CHAPTER ONE

Quantitative Analysis for Managerial

Decision

An Overview

Prepared by Dejene Adugna (PhD)

Assistant Professor
 Definition
Definition of
of Decision-Making
Decision-Making
 Is the process of identifying problems and solving them
 Decision-making is the selection based on some criteria
from two or more possible alternatives.
 Is the process of making choices by identifying a
alternatives , gathering information, and assessing
alternative resolutions.
 Decision-making can be defined as the process of
selecting a right and effective course of action from two or
more alternatives for the purpose of achieving a desired
result
 Decision
Decision making
making process
process
 Describe the problem

 Create potential solutions/alternatives

 Identifying decision criteria

 Allocating weights to the criteria

 Analysis Alternatives using decision Making
Matrix
 Selecting Alternatives/Choose an option
• Implementing the decision and Evaluating the
decision’s effectiveness
1–3
 Step
Step 1:
1: Describe
Describe the
the problem
problem
Deals with identifying and describing
 Specific problem the decision maker must solve
 Challenge the decision maker must overcome, or
 Opportunity decision maker wish to take advantage of
Examples
• Decreased performance levels
• High turnover
• Poor teamwork
• Poor communication
• High product demand etc
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 Step
Step 2:
2: Developing
Developing alternatives
alternatives

• Having identified the problem, the decision-maker needs

to generate appropriate solutions for resolving the
problem.
• To identify the range of feasible solutions the decision
maker should understand organizational and external
constraints as well as organizational resources

5
 Step
Step 3:
3: Identifying
Identifying decision
decision criteria
criteria

Specify criteria used to evaluate alternatives and select the

best one for resolving the problem.
 Cost
 Opportunity costs
 Return on investment
 Time, Profit , Risk involved etc
For effective use, criteria should be specific and
measurable through quantification or other means

6
 Step
Step 44 ::Allocating
Allocating weights
weights to
to the
the criteria
criteria

 Give a weight to each the criteria to reflect the importance

of this attribute to the decision maker
 Assign a relative weight to each criterion, based on how
important that criterion is to the situation.
 Assign relative weight (1-10, with 10 being the most
important) to each criterion.
Note that more than one criterion may have the same
weight.

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 Step
Step 5:
5:Analyzing
Analyzing the
the alternatives
alternatives
• Deals with calculating the total score of each
alternative by using decision Making Matrix

• Score each alternative for each criterion (1-10, with 10

being the best.)
• For each alternative, multiply the score with the
corresponding criteria weight and add these multiples in the
last column. This is the total score for each alternative.
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 Step
Step 6:
6: Selecting
SelectingAlternatives
Alternatives

• Choosing the best alternative or the one that scored the

highest total in step 5.

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 Step
Step 77 :: Implementing
Implementing the
the decision
decision &
& Evaluation
Evaluation

• Putting the decision into action

• Evaluating the outcome or result of the decision to see if
the problem was resolved.
• If the problem still persists, the managers should re-
assess the problem and start over again.

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 Example
Example
Step 1: describing the problem

1–11
 Example….
Example….
Step 2: developing alternatives

1. Coca cola
2. Sprite
3. Fanta
4. Pepsi
5. 7-up
6. Mirinda
7. Malta

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 Example…
Example…

Step 3: Identifying decision criteria

1. Brand
2. Taste
3. Color
4. Packaging
5. Price

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 Example…
Example…

Step 4 : Allocating weights to the criteria

Criteria Weight
Taste 10
Brand 9
Price 8
Packaging 6
Color 4

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 Example…
Example…

Step 5: Analyzing the alternatives

Score each alternative for each criterion
Drink Taste Brand Price Packaging Color
Coca 10 10 7 6 7
Sprite 8 9 8 7 6
Pepsi 9 10 6 8 6
Fanta 6 7 8 8 10
Mirinda 10 9 8 5 5
7-up 10 9 7 8 8
Malta 10 8 8 6 5

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 Total
Total score
score =criteria*weight
=criteria*weight
Drink Taste Brand price Package Color Total

Coca 100 90 56 36 28 310

Sprite 80 81 64 42 24 291

Pepsi 90 90 48 48 24 300

Fanta 60 63 64 48 40 275

Mirinda 100 81 64 30 20 295

7-up 100 81 56 48 32 317

Malta 100 72 64 36 20 292

1–16
 Example
Example …
…

Step 6: Selecting Alternatives

 7 –up is the best option the decision maker , b/c it has
the highest total score

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 Example
Example …
…

Step 7 : Implementing the decision & Evaluation

 Implementation: buy and drink 7-up

 Evaluation: satisfied or unsatisfied?

