Quantitative analysis and pitfalls in decision making

1. Quantitative Analysis
for Decision Making
and Pitfalls
in Decision Making
Report in DEM 723 Managerial Analysis and
Decision Making

2. Introduction
• Mathematical tools have been used for
thousands of years
• Quantitative analysis can be applied to a wide
variety of problems
• It’s not enough to just know the mathematics of a
technique
• One must understand the specific applicability of
the technique, its limitations, and its assumptions

3. 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

4. Meaningful
Information
Quantitative
Analysis
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
Raw Data

5. What is Quantitative Analysis?
Quantitative factors might be different investment
alternatives, interest rates, inventory levels,
demand, or labor cost
Qualitative factors such as the weather, state and
federal legislation, and technology breakthroughs
should also be considered
– Information may be difficult to quantify but can affect
the decision-making process

6. Implementing the Results
Analyzing the Results
Testing the Solution
Developing a Solution
Acquiring Input Data
Developing a Model
The Quantitative Analysis Approach
Defining the Problem

7. 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

8. Developing a Model
Quantitative analysis models are realistic, solvable, and
understandable mathematical representations of a
situation
There are different types of models
$ Advertising
$Sales
Schematic
models
Scale
models

9. 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

10. Acquiring Input Data
Input data must be accurate – GIGO rule
Data may come from a variety of sources such as company
reports, company documents, interviews, on-site direct
measurement, or statistical sampling
Garbage In
Process
Garbage
Out

11. 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

12. 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

13. 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
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

14. 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
Changes occur over time, so even successful
implementations must be monitored to determine if
modifications are necessary

15. Modeling in the Real World
Quantitative analysis models are used
extensively by real organizations to solve real
problems
– In the real world, quantitative analysis models can
be complex, expensive, and difficult to sell
– Following the steps in the process is an important
component of success

16. How To Develop a Quantitative Analysis Model
Expenses can be represented as the sum of fixed and
variable costs and variable costs are the product of
unit costs times the number of units
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 – vXwhere
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold
The parameters of this model
are f, v, and s as these are the
inputs inherent in the model
The decision variable of
interest is X

17. Pritchett’s Precious Time Pieces
Profits = sX – f – vX
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
If sales = 0, profits = –$1,000
If sales = 1,000, profits = [(10)(1,000) – 1,000 – (5)(1,000)]
= $4,000

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

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

20. Advantages of Mathematical Modeling
1. Models can accurately represent reality
2. Models can help a decision maker formulate problems
3. Models can give us insight and information
4. Models can save time and money in decision making
and problem solving
5. A model may be the only way to solve large or
complex problems in a timely fashion
6. A model can be used to communicate problems and
solutions to others

21. Models Categorized by Risk
• Mathematical models that do not involve risk are called
deterministic models
– We know all the values used in the model with complete
certainty
• Mathematical models that involve risk, chance, or
uncertainty are called probabilistic models
– Values used in the model are estimates based on
probabilities

22. Possible Problems in the Quantitative
Analysis Approach
Defining the problem
– Problems are not easily identified
– Conflicting viewpoints
– Impact on other departments
– Beginning assumptions
– Solution outdated
Developing a model
– Fitting the textbook models
– Understanding the model

23. Possible Problems in the Quantitative
Analysis Approach
Acquiring input data
– Using accounting data
– Validity of data
Developing a solution
– Hard-to-understand mathematics
– Only one answer is limiting
Testing the solution
Analyzing the results

24. Implementation – Not Just the Final Step
Lack of commitment and resistance to change
– Management may fear the use of formal
analysis processes will reduce their
decision-making power
– Action-oriented managers may want “quick
and dirty” techniques
– Management support and user
involvement are important

25. Implementation – Not Just the Final Step
Lack of commitment by quantitative
analysts
– An analysts should be involved with
the problem and care about the
solution
– Analysts should work with users and
take their feelings into account

26. © 2008 Prentice-Hall, Inc.
Common Pitfalls in Decision Making
The road of decision-making is filled with numerous
pitfalls and traps. These pitfalls are hard to discern since
they are part of our normal decision making process.
They include misconceptions in the decisions we make, a
bias in favor of one option, falling prey to the status quo,
and continuance with sunk decisions. The more complex
the decision, the more likely you'll run into these pitfalls.

27. © 2008 Prentice-Hall, Inc.
Common Pitfalls in Decision Making
There’s a reason for the saying, “It’s lonely at the top.”
Contrary to popular belief, the hallmark of effective
leadership doesn’t solely rely on the decisions a leader
makes but rather how he or she sets the conditions for
followers to live and learn, read and react, and decide for
themselves as information becomes available.
Without the right information, decision-making, and
therefore, progress, doesn’t happen. This is why it’s so
important for leaders to set the “organizational guardrails”
that foster a single, uniformed direction.

