for Business Decisions

by

ams
There are 2 rooms that are completely isolated
from each other.
In 1 room, there are 3 light switches.
In the other, 3 light bulbs.
How can you determine which light switch is
connected to each light bulb if you can only be
in each room ONCE?
 “ Management is the process of undertaken
by one or more individuals to coordinate the
activities of others to achieve results not
achievable or possible by one individual
acting alone.”
Peter Drucker, a management pioneer,
defined management as:
“the Process of making people more
productive.”
He emphasizes:
Performance, Quality and Service.
 Material Machine
Manpower Resource Resource Money
Resource Resource

M2 M3 M4
M1

The Empowered M=4

Manager
M’s
 “ Management is the process of efficient allocation and
utilization of the different 4 M’s Organizational
Resources.” i.e. M =4 M’s. These are as shown in
next diagram:
 Manpower Resource: Human resources, employees,
labors, staff and other supporters..etc.
 Material Resource: all types of materials, papers,
documents, facilities, procedures and process..etc.
 Machine Resource: Computers, desks, tools and any
other technology..etc.
 Money Resource: Budget, Financial resources, and other
transactions needed to facilitate the work and harmony
of the above three resources.. etc..”
• Familiarize students, who are expected to
be future effective managers, with the
important tools of quantitative methods
and to expose them to a variety of
successful applications although this does
not mean that an effective manager must
be mathematically skilled or must
personally develop models and solutions.
 Quantitative methods should increase the
student confidence as a future decision maker,
through using quantitative methods and
techniques in solving variety of managerial
problems.
 The study of quantitative methods creates
problem-solving skills that are extremely helpful
when the decision maker(s) or manager(s)
encounter any an unsolved problem..
 final advantage will be the student’s (expected
future manager) ability to cope with decisions, as
a manager, as an employee or in his personal life.
Quantitative analysis is a scientific
approach to managerial decision
making whereby raw data are
processed and manipulated
resulting in meaningful
information

Quantitative Meaningful
Raw Data Analysis Information
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
 “The process of identifying a
difference between some actual and
some desired state of affairs and
then taking action to resolve the
difference.”
 Defining the Problem

Developing a Model
Decision
Making
Acquiring Input Data
Problem
Solving
Developing a Solution

Testing the Solution

Analyzing the Results Decision

Implementing the Results

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
 Define the Problem

Identify the Alternative

Determine the Criteria Decision Making

Evaluate the Alternatives

Problem Solving
Choose an Alternative

Implement the Decision

Evaluate the Results Decision

Monitor Results Suc/Fail

 A central theme in the quantitative approach to
decision making is a the appearance and orientation of a
managerial problem.

 The manager responsible for making a decision or

selecting a course of action will probably make an
analysis of the problem.

 This problem process includes:

 A statement of the specific goals or objectives
 A selection of the apparent “best” decision
 A solution for the problem
 Qualitative
analysis based
upon
managerial
experience and
judgement
Managerial Summary
and
problem Evaluation
Decision

Quantitative
analysis based
upon
mathematical
techniques

The Decision-Making Process

 Analyzing the Problem
Structuring the Problem

Define Identify Determine Evaluate Choose

the the the the the
Problem Alternatives Criteria Alternative Alternative

A Classification of the Decision-Making Process

 Models are representation of real objects or situations.

 There are three types or classification of model exist:

 Iconic Models: These are physical replicas of real objects
e.g. Scale model of airplane is a model of real airplane,
child’s toy truck is a model of a real truck.
 Analog Models: These are physical replicas of real objects
but without the same physical appearance.
e.g. A thermometer analog model representing
temperature.
 Mathematical Models: These represent problems by a
system of symbols and mathematical relationships or
expressions.
They are the models used in quantitative approach to
solving managerial problems.
 An important part of the quantitative
analysis approach
 Let’s look at a simple mathematical
model of profit

Profit = Revenue – Expenses

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 – vX
where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold
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 The parameters of this model are
f, v, and s as these are the inputs
Profit = Revenue – (Fixed cost +inVariable
inherent cost)
the model
Profit = (Selling price per unit)(number of units sold) –
[Fixed cost + The decision
(Variable variable
costs of interest of
per unit)(Number
units sold)] is X
Profit = sX – [f + vX]
Profit = sX – f – vX
where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold
Assume you are the new owner of Toys R Us and you
want to develop a mathematical model for your daily
profits and breakeven point. Your fixed overhead is
$100 per day and your variable costs are 0.50 per Toy.
You charge $1 per Toy.

