NEW GLOBAL VISION COLLEGE

Quantitative analysis for decision making

MBA 561

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Chapter One
Introduction
Chapter objectives

After completing this unit, you will be able to:

• Understand the history of OR • OR techniques

• Meaning and definition of OR • Quantitative Analysis and Decision

• Features of OR Making

• Identify application areas of OR • Models and Model Building

• Significance of operations research.

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History of OR

• The subject of OR was developed in military context during World War II,
pioneered by the British scientists.

• At that time, the military management formed a group of scientists to deal with
tactical problems related to air and land defense of the country.

• The main reason for conducting the study was that they were having very limited
military resources. It was, therefore, necessary to decide upon the most effective
way of utilizing these resources.

• The scientists studied the various problems on the basis of quantitative study of
operations suggested certain approaches which showed remarkable success. 4
 Cont’d…
Contd…

• United States military management also motivated to start similar activities.

• Similar OR teams also started functioning in Canada and France.

• Till the 1950s, use of operations research was mainly confined to military
purposes.

• After the end of World War II, the success of military teams attracted the
attention of industrial managers who were seeking solutions to their complex
managerial problems.
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 Cont’d…

• At the end of the war, in UK, the military expenditures were reduced and
most OR experts were released.

• Operations research began to develop in industrial field in the United States

since the year 1950.

• The Operations Research Society of America (ORSA) was formed in 1953

and the International Federation of Operations Research (IFOR) was formed
in 1957.
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 Cont’d…

• Societies were established.

• Various journals relating to operations research began to appear in different

countries in the years that followed the mid-1950s.

• Courses and curricula in operations research in different universities and other

academic institutions began to proliferate in the United States.

• Other countries rapidly followed suit and thus, Operations Research came to be
applied for solving business and industrial problems.
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 Some Factors
Factors contributingtofor
Contributing the Growth
Growth of OR of OR

• Introduction of Electronic Data Processing (EDP) methods further

enlarged the scope for application of OR techniques.

• With the help of a digital computer many complex problems can be

studied on a day-to-day basis.

• As a result, many industrial concerns are adopting OR as an integrated

decision-making tool for their routine decision procedures.

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 What is OR?

Operations
• The activities carried out in an organization/elsewhere.

Research
• The process of observation and testing characterized by the scientific method.
Situation, problem statement, model construction, validation, experimentation,
candidate solutions.

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 Meaning and Definition of OR

• OR is the application of a scientific approach to solving management

problems in order to help managers make better decision
(Bernard W. Taylor III).

• OR is concerned with scientifically deciding how to best design and operate

man-machine system usually requiring the allocation of scare resources.”

Operations Research Society, America

• OR is the art of winning wars without fighting.

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 FEATURES OF OR

• Interdisciplinary team approach: Operations research has the characteristics

that it is done by a team of scientists drawn from various disciplines such as
mathematics, statistics, economics, engineering, and physics.

• Systems approach: Operations research emphasizes on the overall approach

to the system. Therefore, the essence of system orientation lies in the
systematic search for significant interactions in evaluating actions of any part
of the organization.
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 Cont’d…

• Scientific method: it includes both scientific research on the phenomena of operating

systems and the associated engineering activities aimed at applying the results of research.

• Goal-oriented optimum solution: Operations research tries to optimize a well-defined

function subject to given constraints and as such is concerned with the optimization theory.

• Use of models: OR uses models built by quantitative measurement of the variables

concerning a given problem and also derives a solution from the model using one or more
of the diversified solution techniques.

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 Cont’d…

• Requires willing executives: OR does require the willingness on the part of

the executive for experimentation to evaluate the costs and the consequences
of the alternative solutions of the problem.

