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Fourth
Fourth Edition Edition

Quantitative Methods

Quantitative Methods for Decision Makers

Fourth Edition
for Decision Makers
Mik Wisniewski Quantitative Methods
As a manager, developing a good understanding of the quantitative techniques at your disposal is crucial.
Understanding how and when to use them and what their results really mean can be the difference between
making a good or bad decision and, ultimately, between business success and failure.
for Decision Makers
This book covers everything you need to know for an introductory quantitative methods course and it helps
you to understand why each of the methods and techniques are important by relating them directly to real-life
examples where business decisions need to be made.
Mik Wisniewski
For this fourth edition the book content, examples and cases have been thoroughly updated throughout. The
new and improved use of colour, figures, tables and charts help to illustrate key points and make the text easier
to read and understand than ever before. Other key features of this book include:
Activities in every chapter (with a solutions appendix for ease of reference).
Worked examples wherever necessary.
Exercises are supported by real-life data sets, provided in Excel, on the book’s companion website.
A chapter on financial decision-making.
An online lecturer's manual (including solutions to exercises in the text).

Quantitative Methods for Decision Makers will provide you with a detailed understanding of the role and purpose
of quantitative methods in effective management and managerial decision-making. The focus on the application
of these methods by public and private sector managers makes this book especially suitable for those with prior
business experience and for MBA students.

The book’s companion website can be found at www.pearsoned.co.uk/wisniewski

“Wisniewski makes numerical and statistical concepts understandable and

brings them to life using excellent scenarios and case studies. This book
was a valuable resource during my MBA studies and I am encouraging all my
non-statistical colleagues and anyone who works with statistics or perform-
ance measurement data to read this book!”

Wisniewski
Brian J Pickett, Assistant Director, Local Government Data Unit, Wales

Mik Wisniewski is Senior Research Fellow at Strathclyde Business School in

Scotland. He also works as a freelance management consultant with clients
including PriceWaterhouseCoopers, ScottishPower and Shell, and a variety
of public sector organisations.

Additional student support at

www.pearsoned.co.uk/ www.pearson-books.com Additional student support at
An imprint of wisniewski www.pearsoned.co.uk/wisniewski
QUAM_A01.QXD 14/02/2006 7:22 AM Page i

Quantitative Methods
for Decision Makers

Visit the Quantitative Methods for Decision Makers, fourth edition

Companion Website at www.pearsoned.co.uk/wisniewski to
find valuable student learning material including:

• Real-life data sets in Excel to accompany the exercises in the

book
• Basic simulations to accompany relevant exercises in the book
QUAM_A01.QXD 14/02/2006 7:22 AM Page ii

We work with leading authors to develop the

strongest educational materials in business
studies, bringing cutting-edge thinking and
best learning practice to a global market.

Under a range of well-known imprints, including

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To find out more about the complete range of our

publishing please visit us on the World Wide Web at:
www.pearsoned.co.uk
QUAM_A01.QXD 14/02/2006 7:22 AM Page iii

Fourth Edition

Quantitative Methods
for Decision Makers
Mik Wisniewski
Senior Research Fellow, Department of Management Science,
University of Strathclyde Business School
QUAM_A01.QXD 14/02/2006 7:22 AM Page iv

Pearson Education Limited

Edinburgh Gate
Harlow
Essex CM20 2JE
England

and Associated Companies throughout the world

Visit us on the World Wide Web at:

www.pearsoned.co.uk

First published 1994

Second edition published under the Financial Times/Pitman Publishing imprint 1997
Third edition 2002
Fourth edition 2006

© Mik Wisniewski 1994, 2006

The right of Mik Wisniewski to be identified as author of this work has been asserted
by him in accordance with the Copyright, Designs, and Patents Act 1988.

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise without either the prior written permission of
the Publishers or a licence permitting restricted copying in the United Kingdom issued
by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP.

All trademarks used herein are the property of their respective owners. The use of any
trademark in this text does not vest in the author or publisher any trademark ownership
rights in such trademarks, nor does the use of such trademarks imply any affiliation
with or endorsement of this book by such owners.

ISBN-13: 978-0-273-68789-4
ISBN-10: 0-273-68789-1

British Library Cataloguing-in-Publication Data

A catalogue record for this book can be obtained from the British Library.

Library of Congress Cataloging-in-Publication Data

A catalog record for this book is available from the Library of Congress

10 9 8 7 6 5 4 3 2
10 09 08 07 06

Typeset in 9.5/12.5 Stone Serif by 25.

Printed and bound by Mateu-Cromo Artes Graficas, Madrid, Spain.
QUAM_A01.QXD 14/02/2006 7:22 AM Page v

Still dedicated to Hazel – to whom I promised after the last

book that I’d never write another.
QUAM_A01.QXD 14/02/2006 7:22 AM Page vi
QUAM_A01.QXD 14/02/2006 7:22 AM Page vii

Contents

Preface xiv
Guided Tour xvi
Acknowledgements xviii

1 Introduction 1

The Use of Quantitative Techniques by Business 2

The Role of Quantitative Techniques in Business 6
Models in Quantitative Decision Making 9
Use of Computers 9
Using the Text 10
Summary 11
Further reading 11
Useful online resources 12
Application: British Telecom 12

2 Tools of the Trade 16

Learning objectives 16
Some Basic Terminology 17
Fractions, Proportions, Percentages 18
Rounding and Significant Figures 19
Common Notation 21
Powers and Roots 23
Logarithms 24
Summation and Factorials 26
Equations and Mathematical Models 27
Graphs 29
Real and Money Terms 35
Summary 36
Further reading 37
Exercises 38
QUAM_A01.QXD 14/02/2006 7:22 AM Page viii

viii CONTENTS

3 Presenting Management Information 40

Learning objectives 40
A Business Example 41
Bar Charts 44
Pie Charts 52
Frequency Distributions 54
Percentage and Cumulative Frequencies 56
Histograms 58
Frequency Polygons 61
Ogives 62
Lorenz Curves 64
Time-series Graphs 66
Z Charts 68
Scatter Diagrams 74
General Principles of Graphical Presentation 77
Worked Example 78
Summary 82
Further reading 83
Useful online resources 83
Application: Cowie Health Centre, Scotland 84
Exercises 87

4 Management Statistics 93

Learning objectives 93
A Business Example 94
Why are Statistics Needed? 95
Measures of Averages 96
Measures of Variability 100
Using the Statistics 111
Calculating Statistics for Aggregated Data 113
Index Numbers 117
Worked Example 125
Summary 126
Further reading 127
Useful online resources 127
Application: Halifax plc: house price index 127
Exercises 134

5 Probability and Probability Distributions 138

Learning objectives 138

Terminology 141
QUAM_A01.QXD 14/02/2006 7:22 AM Page ix

CONTENTS ix

The Multiplication Rule 144

The Addition Rule 145
A Business Application 146
Probability Distributions 149
The Binomial Distribution 152
The Normal Distribution 159
Worked Example 168
Summary 173
Further reading 173
Useful online resources 173
Application: ICI Pharmaceuticals 174
Exercises 177

6 Decision Making Under Uncertainty 180

Learning objectives 180

The Decision Problem 181
The Maximax Criterion 184
The Maximin Criterion 184
The Minimax Regret Criterion 184
Decision Making Using Probability Information 186
Risk 187
Decision Trees 189
The Value of Perfect Information 192
Worked Example 194
Summary 196
Further reading 196
Useful online resources 197
Application: Gulf Oil 197
Exercises 200

