Ruzanita Mat Rani - FSKM

Topic 1: Introduction to Quantitative Analysis

Introduction

What is Quantitative Analysis (QA)?

QA is the scientific approach to managerial decision making.

Quantitative Analysis involves the application of mathematical method to develop a model

and then to develop a solution.

The techniques have been applied successfully in many areas such as business,
government, health care, education, bank and etc.

Quantitative Analysis also referred to as operations research, quantitative method,

management science and decision science.

History of QA:
First formal activities were initiated in England during World War II.
A team of British scientists set out to make a decision regarding the best utilization of
war material.
Following the end of the war, the ideas advanced in military operations were adapted
to improve efficiency and productivity in the civilian sector.

Major reason for the growth in the use of QA since World War II.
The development of numerous QA methods due to continued research.
Advancement in computing power through digital computers.

The decision-making process:

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Quantitative Analysis:
The approach starts with data. Like data about raw material and workers for a
factory, these data are manipulated or processed into information to know how many
quantity of raw material should be purchase, how many workers we need and etc.

The Quantitative Analysis Approach

Defining the problem

Developing a Model

Acquiring Input Data

Developing a Solution

Testing a Solution

Analyzing the results

Implementing the Results

QMT425/429 concentrate on model development and solution

First step: Defining the problem

The problem must be clearly and concisely defined.

Must identify the right problem.

May be the most difficult step.

May require specific, measurable objectives.

Improperly defining a problem can easily result in no solution or an inappropriate solution.

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Second step: Developing a model

Model is a representation of a situation.

Models may be: iconic (look-alike the real entity), analog (explains a phenomenon by
reference to some other occurrence) e.g. thermometer, schematic (drawing and pictures)
e.g. map and mathematical (mathematical relationship).

Models contain variables (controllable or uncontrollable) and parameters.

Controllable variables are called decision variables.

Good model characteristics should be solvable, realistic, easy to understand and easy to
modify.

A QA model is an abstract representation of an existing problem in the form of graph or chart

but most frequently in mathematical relationships.

Third step: Acquiring input data

Obtain the data that are used in the model (input data).

Obtaining accurate data for the model is essential; even if the model is a perfect
representation of reality, improper data will result in misleading results.

Data may come from: company reports, company documents, interviews, on-site direct
measurement, and statistical sampling.

Fourth step: Developing a solution

Involves manipulating the model to arrive at the best (optimal) solution to the problem.

Solution must be practical and implementable.

Various methods:
o solution of equation(s)
o trial and error
o complete enumeration
o implementation of algorithm

A QA solution technique usually applies to a specific type of model.

Fifth step: Testing the solution

Before a solution can be analyzed and implemented, it needs to be tested completely.

Because the solution depends on the input data and the model, both require testing.

Determine accuracy and completeness of input data: collect data from a different source and
compare.

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Sixth step: Analyzing the result

Analyzing the results starts with determining the implications of the solution.

Sensitivity analysis determines how the solutions will change with a different model or input
data.

Final step: Implementing the results

Implement the results.

This is the process of incorporating the solution into the company.

Developing a QA Model

Example 1.1:
Western Clothing Company produce denim jeans. Each pair of denim jean cost RM8 to produce
and sell for RM23 per pair. Determine the profit if the company produce 300 pairs of jeans.

Model:
Profit = 23X 8X; X = number of jeans sold

If the company sell 300 pairs of jeans,

Profit = 23 (300) 8 (300) = RM4500

Finding Break-Even Point

Example 1.2:
Consider previous example. Let say the company also incurs fixed cost of RM10,000 per month.
Find the break-even point.

Model:
Profit = 23X 8X 10,000; X = number of jeans sold.

At Break-even point: Total Revenue = Total Cost (i.e. Profit = 0)

0 = 23X 8X 10,000
X = 666.7 pairs of jeans.

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The Advantages of using QA in problem solving

1. Problem is solved using scientific method, there is a logical and systematic approach to
solving problem.

2. Most solutions obtained are optimal solution.

3. Save time if the problem is repetitious.

The Advantages of Mathematical Modeling

1. Models can accurately represent reality. If properly formulated, a model can be extremely
accurate.

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 problem solving.

5. A model may be the only way to solve some large or complex problems in a timely fashion.

6. A model can be used to communicate problems and solutions to others.

Mathematical Models Categorized by Risk

There are two types of model:

1. Deterministic model all input variables are known and have constant values (not involved
chance and risk).
For example: the EOQ model in inventory control.

2. Stochastic model at least one input variable is uncertain and with value that varies. Also
known a probabilistic models (involves chance and risk).
For example: simulation model using Monte Carlo method

In QMT425/429,

Probabilistic technique - Decision Theory, Simulation

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Linear Programming technique Graphical and Simplex Method, Transportation and

Assignment
Network technique Project Management
Other technique Inventory