28. © 2008 Prentice-Hall, Inc.
Common Pitfalls in Decision Making
1. Anchors prejudice your decision by introducing an estimate
or idea before you have time to analyze the decision.
For example, suppose you and I need to negotiate
billing rates for my services. If you reviewed my web
site, you clearly saw what my billing rates were. This
information will force or anchor you to seek rates
that are close to what you already know. Anchors
influence your decision by leaving an impression.
Remedy: They are hard to avoid. You can reduce the influence
of anchors by not exposing yourself to information
that influences your decision until you've had time
to think on your own.

29. © 2008 Prentice-Hall, Inc.
Common Pitfalls in Decision Making
2. Sunk decisions are another common pitfall. Here you
are trapped into a past decision because you
don't want to admit that you were wrong. So you
continue to throw more resources into the bad
decision. Technology type projects often lend
themselves to sunk cost decision making
Remedy: To avoid sunk decisions, seek out advice from
people who are not involved in the project and
recognize that failure is a normal part of
decision making.

30. © 2008 Prentice-Hall, Inc.
Common Pitfalls in Decision Making
3. Status quo where you make decisions that tend to not
rock the boat. This bias approach to decision
making is common in organizations where
change is hard to accept. Additionally, if you
break away from the status quo, you open
yourself up to more responsibility and criticism.
Remedy: Remember that status quo is not your only
alternative and status quo rarely remains the
same over time. Ask yourself if the status quo
weren't around would you still make the same
decision in favor of the status quo?

31. © 2008 Prentice-Hall, Inc.
Common Pitfalls in Decision Making
4. Lack of clear guidance. If leaders don’t set parameters early on,
the propensity for uncertainty to develop only
worsens. More so, the one-off conversations and
random interruptions prevent any real work from
getting done because people are unsure of their
decision-making authority.
Remedy: Consider the opposite perspective. The advantage to
such looming uncertainty is that it affords the very
opportunity to create certainty by setting the direction.
The mindset that it’s better to beg for forgiveness than
to ask for permission. If you’re taking incoming mortar
rounds, there is no wrong answer for what direction to
move in, just so long as you move.

32. © 2008 Prentice-Hall, Inc.
Common Pitfalls in Decision Making
5. Unclear purpose. Not understanding the why behind a
decision is akin to driving without a map. You want
to know where you’re going so you can determine
the best route to get there. Otherwise, you’re just
wasting gas.
Remedy: Identify who or what a decision is for. Is it something
that benefits the organization, the team or the
individual? Will the decision impact a greater
audience or just you? If it’s the latter, be sure to
remove as much emotion as possible from your
decision by looking at the positive outcomes it will
yield (you can always find something positive).

33. © 2008 Prentice-Hall, Inc.
Common Pitfalls in Decision Making
6. Define the meeting .One way to make sure you don’t walk away from the
next meeting with your eyes crossed is to know the type of
meeting that will take place.
Informative: These are meetings where updates, status reports and lessons
learned are shared to build the “knowledge bridge” to the next milestone and
to close the gap between silos and business functions. Remember,
knowledge is not power, but sharing it is.
Collaborative: Once the proverbial ship has sailed (an initiative is underway),
it’s time to figure out the best route to get there, and this happens through
group participation. Collaborative meetings help flush out what decisions
need to be made in an effort to collectively solve a business challenge.
Decisive: The ship's captain reels in all the swimmers from the water and
says, “Don’t swim. Fix the boat instead.” In other words, decision-making
meetings offer feedback to ensure your efforts are aligned with organizational
priorities and ready to navigate into uncharted territory.

34. © 2008 Prentice-Hall, Inc.
Common Pitfalls in Decision Making
7. Lack of autonomy. While decisions should be based upon their
collective benefit for all (at least, in an organizational
setting), how you go about making that decision should be
your own. In other words, relying on other peoples’ input as
a basis for your own decision-making is dependent, whereas
gathering input to broaden your knowledge base so you can
make your own choice is independent. The copy-and-paste
approach works short term until that co-worker leaves, along
with your ability to solve problems.
Remedy: For the next week, record how many times you conferred with
somebody over a decision and why. Were you looking for an
alternative perspective to help broaden yours so you could
make a more informed decision? Or were you secretly
hoping for that person to make the decision for you?

35. © 2008 Prentice-Hall, Inc.
Common Pitfalls in Decision Making
8. Wrong people, wrong place. Integral to decision-making
is having the power (defined as credibility and
knowledge) to grab the gavel and say, “This
decision makes sense. Let's do it.” Many
meetings go through an iteractive process
simply because the wrong people are in the
room.
Remedy: If you require strategic decisions then you need
strategic leaders. The stated outcome of a
meeting determines who should be present so
the meeting’s objective can be achieved.

36. © 2008 Prentice-Hall, Inc.
The more a leader can set the
conditions for his or her people to make
decisions the more time he or she can
dedicate to strategy and business growth.
Try to be aware of these pitfalls in making
decisions. And remember, the more
assumptions you make in your decisions,
the more likely you'll be confronted with
these pitfalls.

37. © 2008 Prentice-Hall, Inc.
Final Thought
“People at operations are in the best
position to decide on the most
effective and efficient use of
resources to obtain the best value for
money.”