7 Market Research and Statistical Inference 203

Learning objectives 203

Populations and Samples 205
Sampling Distributions 210
The Central Limit Theorem 211
Characteristics of the Sampling Distribution 212
Confidence Intervals 213
Other Confidence Intervals 215
Confidence Intervals for Proportions 217
Interpreting Confidence Intervals 219
Hypothesis Tests 219
Tests on a Sample Mean 227
QUAM_A01.QXD 14/02/2006 7:22 AM Page x

x CONTENTS

Tests on the Difference Between Two Means 228

Tests on Two Proportions or Percentages 230
Tests on Small Samples 232
Inferential Statistics Using a Computer Package 235
p Values in Hypothesis Tests 236
χ2 Tests 237
Worked Example 244
Summary 250
Further reading 250
Useful online resources 251
Application: Queen’s College, Taunton 251
Exercises 255

8 Quality Control and Quality Management 262

Learning objectives 262

The Importance of Quality 263
Techniques in Quality Management 264
Statistical Process Control 265
Control Charts 267
Control Charts for Attribute Variables 275
Pareto Charts 276
Ishikawa Diagrams 277
Worked Example 279
Summary 281
Further reading 282
Useful online resources 283
Application: Hewlett-Packard 283
Exercises 285

9 Forecasting I: Moving Averages and Time Series 287

Learning objectives 287

The Need for Forecasting 288
Approaches to Forecasting 293
Trend Projections 296
Time-series Models 310
Worked Example 324
Summary 326
Further reading 327
Useful online resources 327
Application: Retail supermarket, UK 328
Exercises 330
QUAM_A01.QXD 14/02/2006 7:22 AM Page xi

CONTENTS xi

10 Forecasting II: Regression 335

Learning objectives 335

The Principles of Simple Linear Regression 336
The Correlation Coefficient 340
The Line of Best Fit 344
Using the Regression Equation 347
Further Statistical Evaluation of the Regression Equation 348
Non-linear Regression 361
Multiple Regression 363
The Forecasting Process 376
Worked Example 381
Summary 386
Further reading 386
Useful online resources 386
Application: RAC 387
Exercises 392

11 Linear Programming 399

Learning objectives 399

The Business Problem 400
Formulating the Problem 401
Graphical Solution to the LP Formulation 403
Sensitivity Analysis 410
Computer Solutions 413
Assumptions of the Basic Model 415
Dealing with More than Two Variables 415
Extensions to the Basic LP Model 419
Worked Example 419
Summary 425
Further reading 425
Useful online resources 426
Application: Blue Bell Inc. 427
Exercises 429

12 Stock Control 431

Learning objectives 431

The Stock-control Problem 432
Costs Involved in Stock Control 433
The Stock-control Decision 435
The Economic Order Quantity Model 438
QUAM_A01.QXD 14/02/2006 7:22 AM Page xii

xii CONTENTS

The Reorder Cycle 439

Assumptions of the EOQ Model 440
Incorporating Lead Time 440
Classification of Stock Items 441
MRP and JIT 445
Worked Example 452
Summary 454
Further reading 454
Useful online resources 454
Application: Unipart 455
Exercises 457

13 Project Management 459

Learning objectives 459

Characteristics of a Project 460
Project Management 460
Business Example 461
Network Diagrams 466
Developing the Network Diagram 470
Using the Network Diagram 474
Precedence Diagrams 475
Gantt Charts 477
Uncertainty 479
Project Costs and Crashing 482
Worked Example 484
Summary 486
Further reading 487
Useful online resources 487
Application: Central Regional Council, Scotland 488
Exercises 490

14 Simulation 496

Learning objectives 496

The Principles of Simulation 497
Business Example 499
Developing the Simulation Model 500
A Simulation Flowchart 501
Using the Model 504
Worked Example 512
Summary 516
Further reading 517
Useful online resources 518
QUAM_A01.QXD 14/02/2006 7:22 AM Page xiii

CONTENTS xiii

Application: University Hospital of Wales 518

Exercises 524

15 Financial Decision Making 529

Learning objectives 529

Interest 530
Nominal and Effective Interest 532
Present Value 533
Investment Appraisal 535
Replacing Equipment 540
Worked Example 545
Summary 546
Further Reading 550
Application: Tomco Oil Inc. 550
Exercises 553

Conclusion 556

Appendices
A Binomial Distribution 557
B Areas in the Tail of the Normal Distribution 562
C Areas in the Tail of the t Distribution 563
D Areas in the Tail of the χ 2 Distribution 564
E Areas in the Tail of the F Fistribution, 0.05 Level 565
F Solutions to Chapter Activities 567

Index 585

Supporting resources
Visit www.pearsoned.co.uk/wisniewski to find valuable online resources

Companion Website for students

• Real-life data sets in Excel to accompany the exercises in the book
• Basic simulations to accompany relevant exercises in the book

For instructors
• A downloadable Instructor's Manual, including teaching notes and solutions to
the exercises in the book

For more information please contact your local Pearson Education sales
representative or visit www.pearsoned.co.uk/wisniewski
QUAM_A01.QXD 14/02/2006 7:22 AM Page xiv

Preface

The contribution that quantitative techniques can make to management decision

making is well researched. There is extensive empirical evidence that the relevant
application of such techniques has resulted in significant improvements in efficiency
– particularly at the microeconomic level – and has led to improvements in decision
making in both profit and not-for-profit organisations. Numerous professional
journals regularly provide details of ‘successful’ applications of such techniques to
specific business problems.
This is, arguably, one of the major reasons why in recent years there has been a con-
siderable expansion of the coverage of such topics throughout business studies pro-
grammes in the higher education sector, not only in the UK but also across much of
Western Europe. Not only postgraduate courses (such as MBAs) and professional cours-
es (in finance, banking and related fields) but most, if not all, business undergraduate
courses nowadays expose the student to basic quantitative techniques. It is no longer
simply the statistical or mathematical specialist who is introduced to these topics but,
in numerical terms far more importantly, a large number of students who go on to a
career in general management.
Coupled with this development has been the revolution that has occurred in
making available powerful and cost-effective computing power on the manager’s desk
top. Not only has this meant that the manager now has instant direct access to avail-
able business information but also that techniques which used to be the prerogative of
the specialist can be applied directly by the manager through the use of appropriate –
and relatively cheap and user-friendly – computer software such as Excel.
Because of these developments it is increasingly important for managers to
develop a general awareness and understanding of the more commonly used
techniques and it is because of this that this textbook was written. There is a plethora
of textbooks covering the quantitative field and the author was reluctant simply to add
another. However, MBA students – and those studying at equivalent levels – often have
different needs and require a different appreciation of these techniques, and it was for
this audience that this text primarily was written. The text aims to provide the reader
with a detailed understanding of both the role and purpose of quantitative techniques
in effective management and in the process of managerial decision making. This text
focuses not only on the development of appropriate skills but also on the development
of an understanding as to how such techniques fit into the wider management
process. Above all, such techniques are meant to be of direct, practical benefit to the
managers and decision makers of all organisations. By the end of the text the reader
should be able to use the techniques introduced, should have an awareness of
QUAM_A01.QXD 14/02/2006 7:22 AM Page xv

