How Quantitative Business Techniques Are Being Used

Schools of business have recently been attempting to bridge the gap

between academic course offerings and the real demands of the decision-
making manager. One of the greatest challenges concerns the area of
management science, or quantitative business methods. From the beginning,
managers have questioned the applications of quantitative methods in
business.
Management scientists are concerned that there is a "practicality gap"
between quantitative business methods and management. Managers claim
they are not using models because they neither adequately represent the
true complexity of situations nor meet real-world needs. The educational
process has been criticized for placing too much emphasis on theory and for
ignoring the needs of the practitioner. In other words, the educational
process with respect to quantitative business techniques is "user-deficient."
The divergence of views on the relative importance of theory versus
application continues to be a dividing line between academicians and
managers. Managers' contention is that students leave schools trained in
techniques but with little or no exposure to real problems. Educators have
countered that the job of the university is to educate people, and this should
involve more than vocational trainig for particular jobs in industry.
Some progress is being made, however, in larger organizations. In general,
as gross sales of an organization increase, the applications of quantitative
business methods also increase. This positive correlation can also be noted
for increases in the number of employees in an organization.
This study will attempt to address the following questions:
* How are quantitative business techniques being applied?
* Who is responsible for their application?
* Which techniques are most frequently used?
* Why are many managers hesitant to use quantitative methods?
* What are some of the barriers to user effectiveness?
In contrast to similar surveys, this study investigates the extend of the
application of quantitative techniques in small and medium-sized
organizations and offers some recommendations based on the results.
THE SURVEY
A survey was conducted with 900 small and medium-sized manufacturing
firms assumed to represent a cross section of U.S. manufacturing
organizations. The study focused on the production industry, with most of
the firms in business for more than ten years. The majority had annual gross
sales under $5 million and employed fewer than 100 people.
The survey examined the types of quantitative business techniques used and
their frequency of utilization in two general categories: operations research
(OR) and forecasting. A comparative analysis of various techniques within
each of these two broad areas is provided.
Operations Research Results
Table 1 illustrates the relative frequency of application of OR techniques by
functional area. As expected, production management showed the highest
usage of operations research techniques with general management being
the second highest. These two accounted for approximately 70 percent of
the application of OR techniques.
Table 2 illustrates responsibility for OR applications by job type. Most of the
involved individuals work in industrial engineering or operations research
departments. However, almost 35 percent indicated that they were in
"management."
In Table 3 the usage levels of eight OR techniques are compared.
Respondents were asked to indicate the frequency of use for each technique
on a five-point scale ranging from "never" to "very frequently." The figures in
the table cells are the percentage of the total responses for that particular
technique. A mean score was also computed for each technique to facilitate
comparisons. The data indicate a relatively wide range in the application of
the various techniques. Quality control, production scheduling models, and
inventory analysis seem to be the most widely used. Some respondents
indicated that these particular methods "produce direct benefits in terms of
cost and are relatively easy to apply." The main reasons given for not using
the other OR methods were:
1. No perceived need for using them.
2. A lack of quantitative skills necessary for using them.
3. A lack of resources.
According to this sample, a number of operations research techniques are
almost never used. Why aren't these methods being used effectively? The
following is a summary of the respondents' comments:
* The benefits of using these techniques are not clearly understood.
* There is a lack of knowledge of quantitative techniques and how they can
be used.
* There is a lack of knowledge of what linear programming, network models,
or queuing models can do.
* "Some of these techniques are so time consuming to use that we pass
them by."
* "Educating others in the organization who are not familiar with quantitative
tools, and who would resist using them if they were, is just too difficult a
task. Users of operations research methods need education and experience
in the powers and politics of change-resistance factors in the real world of
management."
* "In order to overcome the ineffectiveness of operations research
techniques, management scientists must learn to think like managers." "If
they want to have an impact on the real world of the manager, they will have
to think in terms of managers' needs and expectations.
The most significant barriers cited were related to lack of knowledge. In
order to overcome these "barriers to user effectiveness," respondents
proposed a number of suggestions, including:
* "Those with quantitative skills within the company should direct
considerably more of their time toward educating managers."
* "Quantitative training needs to play a larger role in executive development
programs."
This lends support to the long-held belief about the relationship between
knowledge and use. Findings from other studies have also indicated that
increasing manager knowledge is an effective means of improving technique
utilization.
