Quantitative Analysis

Lecture -1- Introduction

Associate Professor, Anwar Mahmoud Mohamed, PhD, MBA, PMP
 Course Contents
Lecture Topic for First Term Chapter
1 Introduction of Quantitative Analysis 1
2 Linear Programming 2
3 Linear Programming: Sensitivity Analysis 3
4 Queuing Models , Waiting Line Models 11
5 Simulation 12

Mid Term Exam

Topic Topic for Second Term Chapter
6 Decision Analysis (Tree) 13
7 Forecasting 16
8 Project Scheduling: PERT/CPM 9
9 Transportation & Assignment 7
10 Group Presentation (Simulation / Waiting line/……) ---
Final Exam
amokhtarpmp@gmail.com
 Grading System
Description Weight

Attendance 10%

Presentation ( Group Assignment) 20%

Mid Term – Exam 30%

Final Exam 40%

Total 100%

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 What is Quantitative Analysis?
• Quantitative analysis is a scientific
approach to managerial decision
making whereby raw data are
processed and operated resulting in
meaningful information
A variety of names exists for the body of
knowledge involving quantitative approaches to
decision making. Today, the terms most commonly
used—management science (MS), operations
research (OR), decision science and business
analytics—are often used.

Project Management Framework (v 1.0) 4

 What is Management?
“ Management is the process of efficient allocation and
utilization of the different 4 M’s Organizational Resources.”
i.e. M =4 M’s :

1. Manpower Resource: Human resources, employees, labors,

staff and other supporters..etc.
2. Material Resource: all types of materials, papers, documents,
facilities, procedures and process..etc.
3. Machine Resource: Computers, desks, tools and any other
technology..etc.
4. Money Resource: Budget, Financial resources, and other
transactions needed to facilitate the work and harmony of the above
three resources.. etc..”

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Problem Solving and Decision Making
Problem solving can be defined as the process of identifying a difference between
the actual and the desired state of businesses and then taking action to resolve this
difference. For problems important enough to justify the time and effort of careful
analysis, the problem-solving process involves the following seven steps:

1. Identify and define the problem.

2. Determine the set of alternative solutions.

3. Determine the criterion or criteria that will be used to evaluate the alternatives.

4. Evaluate the alternatives.

5. Choose an alternative.

6. Implement the selected alternative.

7. Evaluate the results to determine whether a satisfactory solution has been

THE RELATIONSHIP BETWEEN PROBLEM SOLVING AND DECISION MAKING
Decision making is the term generally associated with the first five
steps of the problem-solving process. Thus, the first step of decision
making is to identify and define the problem. Decision making ends with
the choosing of an alternative, which is the act of making the decision.

Quantitative Analysis and Decision Making

Combined the first three steps of the decision-making process under the heading of
“Structuring the Problem” and the latter two steps under the heading “Analyzing the
Problem.”

A SUBCLASSIFICATION OF THE DECISION-MAKING PROCESS

THE ROLE OF QUALITATIVE AND QUANTITATIVE ANALYSIS
The analysis phase of the decision-making process may take two basic

forms: qualitative and quantitative. Qualitative analysis is based primarily on

the manager’s judgment and experience; if the manager has had little

experience with similar problems, or if the problem is sufficiently complex,

then a quantitative analysis of the problem can be an especially important

consideration in the manager’s final decision. Although skills in the

qualitative approach are essential in the manager and usually increase with

experience
THE ROLE OF QUALITATIVE AND QUANTITATIVE ANALYSIS

The skills of the quantitative approach can be learned only by studying

the assumptions and methods of management science. A manager

who is knowledgeable in quantitative decision-making procedures is in

a much better position to compare and evaluate the qualitative and

quantitative sources of recommendations and ultimately to combine the

two sources to make the best possible decision

THE ROLE OF QUALITATIVE AND QUANTITATIVE ANALYSIS
Why a quantitative approach might be used in the decision making
process include the following:

1. The problem is complex, and the manager cannot develop a good solution

without the aid of quantitative analysis.