PREFACE xv

common areas of business application and should have developed sufficient

confidence and understanding to commission appropriate applications of more
complex techniques and contribute to the evaluation of the results of such analysis.
To assist in this each chapter includes:
● a fully worked example, usually with real data, applying each technique in a
business context and evaluating the implications of the analysis for management
decision making;
● a detailed discussion of an application of those techniques by a public or private
sector organisation;
● short articles from the Financial Times illustrating the use of techniques in a variety
of business settings.
There is also a comprehensive, fully-worked Solutions Manual available for lecturers
who adopt the text as the main teaching text for their class. The Manual is around 300
pages long, all end-of-chapter exercises have a full, worked solution together with sup-
porting, explanatory text and there are suggestions for other related exercises that can
be given to students. Diagrams and tables forming part of the solution are available in
A4 size so they can be incorporated into PowerPoint presentations, copied onto acetate
or photocopied for students. Further details are available on the website listed below.
Students can download, in spreadsheet format, many of the data sets used in the
end-of-chapter exercises from www.pearsoned.co.uk/wisniewski.
QUAM_A01.QXD 14/02/2006 7:22 AM Page xvi

Guided tour

182 6 DECISION MAKING UNDER UNCERTAINTY APPLICATION 455

www.inventoryops.com/safety_stock.htm – Optimising safety stock

Game theory helps insurers to judge the risks of terror www.businesslink.gov.uk/bdotg/action/layer?topicId#1074039371 – Stock
control and inventory
Sophisticated analytical tools predict targets and methods of attack, but their accuracy is open to
question,

By Jenny Wiggins
APPLICATION
The Bush Administration has waged company can pinpoint possible potential risks,” he says, adding Unipart
its war against terror on several targets because it believes terror- that this is an “unexpected” use of
fronts: it has created a new ists make rational decisions. the model.
Department of Homeland Security, “Their methods and targeting are How extensively the models will The Unipart Group of Companies (UGC) was of coordination on the part of Unipart meant that the
established a Terrorist Threat very systematic,” he says. be used in the future remains created in 1987 as part of a management buy-out customer was faced with the problem of coordinat-
Integration Center and passed the RMS uses game theory – analyt- unclear.
from BL (British Leyland). Initially the organisation ing the various deliveries, checking ad hoc deliver-
USA Patriot Act. ical tools designed to observe inter- Much depends on the fate of the
focused on the supply (primarily to wholesalers) of ies against the order issued and not being able to
But despite those measures actions among people – in its Terrorism Risk Insurance Act, which
parts and supplies for BL, Rover and Jaguar cars. plan when specific orders might arrive. Coupled
some companies fear the terrorist models. It argues that, as security was passed in 2002 to provide
will always get through. They have increases around prime targets, federal help for any insurance Since its creation, however, it has widened its activ- with this was the service that Unipart offered of
turned to the private sector for help rational terrorists will seek out softer losses sustained as a result of a ities to include a chain of motor-factory outlets, deliveries of emergency orders (known as VOR, or
on gauging the potential impact of targets. terrorism attack. retail outlets for motor parts and related product vehicle-off-road, orders) that might need a much
future attacks. Industry participants, however, Under the act, the Treasury lines. In the late 1980s the company established a quicker response. To try to provide a more respon-
Shortly after September 11 2001, say the predictive abilities of the Department is obliged to cap strategic project in the area of demand chain man- sive service to wholesalers – and allow them to
a small group of companies that models are limited, given the diffi- insurers’ liability and reimburse agement which became known as the ‘responsive maintain their own competitive advantage – the
specialise in assessing risk for the culty of foreshadowing human them for some losses. delivery project’. In short, the project team was company instituted a number of major changes in
insurance industry launched US behaviour. The act has enabled insurers responsible for identifying ways of improving cus-
terrorism risk models. “The probability side can’t be comfortably to extend coverage to tomer service, primarily in the area of parts delivery.
These combine technology and relied on as it is with natural businesses, which are increasingly
The demand chain of which the company formed a Suppliers
data to predict likely terrorist targets hazards,” says Ryan Ogaard, global demanding terrorism insurance.
part is illustrated in Figure 12.6. Unipart clearly
and methods of attack, and pos- practice leader of the modelling unit More than 46 per cent of US
sible losses to life and property. at Guy Carpenter, a reinsurance businesses bought insurance to
forms part of a longer chain linking the original sup-
They are aimed at the insurance specialist. cover terrorism risks in the second plier of parts and equipment to the final retail cus-
and reinsurance industry, which Still, the information the models quarter – nearly double the rate tomer (a fundamental principle in the area of quality Unipart

already uses similar models to contain is considered valuable for during the same period a year management). The company’s immediate cus-
assess potential losses from natural assessing the impact of any attack, before, according to Marsh, an tomers are the national network of parts wholesalers
catastrophes such as hurricanes in part because modelling compa- insurance services group. who in turn service both franchised dealers and
Network of parts wholesalers
and earthquakes. nies have collated extensive data The government has not yet independent traders. At the time the project was ini-
“Most major commercial insurers for their catastrophe risk models. decided whether it will extend the tiated, the delivery service provided to this network
and reinsurers are using terrorism “We’ve already built databases act. If it does not, some market par- was thought, overall, to be good and, indeed, better
modelling today,” says Robert of commercial buildings and resi- ticipants believe the terrorism risk
than the competition in some cases. Nevertheless,
Hartwig, chief economist at the dences and the people in them for models could become an increas-
fundamental improvements were thought both pos-
Insurance Information Institute. the whole country,” says Jack ingly valuable means of underwrit- Network of Independent
sible and desirable as part of a long-term corporate franchised motor
Risk Management Solutions, one Seaquist, terrorism product ing terrorism insurance.
of the companies that sells the manager at AIR Worldwide. But trade associations for the strategy. A typical situation can be described as dealers traders

models, says its models identified The development of the models insurance industry say the inability follows. A parts wholesaler might issue an order to
the Citigroup building in New York has attracted the interest of the US of the models accurately to assess the company for a variety of parts and products.
and Prudential Financial’s building government, which is using some of the frequency of terrorist attacks Because of the geographical distribution in Unipart
in New Jersey as possible targets them in its Department of Homeland means they are not a reliable of product location and stock location, this might Retail
ahead of the US government’s Security, according to Dennis indicator of pricing the risk of mean the customer receiving the order in a frag- customers
code-orange threat alert for the Kuzak, senior vice-president at catastrophic attacks. mented and uncoordinated manner. Some parts
financial sector last month. Eqecat. “From a severity standpoint, the ordered might be delivered directly from the original Figure 12.6 The demand chain
Andrew Coburn, director of ter- “We are in fact helping the US total loss from a terrorist supplier. Other parts would arrive at different dates
rorism research at RMS, says the government get a better handle on event ... could well exceed the Taken from ‘Responsive Delivery!’, T Taylor, Operational
from different Unipart warehouses and distribution Research Insight, 4(2), 1991. Copyright held by the Operational
centres. From the customer’s perspective, this lack Research Society.

Case studies and examples from Longer Applications appear at the end
sources such as the Financial Times of every chapter, exploring the application
and Cap Gemini Ernst & Young bring of quantitative methods in managerial
the statistical concepts to life. decision making.

