Statistics,

Data Analysis, and

Decision Modeling
F

E D I T I O N

James R. Evans
University of Cincinnati

Boston Columbus Indianapolis New York San Francisco

Upper Saddle River Amsterdam Cape Town Dubai London Madrid
Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo
Sydney Hong Kong Seoul Singapore Taipei Tokyo

CONTENTS

Preface

PART I:

17

STATISTICS AND DATA ANALYSIS

CHAPTER 1 Data and Business Decisions

Introduction
23
Statistical Thinking in Business
25
Six Sigma and Statistical Thinking

26

Data in the Business Environment

Metrics and Measurement
The Balanced Scorecard

30

32

Populations, Samples, and Statistics

Using Microsoft Excel
36
Basic Excel Skills
36
Copying Formulas and Cell References
Functions
38
Other Useful Excel Tips
41
Excel Add-Ins
41

Working with Data in Excel

PivotTables

42

27

28
28

Sources and Types of Data

Data Classification

23

34

37

42

Basic Concepts Review Questions

49
Skill-Building Exercises
49
Problems and Applications
49
Case: A Data Collection and Analysis Project

50

CHAPTER 2 Displaying and Summarizing Data

52
Introduction
53
Displaying Data with Charts and Graphs
53
Column and Bar Charts
53
Line Charts
56
Pie Charts
57
Area Charts
57
Scatter Diagrams
57
Miscellaneous Excel Charts
58
Summary of Graphical Display Methods

60

Descriptive Statistics: Concepts and Applications

Excel Descriptive Statistics Tool
63
Measures of Central Tendency
64
Measures of Dispersion
65
Frequency Distributions and Histograms

67

61

21

Measures of Shape
Data Profiles
72
Correlation
73

70

Visual Display of Statistical Measures

76

Box-and-Whisker Plots
76
Stem-and-LeafDisplays
77
Dot-Scale Diagrams
80

Descriptive Statistics for Categorical Data

81
Basic Concepts Review Questions
83
Skill-Building Exercises
84
Problems and Applications
84
Case: The Malcolm Baldrige National Quality Award
88
Appendix: Descriptive Statistics: Theory and Computation

90

Mean, Variance, and Standard Deviation

90
Statistical Measures for Grouped Data
90
Skewness and Kurtosis
91
Correlation
91

CHAPTER 3 Probability Distributions and Applications

Introduction
94
Probability: Concepts and Applications
94
Basic Probability Rules
Random Variables
97

Probability Distributions

93

95

97

Discrete Probability Distributions

99
Continuous Probability Distributions
100
Expected Value and Variance of a Random Variable

Common Probability Distributions

Bernoulli Distribution
103
Binomial Distribution
104
Pois'son Distribution
105
Uniform Distribution
107
Normal Distribution
107
Triangular Distribution
112
Exponential Distribution
113
Other Useful Distributions
114
Probability Distributions in PHStat

101

102

117

Joint, Marginal, and Conditional Probability Distributions

Monte Carlo Methods in Statistics
119
Random Numbers
120
Random Sampling from Probability Distributions
Generating Random Variates in Excel
123
Applications of Monte Carlo Methods in Statistics

Sampling Distributions and Sampling Error

121
125

127

Standard Error of the Mean

130
Applying Sampling Distributions
131

Basic Concepts Review Questions

131
Skill-Building Exercises
132
Problems and Applications
132
Case: Probability Analysis for Quality Measurements
Contents

137

118

Appendix: Probability: Theory and Computation

Expected Value and Variance of a Random Variable
Binomial Distribution
138
Poisson Distribution
139
Uniform Distribution
139
Normal Distribution
139
Triangular Distribution
140
Exponential Distribution
140
Conditional Probability
140
Bayes's Theorem
141

CHAPTER 4

Sampling and Estimation

Introduction
143
Statistical Sampling

138
138

142

143

Sample Design
143
Sampling Methods
144
Errors in Sampling
147

Estimation

147

Point Estimates
148
Unbiased Estimators
149
Interval Estimates
150

Confidence Intervals: Concepts and Applications

150

Confidence Interval for the Mean with Known Population

Standard Deviation
151
Confidence Interval for the Mean with Unknown Population
Standard Deviation
154
Confidence Interval for a Proportion
156
Confidence Intervals for the Variance and Standard Deviation
Confidence Interval for a Population Total
159

Using Confidence Intervals for Decision Making

Confidence Intervals and Sample Size
161
Additional Types of Confidence Intervals
164
Basic Concepts Review Questions
165
Skill-Building Exercises
165
Problems and Applications
166
Case: Analyzing a Customer Survey
168
Appendix: Theory and Additional Topics
169
Theory Underlying Confidence Intervals
Sampling Distribution of the Proportion
Sample Size Determination
171
Additional Confidence Intervals
171