2. The problem is critical (e.g., a great deal of money is involved), and the

manager desires a detailed analysis before making a decision.

3. The problem is new, and the manager has no previous experience from

which to start.

4. The problem is repetitive, and the manager saves time and effort by depend

on quantitative procedures to automate routine decision recommendations.

Model Development
Models are representations of real objects or situations and can be presented
in various forms

1. Iconic Models: These are physical models of real objects e.g. Scale
model of airplane is a model of real airplane, child’s toy truck is a model of a
real truck.

2. Analog Models: These are physical models of real objects but without the
same physical appearance. e.g. A thermometer analog model representing
temperature.

3. Mathematical Models: These represent problems by a system of

symbols and mathematical relationships or expressions.

They are the models used in quantitative approach to solving

managerial problems.
Mathematical Models

For example, the total profit from the sale of a product can be determined by
multiplying the profit per unit by the quantity sold. Let x represent the number of
units produced and sold, and let P represent the total profit. With a profit of $10 per
unit, the following mathematical model defines the total profit earned by producing
and selling x units:
P = 10 x
Iconic Models
The purpose, or value, of any model is that it enables us to make inferences about
the real situation by studying and analyzing the model. For example, an airplane
designer might test an iconic model of a new airplane in a wind tunnel to learn
about the potential flying characteristics of the full-size airplane
In general, experimenting with models requires less time and is less expensive
than experimenting with the real object or situation. Similarly, the mathematical
model in previous equation allows a quick identification of profit expectations
without requiring the manager to actually produce and sell x units.
Models also reduce the risks associated with experimenting with the real situation.

The value of model-based conclusions and decisions depends on how well the
model represents the real situation. The more closely the model airplane
represents the real airplane, the more accurate will be the conclusions and
estimates. Similarly, the more closely the mathematical model represents the
company’s true profit–volume relationship, the more accurate will be the profit
projections.
Quantitative analysis based on mathematical models. When initially considering a
managerial problem, we usually find that the problem definition phase leads to a
specific objective, such as maximization of profit or minimization of cost, and
possibly a set of restrictions or constraints, which express limitations on
resources. The success of the mathematical model and quantitative approach will
depend on how accurately the objective and constraints can be expressed in
mathematical equations or relationships.
The mathematical expression that defines the quantity to be maximized or

minimized is referred to as the objective function.

For example, suppose x represents the number of units produced and sold each

week, and the firm’s objective is to maximize total weekly profit.

With a profit of $10 per unit, the objective function is 10x. A production capacity

constraint would be necessary if, for instance, 5 hours are required to produce

each unit and only 40 hours are available per week. The production capacity

constraint is given by
5x ≤ 40
The value of 5x is the total time required to produce x units; the symbol indicates
that the production time required must be less than or equal to the 40 hours
available.
The decision problem or question is the following: How many units of the product
should be produced each week to maximize profit? A complete mathematical
model for this simple production problem is

Maximize Profit 10 x objective function

subject to (s.t.)

The x ≥ 0 constraint requires the production quantity x to be greater than or equal

to zero, which simply recognizes the fact that it is not possible to manufacture a

negative number
The optimal solution to this simple model can be easily calculated and is given by
x = 8, with an associated profit of $80. This model is an example of a linear
programming model

Flowchart of the process of transforming model inputs Into output

Once all controllable and uncontrollable inputs are specified, the objective function
and constraints can be evaluated and the output of the model determined. In this
sense, the output of the model is simply the projection of what would happen if
those particular factors and decisions occurred in the real situation. A similar
flowchart showing the specific details for the production model. Note that we have
used “Max” as an abbreviation for maximize

FLOWCHART FOR THE PRODUCTION MODEL

Such factors, which can affect both the objective function and the constraints, are
referred to as uncontrollable inputs to the model. Inputs that are controlled or
determined by the decision maker are referred to as controllable inputs to the
model. In the example given, the production quantity x is the controllable input to the
model. Controllable inputs are the decision alternatives specified by the manager
and thus are also referred to as the decision variables of the model