WORKED EXAMPLE 279 THE NORMAL DISTRIBUTION 159

Poor
Activity 5.11
communications

Partial
You work for a mail-order retail company which advertises special promotions in the
Suppliers Staff
invoices national press. Customers who respond to the promotion asking to buy the product
Poorly are offered it on a sale-or-return basis. That is, the company sends the product to the
Poor
designed customer together with an invoice. If the customer is happy with the product they will
supervision
invoices
Poor pay the invoice. If they are not happy, they can simply return the product to the
training company and do not have to pay the invoice. Obviously, in the latter case, the
company has incurred costs which it cannot recoup (postage, handling, etc.). For
Poor
Too many
morale past promotions the company has noted that 12 per cent of customers return the
suppliers
product. For the next promotion 50 000 customer orders are expected. Calculate
Clerical
the mean and standard deviation and comment on how this might be used by
errors management.
Solution is given on p 579.
Lack of IT
equipment

No No control
feedback mechanism
system Inadequate
manual The Normal Distribution
systems
Increased
Methods Systems
volume
of work
We now turn to the second theoretical probability distribution – the Normal distribu-
tion. The Normal distribution is widely used in business and management decision
making and underpins the area of statistical inference that we shall be examining in
Figure 8.10 An Ishikawa diagram for clerical errors
detail in Chapter 7. It is instantly recognisable graphically, as shown in Figure 5.3. The
Normal distribution is symmetrical – often referred to as bell-shaped – and this general
it clearly demonstrates the potential. Having identified causes, management can now shape remains the same no matter what problem we are examining where the Normal
consider solutions to some, or all, of these factors. For example, we could consider distribution applies. This has important consequences as we shall see shortly. What will
requiring all our suppliers to use a common invoice form that has been designed in- vary from one application of this distribution to another is not the general shape but
house; we could introduce a focused training programme for clerical staff; we could two key characteristics of that shape:
invest in additional equipment. Whatever the possible solutions, the diagram allows ● the mean value
management to assess the impact each solution could be expected to have on the effect.
● the variability as measured by the standard deviation.
This by itself can be a valuable conclusion to reach. Improving staff training, for
example, we now realise will not solve the entire problem, given that there are other
factors contributing to the problem that will not be solved by this initiative.
Equally, although the diagram is readily applied to quality problems, it can also be
applied to quality ‘success’. If one feature of a product or service is seen as particularly
successful this method can be a useful mechanism for identifying the key factors that
have contributed to this success, with a view to replicating these factors for other
products
services.

Worked Example

A health clinic has a no-appointments system for patients wishing to see one of the Figure 5.3 The Normal distribution
doctors. This means that if a patient wishes to see a doctor they attend one of the avail-
able clinics and wait their turn until the doctor is free to see them. In the past there has

Colour, figures and worked examples Activities are scattered throughout the
are used throughout to illustrate key points chapters, with solutions at the back of
and to make the text even easier to follow the book.
and understand.
QUAM_A01.QXD 14/02/2006 7:22 AM Page xvii

GUIDED TOUR xvii

USEFUL ONLINE RESOURCES 173 EXERCISES 37

Summary Further reading

In this chapter we have examined the idea of probability and introduced two common If your knowledge of basic mathematics needs a quick ‘refresher’ course you might find
distributions – the Binomial and the Normal. Both distributions – as well as others we it helpful to read through Chapter 2 of Foundation Quantitative Methods for Business by
have not considered – find frequent use in management decision making and are based Mik Wisniewski (Pitman Publishing, 1996), which provides a more detailed review of
on relatively simple principles. The Binomial distribution requires a number of key basic numeracy from a business perspective.
characteristics to be satisfied before it can safely be applied to a problem. The Normal
distribution, on the other hand, requires only that the variable we are investigating is
Normally distributed. A surprising number of variables in practice do follow a Normal
distribution – or at least come sufficiently close. However, as we shall see in a Exercises
subsequent chapter, a far more important use of the Normal distribution lies in its
application to the areas of statistical inference.
1 In the chapter we formulated a break-even problem with:
Some useful numbers to remember for the Normal distribution R = 9.99Q
For any Normally distributed variable: C = 45 000 + 6.99Q
● 68.26 per cent of the data (about two-thirds) will be within &1 standard deviation of Find the new break-even level if:
the mean
(a) overheads increase by 15 per cent
● 95.44 per cent (call it 95 per cent) of the data will be within &2 standard deviations
(b) costs increase by 1.50 per item
of the mean
● 99.7 per cent of the data will be within &3 standard deviations of the mean
(c) the selling price increases to 11.99.

2 A company is thinking of investing £15 000 in a savings fund. The fund runs for a
ten-year period and is expected to generate a return each year of 8 per cent of the
amount invested. All annual returns remain in the fund until the end of the period.
Further reading
(a) Construct a table showing the value of the original investment each year over
this period.
‘Of Calls and Callers – Establishing the Resource Requirements of a Telephone Desk’,
(b) Draw a graph representing this information.
M Gering, Operational Research Insight, 9 (3), 1996, pp 2–5.
‘Operating Margins – It’s a Gas!’, G Jack, Operational Research Insight, 4 (2), 1991, (c) Convert these annual values to logarithms and construct a graph showing the
pp 6–9. logarithmic values. What comments can you make about this graph compared
‘Modelling Age and Retirement in Manpower Planning’, JPK Mohapatra, P Mandal and with the original?
BK Purnendu, International Journal of Manpower, 11 (6), 1990, pp 27–31.
3 A firm finds that the demand for its product can be represented mathematically as:
Qd = 1000 − 5P
where Qd is the number of units of the product demanded by customers and P is
Useful online resources the selling price.
(a) Construct a graph for a price between 0 and 200.
Detailed below are some internet resources that may be useful. Many have further links (b) Comment on the shape of the graph. Why does the line slope downwards?
to other sites. An updated version is available from the accompanying website
(c) If we define revenue as quantity sold times price, obtain an equation for
(www.pearsoned.co.uk/wisniewski). In addition, I would be grateful for details of
revenue.
other websites that have been found to be useful.
(d) Draw a graph of this revenue equation.
www.peterwebb.co.uk/probability.htm – The Layman’s Guide to Probability (e) What price should the firm charge in order to maximise revenue?
mathforum.org/library/topics/probability/ – Math Forum Probability
www.mathcs.carleton.edu/probweb/probweb.html – The Probability Web

Further reading and online resources Exercises at the end of every chapter are
are provided at the end of every chapter. supported by Excel data sets on the book’s
companion website.

The companion website at www.pearsoned.co.uk/wisniewski includes Excel data

sets and basic simulations for students. A downloadable Instructor’s Manual, with the
solutions to the exercises in the text, is available to lecturers.
QUAM_A01.QXD 14/02/2006 7:22 AM Page xviii

Acknowledgements

We are grateful to the Financial Times Limited for permission to reprint the following
material:

