic, method-oriented study of
the basic structure, characteristics, functions
and relationships of an organization to provide
the executive with a sound, scientific and
quantitative basis for decision-making
-E. L. Arnoff and M. J. Netzorg
Definitions of Operations Research
 OR is the application of modern methods of
mathematical science to complex problems involving
management of large systems of men, machine,
materials and money in industry, business,
government and defense. The distinctive approach is
to develop a scientific model of the system
incorporating measurement of factors such as chance
and risk to predict and compare the outcomes of
alternatives decisions, strategies or controls
-J.O.R. Society, U.K.
Chief Characteristics of Operations
Research
 System (or executive) oriented
 Interdisciplinary in nature
 Application of scientific method
 Uncovering of new problems
 Improvement in the quality of decisions
 Use of computer
 Quantitative solution and
 Human factors
Scope of OR
 In the field of Industrial Management: There
is a chain of problems starting from the
purchase of raw materials to the dispatch of
finished goods. OR has been successfully
applied in industry in the fields of
 Production
 Transportation
 Blending
 Product Mix
Scope of OR
 Inventory Control
 Demand Forecast
 Sale and purchase
 Repair and maitenance
 Scheduling and sequencing
 Planning
 Scheduling and control of projects
 Scores of other associated areas
Scope of OR
 In Defense Operations: Defense operations are
carried out by different agencies namely airforce,
army and navy. Activities performed by each of them
can be further divided into activities v.i.z.
 Operations
 Intelligence
 Administration
 Training
 There is thus a need to co-ordinate various activities
involved in order to arrive at optimum strategy and to
achieve consistent goals
Scope of OR
 In both Developing and Developed Economies: in
developing economies, these is a great scope of developing an
OR approach towards planning-
 Objective – Orient planning so that growth per capita income
is maximum in shortest possible time
 Subject to – National goals (To remove poverty in developing
countries there is a great scope for)
 Economists
 Statisticians
 Administrators
 Technicians
 Politicians
 Agriculture experts
All working together to solve this problem with an OR approach
Scope of OR
 In Agriculture Sector on national or
international basis-With population explosion
and consequent shortage of food, every
country is facing the problem of allocation of
land to various crops in accordance with
climatic conditions and available facilities. A
scientific approach can be done for the
problem of optimal distribution of water from
the various water resources by each
developing country
Scope of OR
 In Big and Small organizations- techniques
of OR can be applied to find optimum decision
(either maximization of profit or minimization
of cost) to the problems of employing sales
persons (whether additional employees are
required or not), purchasing of additional
means of transportation etc.
Scope of OR
 In Big Hospitals
 For solving administrative problems
 To reduce out-door patient’s waiting time

 In the area of Transport

 For time regulation of arrival and running of trains
 For minimization of congestion of passengers
 For managing waiting time of passengers

 In Business and Society

 To decide premium rates of various polices or is applied to
LIC
Scope of OR
 Extensively used in
 Petroleum,
 Paper,
 Chemical,
 Metal Processing,
 Aircraft
 Rubber
 Transport and Distribution
 Mining
 Textile Industries
Scope of OR
 In Management – OR is a problem solving
and decision making science. Some of the
areas of management where OR techniques
have been successfully applied are:
 Allocation and Distribution
 Optimal allocation of limited resources such as men,
machines, materials, time and money
 Location and size of warehouses, distribution
centers, retail depots etc.
 Distribution policy
Scope of OR
 Production and Facility Planning
 Selection, location and design of production plants
 Project scheduling and allocation of resources

 Preparation of forecasts for various inventory items

and computing economic order quantities and
reorder levels
 Determination of the number and size of the items to
be produced
 Maintenance policy

 Scheduling and sequencing of production runs by

proper allocation of machines
Scope of OR
 Procurement
 What, how and when to purchase at the minimum procurement cost
 Bidding and replacement policies
 Transportation planning and vendor analysis
 Marketing
 Product selection, timing na d competitive actions
 Selection of advertising media
 Demand forecasts and stock levels
 Customer’s preference for size, colour and packaging of various
products
 Best time to lauch a new product
Scope of OR
 Finance
 Capital requirements, cash-flow analysis
 Credit policies, credit risks etc.
 Profit plan for the company
 Determination of optimum replacement policies
 Financial planning, dividend policies, investment and portfolio
management, auditing, etc.
 Personnel
 Selection of personnel, determination of retirement age and
skills
 Recruitment policies and assignment of jobs
 Wage/salary administration
Scope of OR
 Research and Development
 Determination of areas for research and
development
 Reliability policies and assignment of jobs

 Selection of projects and preparation of their

budgets
Scope of OR in Financial
Management
 Cash Management
 Adequate supply of funds to all sections,
departments and units of the organization is
managed
 LPP technique helps to determine the
allocation of funds to each section
 LPP technique also identifies sections having
excess funds and it may be diverted to the
sections that need them
Scope of OR in Financial
Management
 Inventory Control
 To develop better inventory policies
 To bring down the investment in inventories
 OR techniques help to achieve optimum balance
between inventory carrying costs, ordering costs and
shortage costs.
 OR techniques also helps to determine
 Which items to hold
 How much to hold
 When to order and
 How much to order
Scope of OR in Financial
Management
 Simulation Technique
 Itconsiders various factors that affect the present and
projected cost of borrowing money from commercial
banks, and tax rates, etc.
 It provides an optimum combination of financing
(debt, equity or retained earnings) for the desired
amount of capital
 Simulation replaces subjective estimates, judgment
and hunches of the management by providing reliable
information
Scope of OR in Financial
Management
 Capital Budgeting
 It involves evaluation of various investment proposals such as:
 Market introduction of a new product
 Replacement of an equipment by a new one
 Hiller’s and Hertz’s models (simulation) and decision trees in
conjunction with EMV can be usefully employed to evaluate
various investment proposals/projects
 Optimal investment portfolios (with or without estimates of risk)
are selected using OR techniques of LP, integer programming
and dynamic programming
Applications of Various OR
Techniques
 Industry
 Airlines
 Automobiles
 Transportation
 Petroleum
 Coal
 Chemical
 Mining
 Paper
 Communication
 Computer
 Electronics etc.
Applications of Various OR
Techniques
 Business
 Government
 Military
 Agriculture
Applications of Various OR
Techniques
 Linear Programming is used to solve problems
involving
 assignment of jobs to machines
 Blending
 Product mix
 Advertising media selection
 Least cost diet
 Distribution
 Transportation
 Investment portfolio selection and many others
Applications of Various OR
Techniques
 Dynamic Programming has been applied
to
 Capital budgeting
 Selection of advertising media
 Employment smoothening
 Cargo loading
 Optimal routing problems
Applications of Various OR
Techniques
 Inventory control has been helpful to solve
problems of
 Capital budgeting
 Selection of advertising media
 Employment smoothening
 Cargo loading
 Optimal routing problems