In addition to the descriptive illustration presented above, a number of
statistical tests were performed. The first test concerned the following
hypothesis:
* The application of OR techniques is independent of the firm's main
business activity.
The business activities defined were manufacturing, marketing, distribution,
and other. The tests indicated that type of business activity is not related to
the utilization of OR methods. The second hypothesis tested was as follows:
* The application of OR techniques is independent of the firm's level of sales.
The tests revealed that there is a relationship between level of sales and
utilization of OR techniques. Further examination of the data implied that
firms with higher levels of sales tend to use OR techniques more often than
firms with lower sales levels. Finally, a third hypothesis was tested:
* The application of OR techniques is independent of how long the firm has
been in business.
The tests for this hypothesis implied that both older and younger firms apply
OR techniques in a similar fashion.
FORECASTING RESULTS
Since forecasting has become an important part of many business operations
recently, the survey also examined the application of forecasting techniques.
Table 4 illustrates the relative frequency of application of forecasting
techniques by functional area. Forecasting methods seem to have a broader
appeal than other quantitative techniques. The data reveal that forecasting
is used in all areas of business. One of the reasons for this is that forecasting
does not in itself offer a career path and is therefore usually included as part
of some other functional area such as marketing or management. Although
marketing appears to be the area in which most of the forecasting activity
takes place, forecasting is by no means restricted to that area. Production
planners need detailed forecasts to schedule production activities, order raw
materials, hire workers, and plan shipments. When it comes to actual
production, the forecasts must be detailed, specifying exactly what colors
and styles w
Financial managers use sales forecasts to plan their cash and borrowing
positions during the year. Management requires forecasts for planning
capital expenditures of new plant and equipment, for planning major
promotional activities, and for planning the general direction and future
course of the firm. The results presented in Table 4 support the notion that
the need for forecasts cuts across all functional lines.
Table 5 summarizes responsibility for forecasting applications by an
individual's functioning area. Note that most of the forecasting projects are
performed by marketing and management personnel. In contrast to OR
users, industrial engineers and operations researchers are not heavily
involved in forecasting applications. Some respondents indicated that
marketing was more closely involved with forecasting because "it has direct
responsibility for providing sales forecasts of future levels of demand," or
"Industrial engineers and operations researchers have the knowledge but are
less likely to be a part of the forecasting process."
Table 6 compares the use of nine forecasting techniques. This table is
analogous to Table 3 presented earlier. The data reveal that trend analysis,
seasonal-cyclical indexes, and moving averages tend to be the most
frequently used, while Box-Jenkins analysis is almost never used. The
respondents gave the same reasons for not using these methods as they did
for not using OR techniques: they perceived no need for them, and they
lacked the skills and resources necessary to use them. Some of the specific
comments made by respondents included:
* "Simple forecasting methods perform just as well as sophisticated ones."
* "We do not have the time or money to expend on lengthy, complex
methods such as regression analysis, econometric models or Box-Jenkins."
* "There is confusion as to which forecasting models are most appropriate for
a given set of circumstances."
* "Forecasting is not a career. It is usually a part of the assignment of a
market planner or controller. Such forecasters cannot be expected to
become experts in sophisticated statistical techniques."
It became apparent from discussions with some of the respondents that not
only was there a knowledge gap; there was also a "gap in communications
between the user and the preparer of forecasts.c At one extreme we find the
executive who, through ignorance and fear of quantitative methods, relies
mostly on intuition. At the other extreme is the forecaster skilled in the latest
forecasting techniques but unable or unwilling to relate the forecasting
process to the needs of the organization and its decision makers.
There are major differences between the perceptions of these forecast users
and prepares. It seems that most prepares of forecasts feel inadequate in
understanding management's forecasting problems and in identifying the
important issues in a forecasting situation. Thus, the important issue
becomes the lack of relevance of the forecast. Forecasting often has little
impact on decision making because of "what when, how, and in what form"
the forecasts are provided. The problem may not simply be one of failure to
communicate but may also involve organizational structure. Forecasting is
often performed at levels where it is unlikely that it will ever have much
effect on decision making.
The most common remedy put forth by respondents was gain increased
training. However, a word of caution is necessary here. Increasing the
forecaster's knowledge of sophisticated methods may not necessarily lead to
improved performance. Rather, the training should instruct users of forecasts
in the pros and cons of alternative methods and in the identification of
situations where forecasting can play a major role in improving
organizational decision making. Finally, a forecaster's position should have
the requisite authority and responsibility to ensure that forecasting is
performed at a level in the organization that will allow its proper impact on
decision-making.
