FIRST SEMESTER NOTE

INTRODUCTION

Scientific methods have been man’s outstanding asset to pursue

an ample number of activities. It is analysed that whenever some
national crisis, emerges due to the impact of political, social,
economic or cultural factors the talents from all walks of life
amalgamate together to overcome the situation and rectify the
problem. In this chapter we will see how the quantitative
techniques had facilitated the organization in solving complex
problems on time with greater accuracy. The historical
development will facilitate in managerial decision-making &
resource allocation, The methodology helps us in studying the
scientific methods with respect to phenomenon connected with
human behaviour like formulating the problem, defining decision
variable and constraints, developing a suitable model, acquiring
the input data, solving the model, validating the model,
implementing the results. The major advantage of mathematical
model is that its facilitates in taking decision faster and more
accurately.

Managerial activities have become complex and it is necessary to

make right decisions to avoid heavy losses. Whether it is a
manufacturing unit, or a service organization, the resources have
to be utilized to its maximum in an efficient manner. The future is
clouded with uncertainty and fast changing, and decision-making
– a crucial activity – cannot be made on a trial-and-error basis or
by using a thumb rule approach. In such situations, there is a
greater need for applying scientific methods to decision-making
to increase the probability of coming up with good decisions.
Quantitative Technique is a scientific approach to managerial
decision-making. The successful use of Quantitative Technique for
management would help the organization in solving complex
problems on time, with greater accuracy and in the most
economical way. Today, several scientific management
techniques are available to solve managerial problems and use of
these techniques helps managers become explicit about their
objectives and provides additional information to select an
optimal decision. This study material is presented with variety of
these techniques with real life problem areas.

1.3 ABOUT QUANTITATIVE TECHNIQUE

Quantitative Techniques adopt a scientific approach to decision-
making. In this approach, past data is used in determining
decisions that would prove most valuable in the future. The use of
past data in a systematic manner and constructing it into a
suitable model for future use comprises a major part of scientific
management. For example, consider a person investing in fixed
deposit in a bank, or in shares of a company, or mutual funds, or
in Life Insurance Corporation. The expected return on
investments will vary depending upon the interest and time
period. We can use the scientific management analysis to find out
how much the investments made will be worth in the future.
There are many scientific method software packages that have
been developed to determine and analyze the problems.

In case of complete non-availability of past data, quantitative

factors are considered in decision-making. In cases where the
scope of quantitative data is limited, qualitative factors play a
major role in making decisions. Qualitative factors are important
situations like sudden change in tax-structures, or the
introduction of breakthrough technologies. Application of
scientific management and Analysis is more appropriate when
there is not much of variation in problems due to external factors,
and where input values are steady. In such cases, a model can be
developed to suit the problem which helps us to take decisions
faster. In today's complex and competitive global marketplace,
use of Quantitative Techniques with support of qualitative factors
is necessary.

Quantitative Technique is the scientific way to managerial

decision-making, while emotion and guess work are not part of
the scientific management approach. This approach starts with
data. Like raw material for a factory, this data is manipulated or
processed into information that is valuable to people making
decision. This processing and manipulating of raw data into
meaningful information is the heart of scientific management
analysis.

1.2 HISTORICAL DEVELOPMENT

During the early nineteen hundreds, Fredrick W. Taylor developed

the scientific management principle which was the base towards
the study of managerial problems. Later, during World War II,
many scientific and quantitative techniques were developed to
assist in military operations. As the new developments in these
techniques were found successful, they were later adopted by the
industrial sector in managerial decision-making and resource
allocation. The usefulness of the Quantitative Technique was
evidenced by a steep growth in the application of scientific
management in decision-making in various fields of engineering
and management. At present, in any organization, whether a
manufacturing concern or service industry, Quantitative
Techniques and analysis are used by managers in making
decisions scientifically.

What is operation research?

Operation research can be defined as the scientific approach to
managerialdecision making in which raw data are processed and manipulated
resulting into meaningful information.
Raw data Operation research Meaning information.

It is a process of employing scientific approach to decision making with special

emphasizes on quantification rather than qualification of decision variables.
METHODOLOGY OF QUANTITATIVE TECHNIQUES

The methodology adopted in solving problems is as follows:

Formulating the problem

Defining decision variables and

constraints.