Uncontrollable inputs can either be known exactly or be uncertain and subject to

variation. If all uncontrollable inputs to a model are known and cannot vary, the
model is referred to as a deterministic model. Corporate income tax rates are not
under the influence of the manager and thus constitute an uncontrollable input in
many decision models, a mathematical model with corporate income tax rates as
the only uncontrollable input would be a deterministic model.
If any of the uncontrollable inputs are uncertain and subject to variation, the model
is referred to as a probabilistic model
Data Preparation
Another step in the quantitative analysis of a problem is the preparation of the data
required by the model. Data in this sense refer to the values of the uncontrollable
inputs to the model. All uncontrollable inputs or data must be specified before we
can analyze the model and recommend a decision or solution for the problem
Model Solution
Once the model development and data preparation steps are completed, we
proceed to the model solution step. In this step, the analyst attempts to identify the
values of the decision variables that provide the “best” output for the model. The
specific decision-variable value or values providing the “best” output are referred to
as the Optimal Solution for the model.
For the production problem, the model solution step involves finding the value of
the production quantity decision variable x that maximizes profit while not causing
a violation of the production capacity constraint.
Trial-and-error approach

One procedure that might be used in the model solution step involves a trial-and-

error approach in which the model is used to test and evaluate various decision

alternatives. In the production model, this procedure would mean testing and

evaluating the model using various production quantities or values of x. If a

particular decision alternative does not satisfy one or more of the model constraints,

the decision alternative is rejected as being infeasible, regardless of the

corresponding objective function value. If all constraints are satisfied, the decision

alternative is feasible and is a candidate for the “best” solution or recommended

decision
 TRIAL-AND-ERROR SOLUTION FOR THE PRODUCTION MODEL

The recommended decision is a production quantity of 8 because the feasible

solution with the highest projected profit occurs at x = 8

Models of Cost, Revenue, and Profit
Some of the most basic quantitative models arising in business and economic
applications involve the relationships among a volume variable, such as production
volume or sales volume and cost, revenue, and profit. Through the use of these
models, a manager can determine the projected cost, revenue, or profit associated
with a planned production quantity or a forecasted sales volume. Financial planning,
production planning, sales quotas, and other areas of decision making can benefit
from such cost, revenue, and profit models
Cost and Volume Models

The cost of manufacturing or producing a product is a function of the volume

produced. This cost can usually be defined as a sum of two costs: fixed cost and
variable cost. Fixed cost is the portion of the total cost that does not depend on
the production volume, variable cost, on the other hand, is the portion of the total
cost that depends on and varies with the production volume
 C(x) = 3000 + 2x
Where
x production volume in units
2 is variable cost per unit (uvc)
C(x) total cost of producing x units
Revenue and Volume Models
R(x) = 5x
Where
x sales volume in units
5 is the selling price for one unit (USP)
R(x) total revenue associated with selling x units
Profit and Volume Models

P(x) = R(x) - C(x)

= 5x - (3000 + 2x) = - 3000 + 3x
Breakeven Analysis
The volume that results in total revenue equaling total cost (providing $0 profit) is
called the breakeven point. If the breakeven point is known, a manager can quickly
conclude that a volume above the breakeven point will generate a profit, whereas a
volume below the breakeven point will result in a loss.

P(x) = - 3000 + 3x = 0
3x = 3000
x = 1000

With this information, we know that production and sales of the product must
exceed 1000 units before a profit can be expected
Breakeven point in unit = FC/CM Breakeven point in money = FC/%CM

Where contribution margin (CM) = USP- UVC

Where contribution margin Percentage (%CM) = CM / USP
GRAPH OF THE BREAKEVEN ANALYSIS FOR NOWLIN PLASTICS
 Report Generation and Implementation
 An important part of the problem analysis is the preparation of managerial
reports based on the model’s solution.

 It is essential that the results of the model can be easily understood by the
decision-maker.

 The report should include the recommended decision and other important
information about the model results that may be helpful to the decision-maker.