Profits = Revenue - Expenses

(Price per Unit)  (Number - Fixed Cost
Sold) - (Variable Cost/Unit)  (Number Sold)

Profits = $1*Number Sold - $100 - $.50*Number Sold

f=$100, s=$1, v=$.50

X=f/(s-v)

X=100/(1-.5)

X=200

At this point, Profits are 0

1. Selling price $1.50, cost/bagel $.80,
fixed cost $250/month, what is the
Breakeven point?

2. Seeking a profit of $1,000/month,

selling price $1.25, cost/bagel $.50,
100 sold/day. What is fixed cost?
 In modeling the problem there are some
uncontrollable factors (outside the control of
the Decision-maker) & other controllable
factors (within the control of the decision-
maker).
 The model is described as either:
- Deterministic Model (if all uncontrollable
inputs are known exactly and in advance) e,g.
corporate income tax rates .
or
- Probabilistic (Stochastic) Model (if all
uncontrollable inputs are not known or
uncertain) e.g. future production demand.
 An example of production model illustrates the type of
uncontrollable and controllable inputs through the
following flowchart:

Uncontrollable Inputs
$10 Profit per unit
5 labor-hour per unit
40 labor-hour capacity

Value for the Max 10(x) Projected Profit and

production s.t. 5(x)<=40 Check on Produce.
Quantity (x) x>=0 Time constraint
Controllable Inputs Controllable Inputs Output

Flowchart for the Production Model

 Any model of a problem requires the preparation of the data.
 Data refer to the values of the uncontrollable inputs to the model.
 All uncontrollable inputs or data must be specified before we can
analyze the model and recommend a decision or solution for the
problem.
 For example in the production model, the data required are:
C = Profit per unit, a = production time in hour per unit
b = production capacity in hours.
The general notation of the model will be as follows:
Max. C = 10 x
s.t. ax <= b
x >= 0
 The next step after preparation of the model with its data is the
solution of the model to reach the “best” output.

 Reaching Optimal Solution can be done by trial & error to solve the
model until a “best” solution is reached which does not violate the
constraints of the model. This is called Feasible Decision.

 If the result violates the constraints then it is called Infeasible

Decision and should not be recommended.

 After a model solution has been obtained, the manager and his
assistance should examine the validity of the model by conducting
small test problems before implementing the model in real
applications.
 An important part of the problem analysis is the preparation of
managerial reports based on the model’s solution.

 It is essential that the results of the model can be easily

understood by the decision-maker.

 The report should include the recommended decision and other

important information about the model results that may be
helpful to the decision-maker.

 Successful implementation of the results is of critical importance

to the manager and his management scientists as it imitates the
real situation of the organizational problem.

 Finally, It is the responsibility of the manager to integrate the

qualitative and quantitative techniques in order to reach the
“best” decision.
 Coordinates through scheduling and strategy
◦ make-to-order
◦ make-to-stock
 An integral part of the supply chain
◦ Affects total response time for customers
◦ Shares activities such as inventory planning
 Costs are in tradeoff
◦ Production lot quantities affect inventory levels and
transportation efficiency
◦ Production response affects transportation costs and
customer service
◦ Production and warehouse location are interrelated
Importance of adopting quantitative approach
in addition to using their intuition, experience
and judgment to solving managerial problems
and making rational decisions.
The result will definitely lead to achieving the
organizational main Objectives and improving the
overall Performance and Effectiveness of their
organization.