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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?

* "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:

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."

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.

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.