What is QA?

Quantitative Analysis for Business Decisions

Dr. Mei Lin Spring 2012

Using mathematical tools for business problems Basic concepts, models, and skills used extensively in businesses and organizations

Why QA?
Identify and formulate problems Choose relevant models and tools Make reasonable assumptions Apply problem-solving skills Consider a rich set of solutions Evaluate and make decision Measure performance
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Your Goal
Apply structured thinking on loosely defined business situations Understand underlying intuition of mathematical models Solve models effectively analytically or by using software tools Interpret your solutions in non-technical language
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Teaching and Learning Activities

Lecture
Interaction!

Communication
MOODLE
Slides, FAQs, class schedule, and other materials

In-class exercises
Participation points (Name Card system)

Consultations welcome by appointment Email communication

Check MOODLE first!

Homework
Effort-based Tutorial sessions are compulsory

Exceptions to promptly reply to your emails

Answers on MOODLE or discussed in class Last-minute Requires consultation
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Group Project
4 to 5 members

Assessment
Exams (midterm 28%, final 38%) NO MAKEUP EXAM Homework In-Class and Tutorial Participation Project Total 66% 10% 7% 17% 100%
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Homework Policy
Strict due date/time enforced, no excuses Drop one, regardless of reason Must be handwritten unless asked otherwise

Academic Conduct
No disruptions in class
NO TALKING! NO CELL PHONE!

Observe Due Dates

Homework due at the following Monday by 5:30 p.m. (Assignment box 16) Name Card Due in class by February 3 (Fri) Name List for Project Group Due on March 23 (Fri) Midterm: 10:00 - 12:00 p.m. on March 17 (Sat)
If there is a conflict, please acknowledge me by Jan 30.
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Academic dishonesty is absolutely not tolerated

Project due on April 27 by 5:30 p.m. (Fri)

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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
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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
Quantitative Analysis Meaningful Information

Raw Data

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The Quantitative Analysis Approach

Defining the Problem Developing a Model Acquiring Input Data Developing a Solution Testing the Solution Analyzing the Results
Figure 1.1

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

Implementing the Results

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Developing a Model
Quantitative analysis models are realistic, solvable, and understandable mathematical representations of a situation
$ Sales
Y = b0 + b 1X

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

$ Advertising

There are different types of models Scale models Schematic models

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Developing a Solution
The best (optimal) solution to a problem is found by manipulating the model variables until a solution is found that is practical and can be implemented Common techniques are
Solving equations Trial and error trying various approaches and picking the best result Complete enumeration trying all possible values Using an algorithm a series of repeating steps to reach a solution
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Testing the Solution

Both input data and the model should be tested for accuracy before analysis and implementation
New data can be collected to test the model Results should be logical, consistent, and represent the real situation

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Analyzing the Results

Determine the implications of the solution
Implementing results often requires change in an organization The impact of actions or changes needs to be studied and understood before implementation

Implementing the Results

Implementation incorporates the solution into the company
Implementation can be very difficult People can resist changes Many quantitative analysis efforts have failed because a good, workable solution was not properly implemented

Sensitivity analysis determines how much the results of the analysis will change if the model or input data changes
Sensitive models should be very thoroughly tested
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Changes occur over time, so even successful implementations must be monitored to determine if modifications are necessary
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How To Develop a Quantitative Analysis Model

An important part of the quantitative analysis approach Lets look at a simple mathematical model of profit Profit = Revenue Expenses

How To Develop a Quantitative Analysis Model

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 f = fixed cost

v = variable cost per unit X = number of units sold

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How To Develop a Quantitative Analysis Model

Profit = Revenue (Fixed cost + Variable cost) ProfitThe parameters of this model are f, v, and s = (Selling price per unit)(number of units as sold) [Fixed inputs inherent in the model these are the cost + (Variable costs per unit)(Number of units sold)] The decision variable of interest is X Profit = sX [f + vX] Profit = sX f vX
where s = selling price per unit f = fixed cost

Pritchetts Precious Time Pieces

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 Profits = sX f vX If sales = 0, profits = $1,000 If sales = 1,000, profits = [(10)(1,000) 1,000 (5)(1,000)] = $4,000
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v = variable cost per unit X = number of units sold

Pritchetts Precious Time Pieces

Companies are often interested in their break-even breakpoint (BEP). The BEP is the number of units sold that will result in $0 profit. 0 = sX f vX, or 0 = (s v)X f Solving for X, we have f = (s v)X f X= sv BEP = (Selling price per unit) (Variable cost per unit)
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Pritchetts Precious Time Pieces

Companies are often interested in their break-even breakpoint (BEP). The BEP isPrecious Time Pieces BEP for Pritchetts the number of units sold that will result in $0 profit. BEP = $1,000/($10 $5) = 200 units 0 = sX f vX, or 0 = (s v)X f Solving less than 200 Sales of for X, we haveunits of rebuilt springs will result in a loss f = (s v)X Sales of over 200 units of rebuilt springs will f result in a profit X= sv BEP = (Selling price per unit) (Variable cost per unit)
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Fixed cost

Fixed cost

Advantages of Mathematical Modeling

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Model Exercise
Mrs. Yim wants to sell witch hats for Halloween. The cost of each hat is $5 each, and the cost of renting a stand is $1000/day. To avoid a loss, how should she price the hats and how many are expected to be sold each day?

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Models can accurately represent reality Models can help a decision maker formulate problems Models can give us insight and information Models can save time and money in decision making and problem solving A model may be the only way to solve large or complex problems in a timely fashion A model can be used to communicate problems and solutions to others

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