FirstBus pair to get 80% rise, © Financial Times, 10 July 1996; Brazil launches new
cellular phone drive, © Financial Times, 4 October 2000; Remuneration is exposed to
glare of public scrutiny, © Financial Times, 31 January 1996; McDonnell abandons
plans for new jetliner, © Financial Times, 29 October 1996; Investors beware of parti-
san promises, © Financial Times, 5 January 2001; Blue chip shares go the way of the
white rhino, © Financial Times, 4 October 2000; Bank study puts underlying inflation
at 1.2%, © Financial Times, 27 March 2001; Some ruminations on risk, © Financial
Times, 11 April 1996; Probability and distributions, FT Mastering Management Part 2,
© Financial Times, 3 November 1995; Taking samples, FT Mastering Management Part
3, © Financial Times, 10 November 1995; Bad service 'costing companies millions',
© Financial Times, 29 November 1996; Narrow-bodied jets to take 70% of market,
© Financial Times, 7 March 1996; Electronic trading is expected to surge, © Financial
Times, 18 October 2000; Thorntons' chief hopes to taste seasonal success, © Financial
Times, 14 December 2000; Control through choice, © Financial Times, 27/28 April
1996; Why states must grow, © Financial Times, 6 November 1995; Bank lifts hopes on
inflation target, © Financial Times, 15 February 1996, Strategy by computer, © Financial
Times, 17 April 1996; Getting the combination right, FT Mastering Management Part
8, © Financial Times, 15 December 1995; Retailers aim to refill their shelves just in
time, © Financial Times, 12 February 1996; Systems are never good enough, FT
Mastering Management Part 3, © Financial Times, 10 November 1995; Fines could help
fill holes in the road, © Financial Times, 6 April 2000; Taking the risk out of uncer-
tainty, FT Mastering Management Part 5, © Financial Times, 24 November 1995; Project
approval: the key criteria, FT Mastering Management Part 2, © Financial Times,
3 November 1995; Numbers man bridges the Gap, © Financial Times, 24 August 2004;
Nintendo and Sony showdown in war of consoles, © Financial Times, 22 September
2004; A-levels are more profitable than arts degrees, © Financial Times, 6 March 2003;
Piracy blamed for poor music sales, © Financial Times, 2 October 2003; Managers focus
on right treatment for faked illness, © Financial Times, 24 August 2004; 'Unpalatable
choices lie ahead' in quest for more equal society, © Financial Times, 22 October 2004;
Price of a Big Mac shows the Miami-Nairobi gulf, © Financial Times, 21 August 2003;
Confusing measures of house prices fall well short, © Financial Times, 25 August 2003;
The perfect indicator moves closer, © Financial Times, 20 September 2003; Game
theory helps insurers to judge the risks of terror, © Financial Times, 8 September
QUAM_A01.QXD 14/02/2006 7:22 AM Page xix

ACKNOWLEDGEMENTS xix

2004; Pollsters predict a shake-out, © Financial Times, 29 July 2003; Every statistic tells
a story, © Financial Times, 8 October 2003; Accuracy of analysts' profits forecasts hits
record low, © Financial Times, 9 February 2004; Baby store's boom might just have got
ahead of itself, © Financial Times, 12 July 2003; Trimmed back, focused and ready for
growth, © Financial Times, 12 July 2003; Benefit to move from wallets to purses,
© Financial Times, 8 March 2000; Bush focuses on a burning issue, © Financial Times ,
12 October 2000; How the pies are sliced, © Financial Times, 31 January 2001; Trading
volumes reach new high in London, © Financial Times, 7/8 June 2003; Stock markets
shrug off central bankers' assurances, © Financial Times , 13 March 2001; Three minute
phone cost per GDP per capita, © Financial Times , 24 January 2001; ...says economy
'will not overh...', © Financial Times , 18 February 2000; Through the demographic
window of opportunity, © Financial Times, 25 September 2004; Motorola sets scene
with strong results, © Financial Times, 14 October 2003.

We are grateful to the following for permission to use copyright material:

Fixing a forecast model that ain't broke from the Financial Times, 20 February 2003,
© Alec Chrystal, Cass Business School; Figures 1.3, 1.4 and 1.5 reprinted with permis-
sion from ‘Staffing the Front Office’, C. Richardson, Operational Research Insight,
4(2), 1991, © Operational Research Society; House Price Index on page 128–9 from
Halifax plc; Figures 5.10, 5.11 and 5.12 reprinted with permission from ‘Modeling
Strategic Decision Making and Performance Measurements at ICI Pharmaceuticals’,
G.Islei, G. Lockett, B. Cox, S. Gisbourne and M. Stratford, Interfaces, 21(6), 1991,
© Operational Research Society of America and the Institute of Management Sciences;
Figures 6.5 and 6.6 reprinted with permission from Operations Research, 39(1), 1991,
© Operations Research Society of America; Figure 7.9 reprinted with permission from
Mr C.T. Bradnock, formerly headmaster at Queen’s College, Taunton; Figure 8.12
reprinted with permission from ‘Employee Receptivity to Total Quality’, E. Kowalski
and P. Walley, International Journal of Quality and Reliability Management, 10(1), 1993,
© MCB University Press; Figure 10.8 reprinted with permission from ‘Energy
Forecasting Made Simple’, P. Lang, Operational Research Insight, 1(3), 1988,
© Operational Research Society; Figures 11.6 and 11.7 reprinted with permission from
‘Blue Bell Trims its Inventory’, J.R. Edwards, H.M. Wagner and W.P. Wood, Interfaces,
15(1), 1985, © Operations Research Society of America and the Institute of
Management Sciences; Figure 12.6 and Table 12.8 reprinted with permission from
‘Responsive Delivery!’, T. Taylor, Operational Research Insight, 4(2), 1991, © Operational
Research Society; Figures 14.4 and 14.5 reprinted with permission from ‘Patients,
Parking and Paying’, B. Moores, C. Bolton and A. Fung, Operational Research Insight,
1(2), 1988, © Operational Research Society; Figures 15.1 and 15.2 and Table 15.11
reprinted with permission from ‘Decision Analysis and its Application in the Choice
Between Two Wildcat Adventures’, J. Hosseini, Interfaces, 16(2), 1986, © Operations
Research Society of America and the Institute of Management Sciences.
QUAM_A01.QXD 14/02/2006 7:22 AM Page xx
QUAM_C01.QXD 28/6/05 7:48 am Page 1

1 Introduction

There’s no getting away from it. Quantitative information is everywhere in business:

share prices, costs, income and revenue levels, profit levels, cash flow figures,
productivity figures, customer satisfaction ratings, market share figures. The list goes
on and on. If you’re in a public sector or not-for-profit organisation comparable
information is also being generated. The trend seems to be: let’s measure and quantify
everything we can.
The problem this causes for managers is how to make sense of this mass of
quantitative information. How do we use it to help make decisions and to help the
organisation deal with the issues and pressures that it increasingly faces? Such
decisions may be routine, day-to-day operational issues: deciding how much laser
printer paper to order for the office. They may be longer-term strategic decisions which
will have a critical impact on the success of the organisation: which products
services
do we expand?
And – no great surprise here – this is why this textbook has been written: to help
managers make sense of quantitative business information and understand how to use
that quantitative information constructively to make business decisions. However,
we’re not looking to turn you into mathematical and statistical experts. We want to give
you a reasonable understanding of how a variety of quantitative techniques can be
used to help decision making in any organisation. We also want to convince you that
these techniques are of real, practical benefit. That’s why throughout the text we focus
on the business application of the techniques rather than the theory behind them. We
QUAM_C01.QXD 28/6/05 7:48 am Page 2

2 1 INTRODUCTION

also illustrate how real organisations have used these techniques to improve their busi-
ness performance.
We hope you find this textbook useful.

The Use of Quantitative Techniques by Business

Okay, let’s start with a reality check.