 Successful implementation of the results is of critical importance to the manager

and his management experts as it enhance the real situation of the organizational
problem.
 Finally, It is the responsibility of the manager to integrate the qualitative and
quantitative techniques in order to reach the “best” decision.
 Conclusion
Importance of adopting quantitative approach in addition

to using their awareness, experience and judgment to

solving managerial problems and making rational

decisions.

The result will definitely lead to achieving the

organizational main Objectives and improving the overall

Performance and Effectiveness of their organization.

Practice Exercise
Q1 List and discuss the steps of the decision-making
process?

1. Define the problem;

2. Identify the alternatives;

3. Determine the criteria;

4. Evaluate the alternatives;

5. Choose an alternative
Q2 A firm recently built a new plant that will use more than 50 production
lines and machines to produce over 500 different products. The production
scheduling decisions are critical because sales will be lost if customer
demand is not met on time. If no individual in the firm has had experience
with this production operation, and if new production schedules must be
generated each week, why should the firm consider a quantitative
approach to the production scheduling problem?

A quantitative approach should be considered because the problem is

large, complex, important, new, and repetitive

Q3 Suppose a manager must choose between the following two
mathematical models of a given situation: (a) a relatively simple model
that is a reasonable approximation of the real situation and (b) a thorough
and complex model that is the most accurate mathematical representation
of the real situation possible. Why might the model described in part (a) be
preferred by the manager?

Quicker to formulate, easier to solve, and/or more easily understood

Q4 Let x represent the number of units produced and sold, and let P represent the
total profit. With a profit of $10 per unit, the following mathematical model defines
the total profit earned by producing and selling x units
P = 10x
The firm’s objective is to maximize total weekly profit. A production capacity
constraint would be necessary if, for instance, 5 hours are required to produce each
unit and only 40 hours are available per week. s.t.
5x ≤ 40 & x≥0
Suppose the firm considers a second product that has a unit profit of $5 and
requires 2 hours for each unit produced. Assume total production capacity remains
40 hours. Use y as the number of units of product 2 produced.
a. Show the mathematical model when both products are considered all together.
b. Identify the controllable and uncontrollable inputs for this model.
c. Draw the flowchart of the input–output process for this model
d. What are the optimal solution values of x and y ?
e. Is this model a deterministic or a probabilistic model? Explain
a. Max Profit = 10x + 5y
s.t.
5x + 2y ≤ 40
x ≥ 0 , y ≥ 0

b. Controllable inputs: x and y

Uncontrollable inputs: profit (10, 5), labor-hours (5, 2),
and labor-hour availability (40)

d. X = 0, y = 20; Profit = $100 (solution by trial and error)

e. Deterministic
C. the flowchart of the input–output process for this model
Q5 The O’Neill Shoe Manufacturing Company will produce a special-style

shoe if the order size is large enough to provide a reasonable profit. For

each special-style order, the company incurs a fixed cost of $2000 for the

production setup. The variable cost is $60 per pair, and each pair sells for

$80.

a. Let x indicate the number of pairs of shoes produced. Develop a mathematical

model for the total cost of producing x pairs of shoes.

b. Let P indicate the total profit. Develop a mathematical model for the total profit

realized from an order for x pairs of shoes.

c. What is the breakeven point

a. If x represents the number of pairs of shoes produced, a mathematical
model for the total cost of producing x pairs of shoes is TC = 2000 + 60x.
The two components of total cost in this model are fixed cost ($2,000)
and variable cost (60x).
b. If P represents the total profit, the total revenue (TR) is 80x and a
mathematical model for the total profit realized from an order for x pairs of
shoes is P = TR -TC
= 80x - (2000+ 60x) = 20x - 2000.
c. The breakeven point is the number of shoes produced (x) at the point
of no profit (P = 0). Thus the breakeven point is the value of x when P
20x- 2000= 0. This occurs when 20x = 2000 or x = 100
(i.e., the breakeven point is 100 pairs of shoes).