• Reduces complexity: OR tries to reduce the complexity of business operations

and does help the executive in correcting a troublesome function and to
consider innovations which are too costly and complicated to experiment with
the actual practice.
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 Application Areas of Operations Research

There are so many application areas of operations research; to mention some of the
most widely known areas:

• Manufacturing
• Transportation
• Construction
• Telecommunication
• Financial planning
• Healthcare
• Military
• Public services
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 Significance & Techniques of OR
The commonly used techniques include 2. Inventory models

3. Network models
1. Allocation models :
4. Waiting- line models (Queuing theory)
• Linear programming
5. Simulation
• Transportation models
6. Decision theory
• Assignment models
7. Game theory

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Quantitative analysis and Decision making

What is Decision Making? Discuss

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 Quantitative Analysis & the Decision Making Process

• Decision Making: is the process of selecting a feasible course of action from a set
of alternative, so as to solve problems.

• The decision making process is initiated by a problem.

• The intention of the Decision maker/manager, when making a decision, is to solve

that problem.

• In doing so, the manager first makes an analysis of the alternatives.

• There are two forms of analysis— qualitative and quantitative.

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 Decision Making Process
Qualitative analysis
based upon managerial
experience and judgment

Summary &
Managerial Decision
evaluation
Problem

Quantitative analysis based

upon mathematical
techniques

Figure 1.1 The Decision Making Process

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 Cont’d…
• In qualitative analysis, intuition and the decision maker’s subjective judgment

and experience are used.

• This type of problem solving is more an art than a science.

The qualitative approach is usually used when:

• The problem is simple,

• The problem is familiar,

• The costs involved are not so great,

• Immediate decisions are needed.

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 Cont’d…

The quantitative approach is used when:

• The problem is complex

• The problem is not familiar

• The costs involved are substantial

• Enough time is available to analyze the problem

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 Cont’d…

 Both the quantitative and qualitative analyses of a problem provide

important information for the decision maker.

 quantitative analysis tend to be more objective than those based on a

purely qualitative analysis.

 For this reason OR makes use of quantitative models.

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The management science approach to analyze and solve the problem involves:

Problem Definition

Model Construction

Analysis (Model
Solution)

Implementation &
Follow-up

Figure 1.2 The management science approach

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Models and Model Building

What is a Model? Discuss.

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 Models and model building

• Model is a theoretical abstraction (approximation) of a real-life problem.

• In OR, the problem is expressed in the form of a model.

• A management science model is an abstract representation of an existing

problem situation.

• It can be in the form of a graph or chart, but most frequently a management

science model consists of a set of mathematical relationships.

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 Classification of Models

• The classification of models is a subjective problem. They may be

distinguished as follows:

Models by function

Models by degree of abstraction

Models by structure

Models by nature of an environment

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 1. Models based on Function/purpose:

A. Descriptive Models: explain the various operations in non-mathematical language and try
to define the functional relationships and interactions between various operations.

Eg: organizational chart, pie-diagram, layout plan describes the features of their respective
system

B. Predictive Models: explain or predict the behavior of the system.

E.g: Exponential smoothing forecast model – predicts the future demand.

C. Normative or Optimization Models: These models are designed to provide optimal

solution to the problem subject to a certain constraints on use of resources.

E.g: LP Problem 26
 2. Models based on Structure and Abstraction :

A. Physical or Iconic Models : the physical representation of the real situation, problem or object.

• It is also called Static Model

• It is a physical replica of the real object

• e.g. A Globe, Photographs, Maps, blue prints, paintings, sketches of insects, A solar system

B. Analog or Schematic Models: they use one set of properties to represent another set of properties
which the system under study possesses.
• They don’t have the same physical appearance as the object being modeled.

E.g. Graphs – they represents properties like force, speed, age, time … in terms of distance.

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 Cont’d…
C. Mathematical or Symbolic Models: this is also an abstract model

• A set of relations is represented in the form of mathematical equations, using symbols to

represent various parameters.

Example: Y = a + bx
Max. Z=3000x1 +2500x2
Subject to: 2x1+x2 < 40
x1+3x2 < 45 x1 and x2 are decision variables.
x1 < 12
x1 , x2 > 0

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 3. Models based on certainty/ Nature of an
Environment :
A. Deterministic Models: all the parameters of decision variables are constant
and their functional relationship are known with certainty.

Eg. LP, Integer programming etc.

B. Probabilistic or Stochastic Models: deal with problems of decision making

under uncertainty or risk and the probabilities of the alternative states of nature are
known.

Eg. decision analysis.

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THE END!

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