You’re really looking forward to this quantitative methods course. Right?
You really wish there could be more quantitative methods on your business degree.
Right?
You really see quantitative methods as the key to a successful management career.
Right?
I don’t think so!
Like just about every other business degree student around the world you’re proba-
bly approaching this course and this textbook with a mixture of concern, worry and
misunderstanding.
Concern about your ability in statistics and mathematics, especially as these probably
weren’t your favourite subjects in school either.
Worry about whether you’ll be able to pass the exam and assessments in this subject.
Misunderstanding about why you have to do a quantitative methods course on a busi-
ness degree. After all, business is about strategy, about marketing, about finance, about
human resource management, about IT and ecommerce. We know these are important
to every business because company boards have directors in these areas. But whoever
heard of a company with a director of quantitative methods?
One of the major reasons for writing this book was to provide business studies stu-
dents at both undergraduate and postgraduate levels with a text that is relevant to their
own studies, is easy to read and to understand and which demonstrates the practical
application – and benefits – of quantitative techniques in the real business world. The
book is not aimed at students whose main interest is in statistics, mathematics or com-
puting. We assume that, like ourselves, students in the fields of management, accoun-
tancy, finance and business have no interest in these in their own right but rather are
simply interested in the practical applications of such topics and techniques to business
and to management decision making. The reason why all students in the business area
nowadays need a working knowledge of these quantitative techniques is clear. In order
to work effectively in a modern business organisation – whether the organisation is a
private commercial company, a government agency, a state industry or whatever –
managers must be able routinely to use quantitative techniques in a confident and reli-
able manner. Today’s students are striving to become tomorrow’s managers.
Accountants will make decisions based on the information relating to the financial
state of the organisation. Economists will make decisions based on the information
relating to the economic framework in which the organisation operates. Marketing staff
will make decisions based on customer response to products and design. Personnel
managers will make decisions based on the information relating to the levels of
employment in the organisation, and so on. Such information is increasingly quantita-
tive and it is apparent that managers (both practising and intending) need a working
knowledge of the procedures and techniques appropriate for analysing and evaluating
such information. Such analysis and certainly the business evaluation cannot be
QUAM_C01.QXD 28/6/05 7:48 am Page 3

THE USE OF QUANTITATIVE TECHNIQUES BY BUSINESS 3

delegated to the specialist statistician or mathematician, who, adept though they might
be at sophisticated numerical analysis, will frequently have little overall understanding
of the business relevance of such analysis.

Numbers man bridges the Gap

The US clothing group’s chief ignores fashion intuition, using scientific analysis to woo alienated
customers, writes Neil Buckley

The first few times Paul Pressler, The approach was successful for Mr Pressler calls a mid-life crisis.
chief executive of Gap, the US 15 years, as Mr Drexler worked with Gap’s massive investment in expan-
clothing group, reviewed the new Don Fisher, Gap’s founder, to trans- sion was not yielding a return.
season’s products, the designers form into an international fashion Sassy, youth-orientated retailers
were baffled. retailing giant what had started as a such as Abercrombie & Fitch and
He would ask only a few basic single store in counter-culture American Eagle were coming on the
questions – had they thought of this 1960s San Francisco. scene, offering Gap stiff competi-
or that, why had they chosen a par- Yet by 2002, when Mr Pressler tion. ‘Everyone was looking at them
ticular style – and he would not pass arrived, Gap Inc – which now and saying “look how cool and hip
judgment. When he left the room, includes the lower priced Old Navy they are” and “Gap is now my
the designers ‘were, like, “OK. Did and upmarket Banana Republic father’s brand,” ’ says Mr Pressler.
he like it?” ’, he says, recounting the chains in North America as well as To address the problem, Mr
story in Gap’s design office in international Gap stores – was in Drexler decided Gap needed to go
Chelsea, New York. trouble. Comparable sales, or sales after a younger consumer. Out went
But for Mr Pressler, a former from stores open at least a year – an the khakis and simple white shirts; in
Disney theme park executive, ‘it important indicator of a retailer’s came turquoise low-rise jeans and
didn’t matter whether I liked it or not – health – had fallen, year-on-year, for tangerine cropped T-shirts. But the
what mattered was whether the con- 29 straight months. It was clear Gap customers deserted the stores in
sumer liked it’. His refusal to air stylis- had lost touch with its customers. droves. ‘Mickey took the fashion in a
tic opinions was his way of showing Mr Drexler’s genius had been to direction that was, to his credit,
his staff how he planned to manage be absolutely in tune with the post- trying to be more hip and relevant,’
the company. ‘I had to demonstrate war baby boomers – those born says Mr Pressler, ‘but it was too sin-
to everyone that the general manager between 1946 and 1964 – who were gular, too hip and youthful.’
is here to lead people – not pick the Gap’s first customers. Gap grew At this point, Mr Drexler left Gap,
buttons,’ he says. and adapted with them; when they having served 19 years. Mr Pressler,
Mr Pressler’s anecdote illustrates had children, it clothed them too, then running Walt Disney’s theme
how he runs Gap very differently launching Gap Kids in 1986 and park division and considered a pos-
from his predecessor, Millard Baby Gap in 1990. It kept up their sible successor to Michael Eisner as
‘Mickey’ Drexler, whom he suc- interest with quirky and distinctive Disney’s CEO, says he did not have
ceeded two years ago. Whether advertising. By the late 1990s, as to think too long about accepting
Mickey Drexler liked things or not the boomers took over America’s the Gap job. Like many business-
was very important indeed. boardrooms, the internet took off men of his generation – he is now 48
Popularly known as Gap’s and ‘business casual’ replaced suits – he felt a personal connection.
‘Merchant Prince’, Mr Drexler set and ties, Gap seemed unstoppable. ‘I thought about it first as a con-
the tone, designed products and It increased the number of stores sumer and said: “Damn! This brand
even dictated what quantities of – and the amount of debt – tossing is too good and too awesome”.
products buyers should order from out Mr Fisher’s previously cautious Many of us went to [business]
the company’s suppliers. The busi- approach of opening just enough school on Gap: how it reinvented
ness was largely run on his instinct. stores to ensure 15 per cent com- itself, how it did its marketing. And
Designers, jokes Mr Pressler, ‘relied pound annual earnings growth. as consumers we were all a little
on getting their blessing from the But, like many of its customers, pissed off that it had alienated us.’
pope’. Gap was about to experience what Once inside, he spent 90 days
QUAM_C01.QXD 28/6/05 7:48 am Page 4

4 1 INTRODUCTION

reviewing the business, interviewing brand,’ says Mr Pressler. became converts.

