Methods of Analysis - Case study

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MSL 5080, Methods of Analysis for Business Operations 1

Course Learning Outcomes for Unit I Upon completion of this unit, students should be able to:

1. Differentiate the steps of the quantitative analysis approach. 1.1 Apply quantitative analysis in a real-world situation. 1.2 Perform a break-even analysis.

Reading Assignment Chapter 1: Introduction to Quantitative Analysis

Unit Lesson Quantitative Analysis As good an opening as any to a postgraduate quantitative analysis course is to confirm that yes, mathematics is involved to improve situations and outcomes and also to stress that leadership has always been the foundation for quantitative analysis. The answer will not make you prosper, but leading the effort in deciding what quantitative analysis measurements mean and what to do after seeing these numbers may indeed benefit your organization. There will be a bit more discussion on what leaders may do with quantitative analysis after introducing some fundamentals. To quote the authors from the textbook, “Quantitative analysis is the scientific approach to managerial decision-making” (Render, Stair, Hanna, & Hale, 2015, p. 2). A scientific approach means calculating with numbers. Conversely, perhaps you have worked for leaders who used guesswork or a gut feeling to decide a numbers-based, quantitative issue. Perhaps the leader chose fortunately, and that is good; but pursuit of good fortune becomes hazardous if you are using hope and chance to gain a good outcome. You may have noticed this does not work well for most Las Vegas vacationers who enjoy themselves by gambling against high odds that favor the casinos. So, quantitative analysis can have a valuable place as a decision tool if you can make the analysis properly fit the situation. The use of quantitative analysis to keep track, measure, analyze totals, and forecast, is older than language itself. Sumerians, and other peoples in the Middle East, used it for grain and livestock categories. Exploration of mathematics theory (i.e., learning how to add, subtract, multiply, and divide) made quantitative analysis possible. Now, apply mathematics to estimate probability to see what might happen, determine averages and percentages to see how much might be involved, and address many specific situations. As you can imagine, just knowing a number (e.g., how much livestock a person has) may not mean much by itself. This is where mathematics helps: The purpose of quantitative analysis is to turn raw data into meaningful information. Formulas turn that data into something leaders can use along with considering qualitative factors such as weather and customer demand. In theory, good leadership should do the rest. Business Analytics The textbook covers the terms below that you are intended to recall throughout the course:

 Business analytics uses (usually large amounts of) data to make better business decisions. There are three categories: o Descriptive analytics describes/measures how things were and are now. o Predictive analytics uses past patterns to forecast. o Prescriptive analytics calculates new and better ways (optimal ways) to operate.

UNIT I STUDY GUIDE

Introduction to Quantitative Analysis

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Quantitative analysis formulas will involve one of these categories of analysis each time. The Steps of the Quantitative Analysis Approach Most literature (including the textbook) addressing quantitative analysis describes seven steps that are used to keep the analysis methodical and efficient (Render et al., 2015), which include the following:

1. Define the problem: This takes some effort and leadership to be sure the right problem is being analyzed. Otherwise, later on, the formula will provide information for a different problem than the one your group is working on. Also, the problem has to be quantifiable with specific and measurable things to model with math formulas. If the problem is not quantifiable yet, these measurable objectives that help solve the problems have to be developed first. Note that the textbook offers improving healthcare delivery as an example and suggests analyzing objectives such as reducing hospitalization days or increasing the physician-to-patient ratio as the definition of improvement. Doing these things may improve health care, but the leader has to decide that after he or she sees the quantitative analysis of these things.

2. Develop a model: This formula should model the process that is the problem. If so, its mathematical answer will be the solution for a leader to consider. You can see from the textbook that some of the model’s usual parts include:

 Variable: controllable, meaning a decision can be made to set this variable as a certain number, and uncontrollable, which changes to an unknown extent as other numbers are input into the model.

 Parameter: also numbers in the model, such as cost of the items set in the controllable variable.

 Input data: as discussed, this should be obtainable. If the input data cannot be had, it may be an issue with the model or the problem definition.

3. Acquire input data: Of course, you need accurate data or the model’s answer will be “way off” and not help us. One number to acquire seems easy and it is. But businesses may need thousands of data input into the model. Often, you can use the area under parts of graph curves and other statistics, especially if you are working on probability models that keep cutting fractions to infinity.

4. Develop a solution: This can be solving the model’s equation or using trial and error to input numbers to rule out unrealistic solutions and determine the best (optimal) one. Definition: an algorithm is a series of math steps repeated, often many times, to find an optimal solution.