Developing a suitable model

Acquiring the Input Data

Solving the model

Validating the model

Implementing the results

Figure 1.1

 Problem definition: what is the nature of decision require? Decision is meant to

solve a problem. While problem is any give situation in which what it’s
different from it should be. In trying to analyze the situation it is important to
know the gap that exist between what it is and what if should be.
According to helbert Simon define problem as the most critical stage in problem
resolution and was quoted saying “if he was given one hour to save the
planet he will spent 59 minute in defining the problem and 1munit in resolving
it.
 (B) Developing a model. Once you have identified a problem you can develop a
model toward resolving it. It is an attempt to present realities by way of
mathematics or is a realistic representation of situation by way of maths and
statistic. It is done by way of developing equations to solve the problem.
Quantitative model are realistic, solvable and understandable mathematical
representation of situation.

+ vcq
- fc
pq
2=
R1 cost

Output
For example, the total profit from a given number of products sold
can be determined by subtracting selling price and cost price and
multiplying the number of units sold. Assuming selling price, sp as
N. 40 and cost price, cp N. 20, the following mathematical model
expresses the total profit, tp earned by selling number of unit x
Π or Z
Π = TR - TC
TR = P × Q
TC = TVC + FC
TVC = VC × Q
Π = TR – TC
Π = P × Q – TVC + FC
Π = PQ – (VCQ + FC)
C) Acquire input data. Collect relevant data and process it. Processing may involve
filter the data or screening it and transform it to useful information.
Data may come from varieties of source such as company reports, company
documents, and interviews on sit direct measuments or statistical sampling

Garbage in Processing Garbage out

(D) DEVELOPING 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
 1 solving question (by substituting data in equestrian)
 2 Trial and error - trying various approaches and picking the best result
  Complete enumeration- trying all possible value
(E) TEST THE SOLUTION
a) You must test both input data and model
b) Determine the accuracy and completeness of the input data
c) Collect data from different sources and compare
d) Testing to be before analysis and implantation
e) New data can be collected to test the model.
f) Result should be logically consistency and representing solution.
 Analyze the solution:
(F) ANALYZING THE SOLUTION
a) Understand the action applied by the solution
b) Determine the implication of the solution
c) Implementing result often require change in an organization
d) The impact of action or change need to be studied and understood before
implementation.
 Implementation the result:
 Once the model is tested and validated, it is ready for
implementation. Implementation involves
translation/application of solution in the company. Close
administration and monitoring is required after the solution is
implemented, in order to address any proposed changes that
call for modification, under actual working conditions.
Given the payoff matrix for a decision problem, the process of
decision-making depends upon the situation under which the
decision is being made. These situations can be classified into
three broad categories : (a) Decision-making under certainty, (b)
Decision -making under uncertainty and (c) Decision-making under
risk.

DECISION AND DECISION MAKING

Decision is a choice made from alternative or available options.
Decision making is the process of identifying a problem and opportunities and
resolving them.
Steps in Decision making
 Clear definition of problem at hand.
 List the possible alternatives
 Identify possible outcome
 List the pay off or profit
  Select one of the decision theory or models.
 Apply the model and make your decision
Theories of decision making
A) Rationality theory: manager make consistent, value maximizing choice with
specified constraint .When a consumer derive satisfaction which is equivalent to
the price paid is referred to as rational.
Their assumptions are that decision makers are:
 Perfect rational ,fully objective and logical
 Have carefully define the problem and identify all avialable alternative
 ∴Have a clear define goal
 Will select the alternative that maximize outcome in the organization
interest rather than personal interest.
B) Bounding rationality theory: managers makes decision rationally, but limited
(bounded) by the inability to process information
Assumption
 Decision maker will not seek out or have knowledge of all alternative.
 Decision maker will satisfy: choose the first alternative encounter that
satisfactorily solve the problem rather than maximize the outcome of their
decision by considering all alternative and choose the best.
 Influences on decision making.
 Escalation of commitment. An increase in commitment to a previous
decision despite evidence that it may have been wrong.
C) Intuitive decision making theory: the decision maker make decision base on
experience, feelings and accumulated judgment.
BASIC FEATURES OF DECISION MAKING
1) Alternative Courses of Action or Acts: Every decision-
maker is faced with a set of several alternative courses of
 action A1, A2, ...... Am and he has to select one of them in
view of the objectives to be fulfilled.
2) States of Nature: The consequences of selection of a
course of action are dependent upon certain factors that
are beyond the control of the decision-maker. These
factors are known as states of nature or events. It is
assumed that the decisionmaker is aware of the whole list
of events S1, S2, ...... Sn and exactly one of them is bound
to occur. In other words, the events S 1, S2, ...... Sn are
assumed to be mutually exclusive and collective
exhaustive.
3) Consequences: The results or outcomes of selection of a
particular course of action are termed as its consequences.
The consequence, measured in quantitative or value
terms, is called payoff of a course of action. It is assumed
that the payoffs of various courses of action are known to
the decision-maker.
4) Decision Criterion: Given the payoffs of various
combinations of courses of action and the states of nature,
the decision-maker has to select an optimal course of
action. The criterion for such a selection, however,
depends upon the attitude of the decision-maker.