the 50 most senior people in the The research also helped identify Comparable sales began
company. He was shocked. new product niches that could be growing again in late 2002 and con-
‘A company that I had thought added to stores – petite sizes in tinued until last month when sales
was this unbelievably consumer- Banana Republic, so-called ‘plus’ fell 5 per cent year-on-year. This
centric company was not a con- sizes in Old Navy and maternity drop was largely attributable to poor
sumer-centric company at all,’ he wear in Gap. weather and higher petrol prices.
says. ‘The truth is that we made It helped each chain segment its Operating margins are also getting
decisions in our head, not in the real customers into types – mums, back towards the mid-teens they
world. The tool we used was yester- mums shopping for families, fash- reached in the 1990s.
day’s sales – which didn’t give you ionable teens and more conserva- However, at around $20, Gap’s
consumer insights, or tell you why tive ‘girl-next-door’ teens – so shares still remain well below their
people didn’t shop at our stores.’ designers had a clearer idea of their $50-plus peak in 1999 and the
There were other problems. The likely buyers. market is clamouring to hear where
technology system was, as Mr In pursuit of what Mr Pressler future growth will come from.
Pressler puts it: ‘massively, woe- calls fashion retailing’s ‘Holy Grail’ – Mr Pressler says Gap is studying
fully, behind anything I had ever women’s trousers that fit right – Gap how to expand its core brand in its
seen in my life for a company of our stopped using in-house ‘fit models’ existing overseas markets – Japan,
size.’ A $15bn-a-year business was who were a perfect size 8. Instead, it the UK and France – as well as in
run largely on Excel spreadsheets organised ‘fit clinics’ across the some other countries. It is also con-
and inventory discipline was non- country, and designers got real sidering whether Old Navy and
existent, with little account taken of people to try on their clothes. Banana Republic could work
how much working capital was Sizing initiatives did not stop outside the US and Canada. He
being tied up. there. Gap’s chains used to ship does not rule out departing from the
Mr Pressler set about replacing identical proportions of different existing model of company-run
intuition with science. He carried out sizes of products to all stores. But stores and using franchising, licens-
a detailed ‘segmentation’ study for in, say, fitness-obsessed San ing arrangements or partnerships in
each brand and introduced con- Francisco, it would be left with lots these overseas markets.
sumer research, interviews with of surplus extra large sizes. In the In the US, Mr Pressler admits that
customers and store managers, and Midwest, the surplus would be in he is contemplating a fourth brand.
focus groups. extra small sizes. But he refuses to comment on spec-
The message that came back Mr Pressler got mathematical ulation that Gap is considering a
was clear. Prices aside, consumers experts to analyse Gap’s electronic chain catering to boomer women –
could see little difference between sales information. They divided its those aged 35
–
50 – for whom the
Gap and its Old Navy sister chain. stores into seven different ‘clusters’ core brand is too youthful.
In response, Old Navy was repo- according to the likely sizes of the If Gap is targeting the post-
sitioned as more of a value chain customers in the local area. Each boomer generation now, Mr Pressler
and Banana Republic was taken cluster now gets a different mixture insists the brand will never lose sight
upmarket and given a ‘designer’ of sizes. As a result, fewer products of its 1960s counter-culture origins.
feel. That left the middle ground for are out of stock, more customers Its autumn advertising campaign,
Gap. are satisfied and fewer goods get featuring Sex and the City star Sarah
Mr Pressler stuck with Mr left over to be marked down. Jessica Parker, will, he says, affirm
Drexler’s strategy of waving Meanwhile, systems were its cultural relevance.
goodbye to the boomers, though. updated and sophisticated inven- ‘We were always right on the
‘We have brought a more youthful tory management software intro- spot, on the cultural phenomenon
style aesthetic,’ he says, ‘but it’s a duced. happening at the moment. And we
safe one, not a scary one.’ Mr Pressler admits that the brought it to you, through our com-
‘Instead of going to the 15-to 20- company’s designers were initially mercials, and through our product,
year-olds, we pushed the brand sceptical about his analytical in ways that were compelling,’ he
back to what it has always been, approach. But once they saw what says. ‘That piece of the DNA we still
which is really a 20- to 30-year-olds’ was happening to sales they feel very strongly.’

Source: Financial Times, 24 August 2004, p. 10.

Quantitative methods can make all the difference to business success or failure.
QUAM_C01.QXD 28/6/05 7:48 am Page 5

THE USE OF QUANTITATIVE TECHNIQUES BY BUSINESS 5

This text introduces the major mathematical and statistical techniques used to help
decision making by managers of all types of business organisation: large and small,
private sector, public sector, profit-oriented, not-for-profit, manufacturing, or service
sector. In an increasingly complex business environment managers have to grapple
with problems and issues which range from the relatively trivial – which make of
photocopier will prove more reliable and cost effective – to the strategic – which
products or services do we continue to deliver and which do we discontinue. As the
article on Gap illustrates, managers are expected to be able to justify the decisions they
reach on the basis of logic and hard analysis not just on judgement and experience. In
such an environment the quantitative techniques we shall be examining have an
important part to play. We do not pretend that these techniques offer the manager an
instant solution to the problems faced. But they do offer a method of analysing a
problem using proven techniques, of providing information about that problem and of
assessing the potential outcomes from different decisions. This is not to say, however,
that management decision making is simply about the application of such techniques.
It clearly is not. However, such techniques can provide valuable information about a
business problem that may not be available from any other source. But such informa-
tion is only part of the problem. The manager must assess the information generated by
techniques alongside that available from Finance, from Engineering, from Sales, from
Marketing, from Personnel and so on. Like any piece of information the manager must
be in a position to assess its reliability and its potential usefulness.
This is why, in this text, the focus is very much on an understanding of the general
principles – from a management perspective – behind each technique. It is not the
intention of the text to turn you into an ‘expert’ in the use of such techniques although
you will develop skills in the practical aspects of many of these as we progress. Rather it
is to enable you to appreciate when such techniques may be useful in your decision-
making capacity and to provide you with an insight into how the information gener-
ated by such techniques can be evaluated and used.
But don’t just take our word for this. Let’s look at some documented examples (you’ll
find full details of each of these in the Further Reading section at the end of this
chapter).
● An electricity company in the USA developed a computer-based planning system to
help improve forecasts of demand. The result was a reduction of some US$140
million in fuel costs over a seven-year period.
● The UK Royal Air Force developed a simulation model to quantify the number of
battle damage repair teams likely to be required to maintain aircraft capabilities in
the event of hostilities.
● A computer-based simulation model was developed to help evaluate the strategic
options in terms of transporting coal in Canada from its source to power stations – a
distance of some 3000 km.
● In Canada the technique of linear programming was applied to the use of ambu-
lances in health care and to the related shift systems. This generated annual savings
of around CN$250 000.
● A farming cooperative in Holland implemented an interactive optimisation system
to help plan bulk deliveries of its sugar beet crop with a resulting reduction of 7 per
cent in its operating costs.
● A New Zealand utility company applied quantitative techniques to its car pooling
procedures with the result that the number of vehicles required was reduced by
35 per cent, which generated annual savings of NZ$55 000.
QUAM_C01.QXD 28/6/05 7:48 am Page 6

6 1 INTRODUCTION

● Quantitative techniques were applied to the problem of transporting mentally hand-

icapped adults to a training centre in the UK. As a result travel time could be reduced
by almost 16 per cent and distance travelled by 12 per cent.
● A quantitative model was developed to assist in the planning of transportation of
blood from a regional centre to hospitals. The model generated a reduction of over
12 per cent in the number of units of blood which had reached their expiry date
before use compared with the manual planning system.
● American Airlines has developed a number of quantitative models in relation to its
airline seat reservation systems. The models are estimated to contribute around
US$500 million per year to the company’s revenue.
● Hewlett-Packard used quantitative techniques to forecast capacity and to determine
locations of stocks and supplies in the context of one of its computer printers. As a
result, productivity increased by 50 per cent and incremental revenues of US$280
million in sales were generated.
● Forecasting models are estimated to have saved the mail order company L.L. Bean
US$300 000 each year through improved prediction of incoming calls and staffing
requirements in its call centres.
● Delta Airlines uses mathematical programming models to help in its assignment of
airplanes in its fleet to flight routes. The approach saved the company around
US$300 million over a three-year period.
● Kentucky Fried Chicken (KFC) reduced waiting times for customers by half and
improved productivity, sales and profit through the application of quality manage-
ment techniques.
● DEC (Digital) saved an estimated US$100 million by applying linear programming to
its global manufacturing and distribution strategy.
● Taco Bell, a chain of popular restaurants, used forecasting to help it predict arrivals
of customers through the day and developed a simulation model for planning its
personnel requirements. The company saved an estimated US$53 million in labour
costs in one year alone.

