Presentation lecture 2nd quantitative techniques

Presentation lecture 2nd quantitative techniques

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  Stages in problemsolving in Quantitative Techniques and Business Management by Dr.Ammara Omer Khakwani
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  Any reasoning thatuses numbers is quantitative. Any reasoning that does not use numbers, but is based on judgment and opinions, is qualitative.
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  Stages in problemsolving Models form a key part of the broader decision-making process. (see Figure 1.2). 1) Identify a problem. Describe the details of the problem and its context. At the end of this stage, managers should have a clear understanding of the problem they are tackling and the requirements of their solution. This might include: (a) Initial investigation – to look at operations, identify difficulties and recognize that there is a problem. (b) Defining the problem – to add details to the initial investigation, saying exactly what the problem is (and not just its symptoms), its context, scope, boundaries and any other relevant details. (c) Setting objectives – to identify the decision makers, their aims, improvement they want, effects on the organization, and measures OF success. (d) Identifying variables, possible alternatives and courses of action. (e) Planning the work – showing how to tackle the problem, schedule activities,design timetables and check resources.
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  2)Analyse the problem.At the end of this stage, managers should have a clear understanding of their options and the consequences. For this they might: (a) Consider different approaches to solving the problem. (b) Check work done on similar problems and see if they can use the same approach. (c) Study the problem more closely and refine the details. (d) Identify the key variables and relationships between them. (e) Build a model of the problem and test its accuracy. (f ) Collect data needed by the model and analyse it. (g) Run more tests on the model and data to make sure that they are working properly, are accurate and describe the real conditions. (h) Experiment with the model to find results in different circumstances and under different conditions. (i) Analyse the results, making sure that they are accurate and consistent.
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  3) Make decisions.This is where managers consider the results from analyses, review all the circumstances and make their decisions. This has three steps to: (a) Compare solutions, looking at all aspects of their performance. (b) Find solutions that best meet the decision makers’ objectives. (c) Identify and agree the best overall solution.
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  4) Implement thedecisions. At this point managers turn ideas into practice, moving from ‘we should do this’ to actually doing it. For this they: (a) Check that the proposed solution really works and is an improvement. (b) Plan details of the implementation. (c) Change operations to introduce new ways of doing things.
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  The main featuresof a model are as follows: 1. It is a representation of reality. 2. It is simplified, with only relevant details included. 3. Properties in reality are represented by other properties in the model.
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  WORKED EXAMPLE 1.1 Anautomatic ticket machine only accepts pound coins. The numbers of tickets it gives are: £1 – 1 ticket, £2 – 3 tickets, £3 – 4 tickets, £4 – 5 tickets, £5 – 7 tickets How can you get the cheapest tickets? Solution You can do a simple calculation to find the best value for money. You know that: o £1 gives 1 ticket, so each ticket costs £1/1 = £1 o £2 gives 3 tickets, so each ticket costs £2/3 = £0.67 o £3 gives 4 tickets, so each ticket costs £3/4 = £0.75 o £4 gives 5 tickets, so each ticket costs £4/5 = £0.80 o £5 gives 7 tickets, so each ticket costs £5/7 = £0.71 Buying three tickets for £2 clearly gives the lowest cost per ticket.
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  WORKED EXAMPLE 1.2 Thepolicy of Benchmark Global Consultants is to employ one consultant for every 10 clients on their books. Last month they had 125 clients. How many consultants should they employ? Solution A purely quantitative analysis suggests employing 125/10 = 12.5 consultants. They could employ part time staff, but this may not be feasible, particularly if the number of clients keeps changing. Realistically the company could round the number of consultants to either 12 or 13. The best decision depends on a range of qualitative factors – such as expected changes to client numbers, amount of work sent by each client, attitudes of consultants, type of business, planned staff departures, recruitment, training, seasonal trends, and so on. Managers must review all the available information– both quantitative and qualitative – before making their decision.