5. Test the solution: Are the solutions consistent when checking with data from another source? Does it all make sense? A firm cannot make negative products, so an answer of “–100 coats per month” means the model or calculation needs to be re-checked and maybe go back to the “Develop a Model” step.

6. Analyze the results: What does the solution mean to the person who asked for the quantitative analysis? The analysts are not functioning as the superiors of the clients who asked for this, but analysts owe them some situational awareness. Perhaps, some sensitivity analysis is in order to see how much the solution changes when you change the model or data inputted. Or, if you are not getting a solution they can use, it may be time to go back to redevelop the model.

7. Implement the results: Here is where leadership is directly involved. Humans lead, and so there should be no surprise at encountering human reactions to cold and hard numbers. However, humanity is indeed why a scientific approach, such as quantitative analysis, has value. The model solution may imply a new expense that leaders or staff do not want to commit to, there may be social implications that entrenched leaders did not want to address, or natural inertia of not expending energy may form a resistance to change. Conversely, analysts may not be committed themselves, and “crunched the numbers because it’s their job.” A better performance can be had by caring about what you do and what it means—at least to understand something about the problem, model, and solutions reached. With this approach, the people, and not machines, will continue to make decisions.

How to Develop a Quantitative Analysis Model You are ready to develop a model! Look at a model like one in the textbook. Notice that the authors chose a reasonably simple model that must be relevant to many businesses. In the step, “Develop a Model,” there is an item that addresses a problem with sales. The model often is:

Profit = Revenue – Expenses

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As you know from working in sales almost anywhere, expenses are often a combination of a fixed cost of doing business, and a variable cost that changes with how much business is done, or you will see here, how many units sold:

Expenses = (Fixed cost + Variable cost) The variable cost really means:

Variable cost = (Variable cost per unit) (Number of units sold) Remember that terms grouped next to each other in parentheses means they are multiplied. So, the variable cost of a day’s sales of one type and size of coffee might be ($1 per large cup) (35 cups in a day) = Variable cost of $35 for that day for the business to sell that size of coffee that day. The revenue part really means:

Revenue = (Selling price per unit) (Number of units sold) So the Revenue of a day’s sales of one type and size of coffee might be ($2 per large cup) (35 cups in a day) = Revenue of $70 for that day for the business to sell that size of coffee that day. Then, it seems this is how the business did for large coffees that day:

Profit = Revenue – Expenses Profit = ($2 x 35) – ($1 x 35)

Profit = ($70) – ($35) Profit = $35

The textbook uses the following letters to represent the corresponding expenses:

f = fixed cost v = variable cost per unit s = selling price per unit X = number of units sold

This works, as long as you keep track of what each letter stands for. You can vary these variables to see what profit results from changing the expenses that can be controlled, including selling price, number of units sold, and even variable cost per unit if you can go back and renegotiate or coordinate for a change in that. Breaking even is important for most businesses, and you can model a simple break-even point where profit is $0, the usual definition of breaking even:

$0 = sX – f – vX Some math can help solve for X (the number of units sold), and you will want to know in order to break even:

0 = (s – v)X – f f = (s – v)X

X = f then X is the Break-Even Point (BEP)

s – v

BEP = f s – v

If you experiment with some numbers for f, s, and v at this point to find the coffee shop’s BEP for large coffees, and set f = 50 as the business’s fixed cost for the day, then assume the shop is selling only large coffees to put a fixed cost against, and s = 2 and v = 1.

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BEP = 50 / 2-1, = 50 / 1, = 50 It looks like they need to sell 50 coffees to cover the fixed cost of building, utilities, salaries, and the cost of the coffee if they are selling them at $2 each. If costs go up, they may have to look at advertising to sell more coffees, raise the price of large coffees, or try to reduce the fixed cost.

Reference Render, B., Stair, R. M., Jr., Hanna, M. E., & Hale, T. S. (2015). Quantitative analysis for management (12th

ed.). Upper Saddle River, NJ: Pearson.

Suggested Reading The links below will direct you to a PowerPoint view of the Chapter 1 Presentation. This will summarize and reinforce the information from this chapter in your textbook. Click here to access a PowerPoint presentation for Chapter 1. Click here to access the PDF view of the presentation. Using the CSU Online Library, locate the article below in the Business Source Complete database. This article will outline a list of managerial resolutions for businesses. Davis, T. (2016). You can still go broke just breaking even. Southeast Farm Press, 43(3), 6.

Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. Complete the “Self-Test” on pages 18–19 of the textbook. Use the answer key (Appendix H) in the back of the textbook in order to check your answers.