The three hypotheses examined for the OR techniques were also tested for
forecasting; these tests yielded results analogous to those for OR techniques.
CONCLUSIONS
Since the firms surveyed here were in the manufacturing sector, one should
not generalize the above results to all business activities. Another important
consideration is that many of the firms surveyed were small. Of the firms
surveyed, 42 percent had fewer than 25 employees, and 29.4 percent had
sales under $1 million. This might account for the fact that 44.8 percent of
the respondents indicated that they saw no need for using some of the
methods being studied. It also may explain the relatively high percentage of
respondents citing a lack of sufficient resources to use these methods (21
percent) and a lack of quantitative skills to apply them (22.4 percent). In
addition, 94.7 percent of the firms responding had been in business for more
than 10 years. Therefore, most of the responding organizations represent
older firms. This should not affect the results, since it was found that the age
of the firm has little relation to the utilization of these quantitative
techniques.
Production management and general management seem to be the main
users of OR techniques; forecasting methods seem to be more widely used
among all functional areas. The respondents identified a number of barriers
to using quantitative techniques, including a perceived lack of need for
them, a deficiency in skills, and a lack of resources. The first of these is
probably a function of the type of education received in this area. It implies
that universities may be placing too much emphasis upon techniques and
not enough on implementation. However, when these methods are used,
industrial engineers and management personnel are the individuals most
responsible for applying OR techniques in smaller and medium-sized firms,
with forecasting methods primarily utilized by marketing and management
personnel.
The most frequently used OR techniques appear to be in the areas of quality
control, scheduling, and inventory analysis. The general feeling here is that
"these methods produced tangible benefits and are not difficult to use."
Network models, queuing theory, and maintenance and repair models are
utilized the least. Some managers indicated that they did not know what
these tools could do for them. These conclusions are probably reflective of
the smaller size of the firms surveyed, since one test did indicate that size of
the firm (in terms of sales) is related to frequency of use.
The most frequently used forecasting methods for this sample of firms are
trend analysis, seasonal-cyclical indexes, and moving averages. Respondents
indicated that, in general, "simple methods performed just as well as
sophisticated ones." The more complex methods, such as Box-Jenkins, are
rarely used. Most managers agreed, "We do not have the time or money to
expend on lengthy, complex methods." This again is likely to be a function of
the cross section of firms that were surveyed. Smaller firms with less sales
will have fewer resources, and their personnel will probably lack the
quantitative skills to implement the more sophsiticated forecasting methods.
Universities are placing too much emphasis upon techniques that appear to
be used relatively infrequently in practice. For instance, this survey points to
three main areas of implementation in the area of operations research:
quality control, inventory analysis, and production scheduling. It is
understood that a balance of course offerings in OR is to be maintained, but
it seems that more weight should be given to these three areas.
It is also apparent that practitioners are having difficulty in dealing with ill-
defined problems. Therefore academic institutions need to provide more
training in applying quantitative business techniques to "nonstructured"
situations. Almost half of the respondents in this study indicated they
perceived no need for using these methods. This is probably due to
insufficent knowledge with respect to identifying real-world problems that do
not come already supplied with accurate data. Operations research courses
need to address this issue.
Several other inferences can be drawn:
* Forecasting should be offered to all students in business curriculums and
should be a requirement for marketing and management majors.
* Techniques such as Box-Jenkins should probably only be offered to
students who plan to make a career of forecasting or continue into graduate
school.
* The general practitioner is not using sophisticated techniques.
*Moving averages, trend analysis, seasonal-cyclical indexes, and leading
indicators are the forecasting tools used most by practitioners in small and
medium-sized firms.
Finally, since managers are mainly responsible for applying operations
research techniques in smal and medium-sized firms, academic institutions
should incorporate the implementation of quantitative methods into their
management curriculum.
The results presented above point to certain quantitative business methods
that seem to be more frequently used than others. However, the conclusions
presented are generally applicable to smaller and medium-sized firms and
should be intepreted in that context. If academic institutions are to produce
a quality product, they need to stay in tune with the demand for that
product. Quantitative business instruction must face up to real-world needs if
practitioners are expected to implement these methods.