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  CASE STUDY Patrick Chuais the senior vice-president of RPF Global, a firm of financial consultants with offices in major cities around the Pacific Rim. He outlines his use of quantitative ideas as follows. ‘Most of my work is communicating with managers in companies and government offices. I am certainly not a mathematician, and am often confused by figures – but I use quantitative ideas all the time. When I talk to a board of directors, they won’t be impressed if I say, “This project is quite good; if all goes well you should make a profit at some point in the future.” They want me to spell things out clearly and say, “You can expect a 20% return over the next two years.” My clients look for a competitive advantage in a fast-moving world. They make difficult decisions. Quantitative methods help us make better decisions – and they help explain and communicate these decisions. Quantitative methods allow us to: look logically and objectively at a problem; measure key variables and the results in calculations; analyze a problem and look for practical
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  solutions; • compare alternativesolutions and identify the best; • compare performance across different operations, • companies and times; • explain the options and alternatives; • support or defend a particular decision; • overcome subjective and biased opinions. Quantitative methods are an essential part of any business. Without them, we just could not survive!’ Source: Chua P., personal correspondence, 2006; Chua P., talk to Eastern Business Forum, Hong Kong, 2005.
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  Then a symbolicmodel for the amount of value added tax payable is: VAT = rate × sales where the symbol ‘VAT’ in the model represents the amount of tax paid in reality, and the symbols ‘rate’ and ‘sales’ represent the actual rate of VAT and value of sales. If a company sells a product for £300 a unit, a model of its income is: income = number of units sold × selling price = number of units sold × 300 We can extend the model by finding the profit when it costs £200 to make each unit: profit = number of units sold × (selling price − cost) or profit = number of units sold × (300 − 200) = number of units sold × 100 This equation is our model.
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  BG Group (BGG)is an international energy group with a turnover of around $6 billion a year. Its main business is the supply of natural gas. This is a ‘clean’ fuel, and because the worldwide demand for energy is growing, sales are expected to rise significantly over the next 10 years. To meet this demand BGG has to continually find and develop new reserves. National governments generally regard gas fields as a vital strategic resource, so they keep tight control over them. To develop a field, governments divide it into blocks and invite energy companies to bid for exploration rights. BGG, along with every other energy company, has to decide whether to bid for exploration rights in available blocks, and how much to bid. These are important decisions that are characterised by high costs (typically hundreds of millions of dollars), long lead times (typically five years before a project starts earning money), limited lifetime (as there is a finite amount of gas available) and complex tax and contractual arrangements. BGG considers many factors in each decision. Firstly, there are qualitative factors, particularly BGG’s rigorous ethical guidelines and business principles. These are important in showing how
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  Example:_ BG Group doesbusiness and what it stands for – and how it deals with issues such as gas finds in sensitive environments, conflict zones, or areas where indigenous peoples are contesting land rights. Other qualitative questions concern the availability of alternative projects, structure of the company’s long-term portfolio of fields, partnerships, effect on share value, and so on. Secondly, there are quantitative factors. These focus on two issues: 1) Risks – where geologists look at the chances of finding gas and the likely size of discoveries, engineers look at potential difficulties with production, health and safety look at safety and environmental risks, and economists look at likely demand, prices and commercial risks. 2) Return from the project, starting with the basic formula: net cash flow = revenue − costs − taxes Managers review the results from both qualitative and quantitative analyses before making any decision. Sources: BG Annual Reports and websites www.bg-group.com and www.thetimes100.co.uk.
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  Exercise Q.1.1What are thebenefits of quantitative methods? Q.1.2 Do quantitative analyses make the best decisions? Q.1.3 Managers must be good mathematicians. Do you think this is true? Q.1.4 Why has the use of quantitative methods by managers increased in the past 20 years?
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  1.5) Why domanagers use models? 1.6 )What are the stages in solving a problem? 1.7 )Where do quantitative models fit into this approach? 1.8) Is there only one correct way to tackle a problem?
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  Answers of Questions 1.1_They allow clear, precise and objective measures of features, calculations using these, and rational analysis of problems. 1.2_ No – managers make decisions. 1.3_ No – but they must be aware of the types of analysis available,understand the underlying principles, recognise the assumptions and limitations, do some analyses themselves, have intelligent discussions with experts, and interpret the results. 1.4 _There are several reasons for this, including availability of computers, improving software, fiercer competition forcing better decisions, new quantitative methods, good experiences with earlier analyses, better education of managers, and so on. 1.5 To develop solutions for problems, allow experimentation without risk to actual operations, allow experiments that would not be possible in reality, check the consequences of decisions, see how sensitive operations are to change, and so on. 1.6 We describe four stages: identifying a problem, analysing it, making decisions and implementing the results. 1.7 Generally in the analysis stage.
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  1.8 No –we can use any approach that efficiently gets a good answer. 1.9 No – you can get a feel for the numbers without doing the detailed calculations. 1.10 Because they are widely available, they use standard formats that are familiar and easy to use, and you do not have to learn how to use a new program for each problem.