Introduction to

Quantitative
Analysis
September 2020
Learning Objectives

1. Describe the quantitative analysis approach

2. Understand the application of quantitative analysis in a real

situation

3. Describe the use of modeling in quantitative analysis

4. Use computers and spreadsheet models to perform

quantitative analysis

5. Discuss possible problems in using quantitative analysis

6. Perform a break-even analysis

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Chapter Outline

1.1 Introduction

1.2 What Is Quantitative Analysis?

1.3 The Quantitative Analysis Approach

1.4 How to Develop a Quantitative Analysis Model

1.5 The Role of Computers and Spreadsheet Models in the

Quantitative Analysis Approach

1.6 Possible Problems in the Quantitative Analysis

Approach

1.7 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
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 Technological breakthroughs.
 The Quantitative Analysis Approach
Defining the Problem

Developing a Model

Acquiring Input Data

Developing a Solution

Testing the Solution

Analyzing the Results

Implementing the Results

Figure 1.1 1-8
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.

+ b 1X
$ Sales

Y= b 0

$ Advertising

There are different types of models:

Scale Schematic
models models
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Developing a Model

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.

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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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The modeling process

 Opportunity/problem recognition
 Model formulation
 Data collection
 Analysis of the model
 Implementation and project management
Generic Quantitative Business Modeling Process

Real-life
Step 1: Step 2:
Opportunit
Problem Model
y recognition formulation
Problem

Vali
d a tio
So n
lut
ion Step 3:
tes Data
t in
g, collection
ve
r if
ica
t io
n

Step 5:
Implementation Step 4:
and project Analysis
management of the model
The components of mathematical models
Area Decision Dependent Uncontrollabl
Variables Variables e
Variables
Financial Investment amounts Total profit Inflation rate
Investment Period of investment Rate of return Prime rate
Timing of Earnings per share Competition
investment Liquidity
Marketing Advertising budget Market share Disposable income
Number of models Customer Competitor’s actions
Zonal sales reps satisfaction
Manufacturing Production amounts Total cost Machine capacity
Inventory levels Quality level Technology
Inventive plan Spoilage Material prices
Accounting Audit schedule Data processing cost Legal requirements
Use of computers Error rate Tax rates
Depreciation Computer
schedule technology
Transportation Shipments Total transport cost Delivery distance
regulations
Services Number of servers Customer Demand for service
satisfaction
A
 Manufacturing
Inputs Systems Model
Processes Outputs

Machines
Raw Methods Finished
materials Tools products
Labor
Energy

Environment Dependent
variables:

Quantity
Quality
Decision Uncontrollable Profit
variables: variables:

What to produce Price of material

When Speed of machine
Who will work Wages
Where to stock Legal requirements
A simplified Model of a Manufacturing System
Decision Variables: Mathematical relationship: Dependent variable:

X1 , X 2 Maximize revenue
(What quantities of
products 1 and 2
(objective) R = 5X1 +
should be Subject to: 2X2
produced?) (total revenue)
X1 + X2 ≤ 50
(Constraint)

Uncontrollable variables:

5, 2 and 50
(market prices, machine
limitation)
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.

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
Expenses can be represented as the sum of fixed and variable costs and
The parameters of this model
variable costs are the product of unit costs times the number of units
are f, v, and s as these are the
Profit = Revenue – (Fixedinputs inherent
cost + Variable in the model
cost)
Profit = (Selling price per
Theunit)(number
decision of variable
units sold) of
– [Fixed
cost + (Variable costs per unit)(Number of units sold)]
Profit = sX – [f + vX]
interest is X
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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 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.

s = 10 f = 1,000 v=5
Number of spring sets sold = X

Profits = sX – f – vX

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.
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 their 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 $1,000/($10
– vX, or – 0$5)==(s200 units
– v)X –f
Salesfor
Solving of less
X, wethan
have 200 units of rebuilt springs
will result in a loss.
f = (s – v)X
Sales of over 200 units of rebuilt springs will
result in a profit. X = f
s–v

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

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 Computers and Spreadsheet Models

Using Goal
Seek in the
Break-Even
Problem

Program 1.4
 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.
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.
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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