CHAPTER 5

160

169
170

Hypothesis Testing and Statistical Inference

Introduction
175
Basic Concepts of Hypothesis Testing
Hypothesis Formulation
176
Significance Level
177
Decision Rules
178
Spreadsheet Support for Hypothesis Testing

One-Sample Hypothesis Tests

One-Sample Tests for Means
Using p-Values
183

156

174

175

180

181
181

Contents

One-Sample Tests for Proportions

185
Type II Errors and the Power of a Test 187
Two-Sample Hypothesis Tests
190
Two-Sample Tests for Means
190
Two-Sample Test for Means with Paired Samples
192
Two-Sample Tests for Proportions
193
Hypothesis Tests and Confidence Intervals
194
Test for Equality of Variances 195
ANOVA: Testing Differences of Several Means
197
Assumptions of ANOVA
199
Tukey-Kramer Multiple Comparison Procedure 199
Chi-Square Test for Independence
201
Basic Concepts Review Questions
203
Skill-Building Exercises
204
Problems and Applications
204
Case: HATCO, Inc.
208
Appendix: Hypothesis-Testing Theory and Computation
Two-Sample Tests for Differences in Means
208
Two-Sample Test for Differences in Proportions
209
Test for Equality of Variances 209
Theory of Analysis of Variance 209
CHAPTER 6 Regression Analysis
210
Introduction
211
Simple Linear Regression
212
Least-Squares Regression
214
Coefficient of Determination
218
Application of Regression to Investment Risk
Interpreting Regression Analysis Output
Regression Statistics
221
Hypothesis Testing
222
Residual Analysis
222
Confidence and Prediction Intervals
224

218
221

Assumptions of Regression Analysis

224
Multiple Linear Regression
227
Interpreting Results from Multiple Linear Regression
Correlation and Multicollinearity
230
Building Good Regression Models
231
Stepwise Regression
234
Best-Subsets Regression
235
The Art of Model Building in Regression
236

228

Regression with Categorical Independent Variables

Categorical Variables with More Than Two Levels
242
Regression Models with Nonlinear Terms
245
Basic Concepts Review Questions
247
Skill-Building Exercises
247
Problems and Applications
248
Case: HATCO
251

,^~/
/

10

Contents

239

208

Appendix: Regression Theory and Computation

252

Regression as Analysis of Variance

252
Standard Error of the Estimate
253
Adjusted R-Square
253
Confidence Intervals
253
Prediction Intervals
254

CHAPTER 7 Forecasting
255
Introduction
256
Qualitative and Judgmental Methods
Historical Analogy
257
The Delphi Method
258
Indicators and Indexes for Forecasting

257
258

Statistical Forecasting Models

259
Forecasting Models for Stationary Time Series
Moving Average Models
261
Error Metrics and Forecast Accuracy
Exponential Smoothing Models
266

261

264

Forecasting Models for Time Series with Trend and Seasonality

Models for Linear Trends
269
Models for Seasonality
269
Models for Trend and Seasonality

269

269

Choosing and Optimizing Forecasting Models Using CB Predictor

Regression Models for Forecasting
275
Autoregressive Forecasting Models
276
Incorporating Seasonality in Regression Models
Regression Forecasting with Causal Variables

270

278
280

The Practice of Forecasting

282
Basic Concepts Review Questions
284
Skill-Building Exercises
284
Problems and Applications
284
Case: Energy Forecasting
286
Appendix: Advanced Forecasting Models
Theory and Computation
286
Double Moving Average
286
Double Exponential Smoothing
287
Additive Seasonality
287
Multiplicative Seasonality
287
Holt-Winters Additive Model
288
Holt-Winters Multiplicative Model
288

CHAPTER 8 Statistical Quality Control

289
Introduction
289
The Role of Statistics and Data Analysis in Quality Control
Statistical Process Control
291
Control Charts
x- and R-Charts

290

292
293

Analyzing Control Charts

298

Sudden Shift in the Process Average

Cycles
299

299

Contents

11

Trends
299
Hugging the Center Line
300
Hugging the Control Limits
300

Control Charts for Attributes

Variable Sample Size

302

304

Process Capability Analysis

307
Basic Concepts Review Questions
309
Skill-Building Exercises 309
Problems and Applications
310
Case: Quality Control Analysis 311

PART II:

DECISION MODELING
AND ANALYSIS
313

CHAPTER 9 Building and Using Decision Models

Introduction
315
Decision Models 316
Model Analysis
319

315

What-IfAnalysis
320
Model Optimization
324

Tools for Model Building

326

Logic and Business Principles

327
Common Mathematical Functions
328
Data Fitting
328
Spreadsheet Engineering
330

Modeling Examples

331

Gasoline Consumption
331
Revenue Model
331
New Product Development
333

Models Involving Uncertainty

333

Newsvendor Model
334
Monte Carlo Simulation
334
Fitting Probability Distributions to Data

