ISOM 201 - Chapter 1 (Render & Stairs)

Data & Decision AnalysisISOM201 : Data & Decision AnalysisISOM201 Dr. Martin Schedlbauer Office: S640 Office Hours: Mo/We 1:00 – 1:30pm and by appt. E-Mail: mschedlbauer@suffolk.edu

Introduction to Quantitative Analysis : Chapter 1 To accompanyQuantitative Analysis for Management, Tenth Edition, by Render, Stair, and Hanna Power Point slides created by Jeff Heyl Introduction to Quantitative Analysis © 2009 Prentice-Hall, Inc.

Learning Objectives : Learning Objectives Describe the quantitative analysis approach Understand the application of quantitative analysis in a real situation Describe the use of modeling in quantitative analysis Use computers and spreadsheet models to perform quantitative analysis Discuss possible problems in using quantitative analysis Perform a break-even analysis After completing this chapter, students will be able to:

Chapter Outline : 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

Introduction : Introduction Modeling is critical in figuring out if something works as planned Many disciplines use modeling: architecture civil engineering military There are different types of models: scale models schematic models (diagrams) quantitative models (mathematical formulae) most appropriate for business and finance

Introduction : 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

Examples of Quantitative Analyses : 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 by using quantitative analysis to develop better sales plans Continental Airlines saved over $40 million using quantitative analysis models to quickly recover from weather delays and other disruptions

What is Quantitative Analysis? : Quantitative analysis is a scientific approach to managerial decision making whereby raw data are processed and manipulated resulting in meaningful information What is Quantitative Analysis?

What is Quantitative Analysis? : Quantitative factors might be different investment alternatives, interest rates, inventory levels, demand, or labor cost Qualitative factors such as the weather, state and federal legislation, and technology breakthroughs should also be considered Information may be difficult to quantify but can affect the decision-making process What is Quantitative Analysis?

The Quantitative Analysis Approach : The Quantitative Analysis Approach Figure 1.1

Defining the Problem : Defining the Problem Need to develop a clear and concise statement that gives direction and meaning to the following steps This may be the most important and difficult step It is essential to go beyond symptoms and identify true causes 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

Developing a Model : Developing a Model Quantitative analysis models are realistic, solvable, and understandable mathematical representations of a situation Other types of models can be useful too

Developing a Model : Developing a Model Models generally contain variables (controllable and uncontrollable) and parameters Controllable variables are generally the decision variables and are generally unknown Parameters are known quantities that are a part of the problem

Acquiring Input Data : Acquiring Input Data Input data must be accurate – GIGO rule Data may come from a variety of sources such as company reports, company documents, interviews, on-site direct measurement, or statistical sampling

How To Develop a Quantitative Analysis Model : How To Develop a Quantitative Analysis Model An important part of the quantitative analysis approach Let’s look at a simple mathematical model of profit Profit = Revenue – Expenses

How To Develop a Quantitative Analysis Model : How To Develop a Quantitative Analysis Model Expenses can be represented as the sum of fixed and variable costs and 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

How To Develop a Quantitative Analysis Model : How To Develop a Quantitative Analysis Model Expenses can be represented as the sum of fixed and variable costs and 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

Pritchett’s Precious Time Pieces : Pritchett’s Precious Time Pieces Profits = sX – f – vX 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 If sales = 0, profits = –$1,000 If sales = 1,000, profits = [(10)(1,000) – 1,000 – (5)(1,000)] = $4,000

Pritchett’s Precious Time Pieces : Pritchett’s Precious Time Pieces 0 = sX – f – vX, or 0 = (s – v)X – f Companies are often interested in their break-even point (BEP). The BEP is the number of units sold that will result in $0 profit. Solving for X, we have f = (s – v)X

Pritchett’s Precious Time Pieces : Pritchett’s Precious Time Pieces 0 = sX – f – vX, or 0 = (s – v)X – f Companies are often interested in their break-even point (BEP). The BEP is the number of units sold that will result in $0 profit. Solving for X, we have f = (s – v)X

Models Categorized by Risk : Models Categorized by Risk Mathematical models that do not involve risk are called deterministic models We know all the values used in the model 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

Computers and Spreadsheet Models : Computers and Spreadsheet Models Using Goal Seek in the Break-Even Problem Program 1.4

Possible Problems in the Quantitative Analysis Approach : Possible Problems in the Quantitative Analysis Approach Defining the problem Problems are not easily identified Conflicting viewpoints Impact on other departments Beginning assumptions Solution outdated Developing a model Fitting the textbook models Understanding the model

Possible Problems in the Quantitative Analysis Approach : Possible Problems in the Quantitative Analysis Approach Acquiring input data Using accounting data Validity of data Developing a solution Hard-to-understand mathematics Only one answer is limiting Testing the solution Analyzing the results

Summary : Summary Quantitative analysis is a scientific approach to decision making The approach includes Defining the problem Acquiring input data Developing a solution Testing the solution Analyzing the results Implementing the results