Decision-making under Certainty

The conditions of certainty are very rare particularly when
significant decisions are involved. Under conditions of
certainty, the decision-maker knows which particular state of
nature will occur or equivalently, he is aware of the
consequences of each course of action with certainty. Under
such a situation, the decision-maker should focus on the
 corresponding column in the payoff table and choose a
course of action with optimal payoff.

Decision making under uncertainly

When it is known it is called certain. At the opposite extreme, we have
uncertainly. No information is available on how likely the various state of
nature are. Under this condition, four possible decision criteria are :
a) Maximin
b) Maximax
c) Laplex
d) Minimax

a. MAXIMIN: These criterions determine the worst possible pay off for each
alternative, and choose the alternative that has the best worst. The maximin
approach is essentially a pessimistic one because it take in to consideration of
worst possible out come for each alternative. For instance consider the following
profit
Possible features depend
State of nature
Alternative Low Moderate High Maximi

Small facility 11 11 11 11best

Medium facility 7 12 12 7

Large facility (4) 2 16 (4)

Since ,11 is the best outcome. Hence, small facility selected for decision.
b. MAXIMAX: the criterion determine the best possible pay off and choose the
alternative with best pay [Link] maximax approach is optimistic . It those not take
in to account pay off other than best.
State of nature
Alternative Low Moderate High Maximax

Small facility 10 10 10 10

Medium facility 7 12 12 12

Large facility (4) 2 16 16best

The best pay off is 16

c. LAPLACE: The criterions determine the average pay off for each
alternative and choose the alternative with the best average pay off.

State of nature
Alternative Low Moderate High Laplace

Small facility 10 10 10 10

Medium facility 7 12 12 10.3best

Large facility (4) 2 16 4.6

Since

d. MINIMAX Regret: criterion determines the worst, regret for each alternative
and choose the alternative with the best worst. This approach seek to minimize the
difference between the playoff that is realized and the best payoff for each state of
nature.
Alternative Low Moderate High Minimax
regret

Small facility 0 2 6 6

Medium facility 3 0 4 4best worst

Large facility 14 10 0 14

Note: minimax is use when considering profit using state of nature.

Decision making under risk
Between the two extreme of certainly and uncertainly lies the case of risk.
The possibility of occupancy for each state of nature is known (note that the
best state are mutually exclusive and collectively exhausitive, these
possibilities must add to 1.00). A widely use approach under such
circumstancy is the expected monetary value criterion ( EMV) . The
VALUE IS COMPUTED for each alternative, and the one with the best
expected value is selected. The expected value is the sum payoff for an
alternative where each pay off is weighted by the possibility of each of the
state of nature. Thus the approach is
Expected Monitory value (EMV) determines the expected pay off of each
alternative CHOOSE THe alternative that have the best expected pay off.
Example: the pay off in (naira) of the three act A 1, A2, A3 and the possible
state of nature S1, S2 and S3 are given below:

Possible feature demand

Alternative N1 N2 N3
 A1 -20 200 400

A2 -50 -100 600

A3 200 -50 300

The probability of state of nature is:

N1 is 0.3, N2 is 0.4 and N3 0.3 respectively.

Alternative N1 0.3 N2 0.4 N3 0.3

A1 -20 200 400

A2 -50 -100 600

A3 200 -50 300

Compute for EMV

State of nature

(0.3×-20)+ (0.4×200) + (0.3×400)

-6+80+120=194
(0.3×-50)+ (0.4×-100) + (0.3×600)
-15-40 +180=125
(0.3×200)+ (0.4×-50) + (0.3×300)
60+ (-20) + 90 =130
Based on EMV, alternative A, which is = 194 has the highest expected money
value.
Compute for expected opportunity lost (EOL)
Alternative N1 0.3 N2 0.4 N3 0.3
 A1 220 0 200

A2 250 300 0

A3 0 250 300

Note, that the regret matrix is before attached the weight to the pay off.

(0.3×220)+ (0.3×200) =126

(0.3×250)+ (0.4×300) =195
(0.4×250)+ (0.3×300) =190

EXPECTED VALUE WITH PERFECT INFORMATION (EVPI)

The expected value with perfect information is the amount of
profit foregone due to uncertain conditions affecting the selection
of a course of action.

Expected value of perfect information = EvpI= EPPI –EMV

The excepted profit with perfect information is arrived at by select the best pay
off for each state of nature. E.g EpI = (200×0.3)+ (200×0.4)+ (600×0.3) = 320
EvpI = 320-194 =126