That made you sit up and take notice, didn’t it?

The appropriate use of quantitative techniques can help the business ‘bottom line’ –
whether that bottom line is increased profitability, reduced costs, improved efficiency,
or better customer service. Quantitative techniques work! And they work best when
used by managers.

The Role of Quantitative Techniques in Business

It will be worthwhile at this stage considering the specific role of quantitative tech-
niques in the wider business decision-making context. Although this text inevitably
focuses on a number of common techniques business decision making is more than
simply the application of a technique to a problem. It is worth considering what the
overall purpose of such techniques is in relation to the decision maker. Such techniques
aim to improve decision making within an organisation.
Those of you with experience of management in an organisation will appreciate that
life for any manager in any organisation is becoming increasingly difficult and
QUAM_C01.QXD 28/6/05 7:48 am Page 7

THE ROLE OF QUANTITATIVE TECHNIQUES IN BUSINESS 7

complex. Although there are many factors contributing to this, Figure 1.1 illustrates
some of the major pressures making decision making increasingly problematic.
Organisations generally find themselves operating in an increasingly complex environ-
ment. Changes in government policy, privatisation, increasing involvement of the
European Union, and political and economic changes in Eastern Europe all contribute
to this complexity. At the same time, organisations face increasing competition from
both home and abroad. Markets that were thought to be secure are lost to competitors.
In the public sector, services – local authority, health care, emergency services – are
increasingly required to operate in a competitive manner. Also, the markets and
customers available to organisations are changing. This combines with increasing and
constantly changing pressures from customers in terms of both their requirements and
their expectations. The drive for quality and customer satisfaction gathers pace in both
the public and private sectors.
Because of the increasing complexity of the business environment in which organis-
ations have to function, the information needs of a manager become more complex
and demanding also. With the pace of increasing competition – and with continual
improvements in telecommunications – the time available to a manager to assess,
analyse and react to a problem or opportunity is much reduced.
Managers, and their supporting information systems, need to take fast – and hope-
fully appropriate – decisions. Finally, to add to the problems, the consequences of
taking wrong decisions become more serious and costly. Entering the wrong markets,
producing the wrong products or providing inappropriate services will have major, and
often disastrous, consequences for organisations.
All of this implies that anything which can help the manager of an organisation in
facing up to these pressures and difficulties in the decision-making process must be seri-
ously considered. Not surprisingly this is where quantitative techniques have a role to
play. This is not to say that such techniques will automatically resolve such problems.
But they can provide both information about a situation or problem and a different
way of examining that situation that may well help. Naturally such quantitative analy-
sis will produce information that must be assessed and used in conjunction with other

Increasing More complex More complex

competition business environment business structures

Complex information
needs and systems

Changing
THE MANAGER
markets

Increased
uncertainty

Changing customer
requirements/ Larger error Reduced reaction
expectations costs times

Figure 1.1 The manager and the decision-making environment

QUAM_C01.QXD 28/6/05 7:48 am Page 8

8 1 INTRODUCTION

sources. Business problems are rarely, if ever, tackled solely from the quantitative per-
spective. Much qualitative assessment must also take place. For example, consider a
local authority considering the replacement of some of its refuse collection vehicles.
We may well be able to apply a number of quantitative techniques to this situation –
applying financial analysis principles, examining patterns and trends in refuse collec-
tion, comparing one vehicle’s performance with other vehicles, forecasting the likely
demand for refuse collection over the life of the vehicle and so on. However, before
reaching a decision, other factors and information will need to be considered. Is this
the right time ‘politically’ to be making what may be a major capital investment? How
will the workforce react to a new vehicle – given this may require some retraining – and
to what may be new modes or methods of working? Will the management of this
service be able to cope with the problems that such a change will bring? All of these
factors and more will need to be taken into account by the manager before reaching a
decision. Clearly, techniques have a potentially important role to play in helping reach
a decision but they are not sufficient by themselves. This is illustrated – albeit simplis-
tically – in Figure 1.2. A business situation – at the strategic or operational level – needs
to be examined from both a quantitative and a qualitative perspective. Information and
analysis from both these perspectives need to be brought together, assessed and acted
upon.
However, the techniques we introduce in this text not only are valuable at corporate,
strategic level, but they are also particularly useful at the operational level in day-to-day
management (although use at this level is rarely publicly reported). We shall be intro-
ducing a number of illustrations of this level of use throughout the chapters. In short,
knowledge of such techniques, the ability to know when to apply them and the ability
to relate the quantitative outputs from such techniques to business decision making is
critically important for every manager in every organisation. Not to develop such skills
and knowledge will put your own organisation at a critical competitive disadvantage.

Business
problems

Quantitative Qualitative
analysis analysis

Problem
analysis

Decision

Figure 1.2 The decision-making process

QUAM_C01.QXD 28/6/05 7:48 am Page 9

USE OF COMPUTERS 9

Models in Quantitative Decision Making

Throughout the text we shall be introducing what are known as models to help develop
quantitative techniques in a business context. Models come in a variety of forms in
business: they are not just quantitative. A scale model might be constructed of a new
office development; a financial model may be developed to assess the impact of budget
changes on product
service delivery; the marketing department may develop a model
in terms of assessing customer response to product changes. However, any model, no
matter what its form or purpose, has one distinctive feature: it is an attempt to repre-
sent a situation in a simplified form. Any model tries to represent the complex
real-world situation in a more simplistic and potentially more easily understood form.
This is achieved by developing the model so that it focuses on the key aspects of the
situation and ignores the rest.
In this text we shall be developing a variety of statistical and mathematical models
for use in business decision making. We shall be using such mathematics and statistics
to help us make sense of a complex real-world problem, and we shall be utilising tech-
niques to help us focus on what we believe to be the key aspects of the problem. Just as
an architect uses a scale model of a new construction or an engineer of some machine,
so a manager needs to be able to develop and use quantitative models to help in the
decision-making process.

Use of Computers

Readers will probably be aware already that computers and information technology in
general have had a fundamental effect on most business organisations. The same
applies to the quantitative techniques that we shall be introducing in the text. It used
to be the case that ‘solving’ quantitative problems – in the sense of completing the
mathematics and statistics required – restricted the use of such techniques to large-scale
problems, which were analysed by the quantitative specialist. Over the last two decades
or so, however, the advent of the personal computer (PC) has revolutionised both the
areas to which techniques are applied and the type of person using such techniques. PC
facilities such as spreadsheets or the more common statistical and mathematical pack-
ages now make such analysis readily available to any business decision maker. In the
author’s view, this has been one of the major factors behind the explosion of interest in
such techniques (mirrored of course by virtually all business undergraduate and post-
graduate students being forced to undertake at least one course in such techniques).
Naturally the use of such software presupposes that you are able to interpret the com-
puter output that can be generated, not only in a strictly quantitative way but also in
terms of assessing its potential to help business decision making. Many of the end-of-
chapter exercises, however, are eminently suited for further analysis using either a
spreadsheet package or some statistical software, and we would encourage both
students and tutors to take advantage of this wherever possible.
The data sets used in the text are suitable for IBM PC-compatible computers, relating
to end-of-chapter exercises which are suitable for computer-based analysis. These files
can also be used as direct input with many spreadsheet programs and with the more
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