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 Decision
Decision making
making approaches
approaches

a) Qualitative approach
• Used in case of simple situations or routine problems
• Based largely on the manager’s judgment and experience
• Includes the manager’s intuitive “feel” for the problem
• Is more of an art than a science
 Decision
Decision making
making approaches
approaches

b) Quantitative approach
• Used in novel situations
• Mostly based on statistical analysis of collected
data associated with the problem
• Analyst will use one or more quantitative methods
to make a recommendation
• Is more of a science than art
 Quantitative approaches …
Quantitative approaches …
 Quantitative approaches to decision making is referred
to as
• Operations Research
• Management Science
• Decision Science
• OR deals with the Application of scientific methods
for making decision
• OR is an analytical method of problem-solving and
decision-making that is useful in the management of
organizations.
 Operations
Operations Research
Research Origin
Origin (History)
(History)

 OR originated during World war II, by British group of

experts to apply a scientific approach in the study of
military operations to win the battle.
 The main objective was to allocate scarce resources in
an effective manner to various military operations and
to the activities within each operation.
 It is now widely used in military, business, industry,
transportation, public health, crime investigation, etc
 Operations
Operations research
research process
process

1. Identifying a problem that needs to be solved.

2. Constructing a model around the problem that
resembles the real world and variables.
3. Using the model to derive solutions to the problem.
4. Testing each solution on the model and analyzing its
success.
5. Implementing the solution to the actual problem.

1–23
 Constructing
Constructing the
the Model
Model
 A model is defined as a representation of real life system
whether such system refers to a problem, process,
operations or events. Models enable us to experiments more
effectively than on the system itself which is either
impossible or too costly.
Types of models:
1. Iconic models - are actual, scaled down versions of the
original. Examples include a globe, a scale-model car.
Such models are not very common in operations research,
mainly because getting accurate representations of complex
systems through physical models is often impossible.
2. Analog models - physical in form, but do not physically
look like the object being modeled.
Example : organizational chart, time , speed etc
3. Mathematical models - represent real world problems
through a system of mathematical formulas and expressions
based on key assumptions, estimates, or statistical analyses
Mathematical models can be:-
• Deterministic or
• Probabilistic models

1–25
 Deterministic
DeterministicVs
Vs Stochastic
Stochastic

Deterministic Model:
All parameters used to describe the model are assumed to
be known (or estimated with a high degree of certainty).
Stochastic or Probabilistic Model:
The exact values for some of the parameters may be
unknown but it is assumed that they are capable of being
described in some systematic fashion (e.g., through the use
of a probability distribution).
 Characteristics
Characteristics of
of OR
OR (Features)
(Features)

 Decision making approach - the main aim of OR is to find

the best or optimal for a problem under consideration
 Inter-disciplinary team approach: it uses techniques from
economics, mathematics, chemistry, physics, etc.
 Use of scientific research - It makes use of scientific
research to arrive at a optimum solution.
 Use of Computer : for decision-making and problem solving
computers are widely used
 It gives Quantitative solution
 It considers the human factors also.
 Techniques
Techniques of
of Operations
Operations Research
Research

 Linear Programming (LP) is a mathematical technique of

assigning a fixed amount of resources to satisfy a number
of demands
 The transportation problem: is used to determine the
minimum cost of distributing a product from a number of
sources to a number of destinations.
 Assignment Problem involves the allocation of n different
facilities to n different tasks
 Goal Programming is a tool to tackle multiple and
incompatible goals of an enterprise.
 Techniques
Techniques of
of Operations
Operations Research
Research
• Queuing theory: used to determine How much average
time will be used up by the customer waiting in a queue
and What will be a standard length of the queue
• Game theory is used for decision making under
conflicting situations where there are one or more
opponents (i.e., players).
• Inventory Control are related with the finding of the best
order quantity and ordering intervals considering the
factors like cost of placing orders, demand per unit time,
costs related with goods held up in the inventory and the
cost due to scarcity of goods, etc.
 Techniques
Techniques of
of Operations
Operations Research
Research
• Markov Process is a process of predicting regarding future
outcomes based on present state
• Network Scheduling-PERT and CPM is a technique used
for planning, scheduling and monitoring large projects.
• Replacement Models are concerned with the problem of
replacement of machines, individuals, capital assets, etc.
due to their deteriorating efficiency, failure, or breakdown.