337

Model Assumptions, Complexity, and Realism

339
Basic Concepts Review Questions 342
Skill-Building Exercises 342
Problems and Applications
342
Case: An Inventory Management Decision Model
347
CHAPTER 10 Risk Analysis and Monte Carlo Simulation
Introduction
349
Monte Carlo Simulation Using Crystal Ball 351
A Financial Risk Analysis Simulation
351
Defining Model Inputs
351
Running a Simulation
358
Saving Crystal Ball Runs
359
Analyzing Results
359
Crystal Ball Reports and Data Extraction
366
Crystal Ball Functions and Tools 367

12

Contents

349

Applications of Monte Carlo Simulation

Newsvendor Model
369
Overbooking Model
373
Cash Budgeting
374
New Product Development Model
Project Management

369

379

382

Basic Concepts Review Questions

Skill-Building Exercises
388
Problems and Applications
389
Case: The Bellin Project
393

388

CHAPTER 11 Decisions, Uncertainty, and Risk

394
Introduction
395
Decision Making without Uncertainty and Risk
395
Decisions Involving a Single Alternative
396
Decisions Involving Non-Mutually Exclusive Alternatives
396
Decisions Involving Mutually Exclusive Alternatives
397

Decisions Involving Uncertainty and Risk

Making Decisions with Uncertain Information
Decision Strategies
399
Risk and Variability
401

Expected Value Decision Making

398
398

403

Opportunity Loss and Expected Value of Perfect Information

Analysis of Portfolio Risk
406
The "Flaw of Averages"
407

Decision Trees

405

408

New Drug Development Model

409
Decision Trees and Risk
412
Sensitivity Analysis in Decision Trees

Utility and Decision Making

/ Exponential Utility Functions

414

415
419

Basic Concepts Review Questions

420
Skill-Building Exercises
420
Problems and Applications
421
Case: The Sandwich Decision
427
CHAPTER 12 Queues and Process Simulation Modeling
Introduction
429
Queues and Queuing Systems
429
Basic Concepts of Queuing Systems
Customer Characteristics
430
Service Characteristics
431
Queue Characteristics
432
System Configuration
432
Performance Measures
432

Analytical Queuing Models

Single-Server Model
Little's Law
435

428

430

433

433

Process Simulation Concepts

436
Contents

13

Process Simulation with SimQuick

437

A Queuing Simulation Model

438
Queues in Series with Blocking
443
Grocery Store Checkout Model with Resources
444
Manufacturing Inspection Model with Decision Points
447
Pull System Supply Chain With Exit Schedules
449
Other SimQuick Features and Commercial Simulation Software

451

Continuous Simulation Modeling

453
Basic Concepts Review Questions
456
Skill-Building Exercises
457
Problems and Applications
457
Case: Production/Inventory Planning
462
Appendix: SimQuick Reference Manual
462
CHAPTER 13

Linear Optimization

467

Introduction
467
Building Linear Optimization Models

468

Characteristics of Linear Optimization Models

471

Implementing Linear Optimization Models on Spreadsheets

Excel Functions to Avoid in Modeling Linear Programs

Solving Linear Optimization Models

473

474

Solving the SSC Model

477
Solver Outcomes and Solution Messages
Interpreting Solver Reports
480
How Solver Creates Names in Reports
Difficulties with Solver
484

479
484

Applications of Linear Optimization

485

Process Selection
487
Blending
488
Portfolio Investment
489
Transportation Problem
490
Interpreting Reduced Costs
493
Multiperiod Planning
494
A Model with Bounded Variables
497
A Production/Marketing Allocation Model

503

How Solver Works

507
Basic Concepts Review Questions
508
Skill-Building Exercises
508
Problems and Applications
509
Case: Haller's Pub & Brewery
518
CHAPTER 14 Integer and Nonlinear Optimization
Introduction
519
Integer Optimization Models
520
A Cutting Stock Problem
520
Solving Integer Optimization Models

521

Integer Optimization Models with Binary Variables

Project Selection
524
Site Location Model
526

14

Contents

519

524

472

Computer Configuration
528
A Supply Chain Facility Location Model

Mixed Integer Optimization Models

531

532

Plant Location Model

532
A Model with Fixed Costs
533
Logical Conditions and Spreadsheet Implementation

Nonlinear Optimization

535

Hotel Pricing
535
Solving Nonlinear Optimization Models
537
Markowitz Portfolio Model
540
Evolutionary Solver for Nonlinear Optimization

Risk Analysis and Optimization

546
Combining Optimization and Simulation
A Portfolio Allocation Model

535

542

549

549

Using OptQuest 550

Basic Concepts Review Questions
Skill-Building Exercises
559
Problems and Applications
559
Case: Tindall Bookstores
568

559

Appendix
Table A.I The Cumulative Standard Normal Distribution
572
Table A.2 Critical Values of t
574
2
Table A.3 Critical Values of x
577
Table A.4 Critical Values of F
578
Table A.5 Critical Valuesa of the Studentized Range Q
581
Index

583

Contents

15