Quantitative Methods

Essential Basics

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Varsha Varde \
M. Sc; Ph. D. in Statistics (O. R.) Taught Advanced Stats to PG Students Quantitative Faculty in NIBM Visiting Faculty at JBIMS Officer in Bank Of India General Manager At AFC Handled consultancy in Various Fields
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QUANTITATIVE METHODS
It is a broad term Two branches of relevance to us are statistics and operations research Each of these offers several tools and techniques to tackle real life problems in scientific manner

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STATISTICS
Word derived from Latin word status It came into existence as collection of certain data of states It continued to expand its boundaries to include planning and organising of data collection ,analysis of data and drawing meaningful conclusions from data Data are input, statistics is process and information is output
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TOOLS IN STATISTICS
Broadly classified into Descriptive statistics-describes principal features of the collected data Inferential statistics-says something about future or for present but for larger group of data than actually collected Sampling- designing of sample survey, selection of representative sample Probability- quantifying uncertainties
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History of OR
Origin: research in military operations 1930s: British scientists helped in solving problems of military operations, such as: Effective use of radar, Anti-submarine warfare, civilian defence, deployment of convoy vessels Team: Experts from various disciplines Inter disciplinary character of OR still continues World war II: Military operations research in US.
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History of OR
Post world war-II: Military continued using OR analysts But, OR as a discipline not accepted in outside world Reason: OR solves only military problems Two Events helped spread to non military establishments Development of Simplex method in1947 Development and usage of high speed computers OR as a discipline came into existencein1950s OR: Systematic and scientific approach to problem solving
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Models in Operations Research

Linear programming Transportation Assignment Inventory Queuing Project scheduling Simulation Decision analysis
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Statistical Problems
1. A market analyst wants to know the effectiveness of a new diet. 2. A pharmaceutical Co. wants to know if a new drug is superior to already existing drugs, or possible side effects. 3. How fuel efficient a certain car model is?
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Statistical Problems
4. Is there any relationship between your Grades and employment opportunities. 5. If you answer all questions on a (T,F) (or multiple choice) examination completely randomly, what are your chances of passing? 6. What is the effect of package designs on sales
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Statistical Problems
7. How to interpret polls. How many individuals you need to sample for your inferences to be acceptable? What is meant by the margin of error? 8. What is the effect of market strategy on market share? 9. How to pick the stocks to invest in?

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Applications of OR/MS
Finance & Investment: How much capital do we need, what portfolio should we select? Manpower planning & assignment: How many employees do we need,who will do what? Location, Allocation, Distribution & Transportation: where is the best location for operation, how big should the facilities be? Reliability & Replacement Policy: How well, reliable is the equipment,when should it be replaced? Loading, Sequencing & Scheduling: What job is more important, in whatorder should we do jobs? Inventory Control and Stock-out: How much inventory should we hold,when do we order more? Project Planning and Control: How long will a project take, how should resources be used? Queuing and Congestion: How many servers are needed, what service level are we giving ?
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Course Coverage
Essential Basics Management Data Classification & Presentation Tools Preliminary Analysis & Interpretation of Data Correlation Model Regression Model Time Series Model Forecasting Uncertainty and Probability Probability Distributions Sampling and Sampling Distributions Estimation and Testing of Hypothesis Chi-Square and Analysis of Variance Decision Theory Linear Programming

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Suggested Reading
Statistics for Management by Richard I LevinPrentice Hall Of India New DelhiDavid C. Howell (2003) Quantitative Techniques for Management Decisions by U K Srivastava & Others-New Age International-New Delhi Quantitative Methods for Business by David R Anderson &Others-Thomson Learning-New Delhi Business Statistics by David M Levine & OthersPearson Education-Delhi-2004
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Quantitative Methods
Essential Basics

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Types of Numbers

Nominal Numbers Ordinal Numbers Cardinal Numbers

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Nominal Numbers
Purpose: Identification of an Object Example: House Number (10 Janpath) Telephone Number Smart Card PINumber Number on Cricket T-Shirt No Quantitative Properties Except Equivalence: Two Different Nominal Numbers Indicate Two Different Objects
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Ordinal Numbers
Purpose: Represent Position or Ranking Example: WTA Ranking of Sania Mirza Salary Grade Floor Number Performance Rating No Quantitative Properties Except Order & Equivalence: Different Ordinal Numbers Indicate Different Objects in Some Kind of Relationship with Each Other
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Cardinal Numbers
Purpose: Represent Quantity Example: Sales Turnover in Million Rs. Production in Tons Number of Employees Earning Per Share Truly Quantitative Follow All Mathematical Properties: Order, Equivalence, +, -, x, /.
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Interval and Ratio Scales

Interval Scale employs arbitrary zero point Ratio Scale employs a true zero point Only ratio scale permits statements concerning ratios of numbers in the scale; e.g 4kgs to 2 kgs is 2kgs to 1 kg Scale of Temperature measured in celsius is Interval Scale. Height as measured from a table top has interval scale Height as measured from floor has ratio scale Apart from difference in the nature of zero point ,interval and ratio scales have same properties and both employ cardinal numbers
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Example
Zone Northern Western Eastern Southern Type
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Code No. 01 02 03 04

Sales
(Rs. In Million)

Rank 3 1 4 2

483 738 265 567

Example
Zone Northern Western Eastern Southern Type Code No. 01 02 03 04 Nominal Sales
(Rs. In Million)

Rank 3 1 4 2 Ordinal
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483 738 265 567 Cardinal

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Basic Definitions
Constant: A Characteristic that never changes its Value (Example ?) Variable: A Characteristic that assumes different Values (Example ?) Discrete Variable: Cannot take a Value Between Any Two Values (Example ?) Continuous Variable: Can take a Value Between Any Two Values (Example ?)
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Discrete Measurement Data

Only certain values are possible (there are gaps between the possible values).

Theoretically, any value within an interval is possible with a fine enough measuring device.
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Continuous Measurement Data

Discrete data -- Gaps between possible values

Continuous data -- Theoretically, no gaps between possible values

0
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Examples: Discrete Measurement Data

Number of students late for class Number of crimes reported in a police station Number of times the word number is used Number of defectives in a lot Generally, discrete data are counts.
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Examples: Continuous Measurement Data

Cholesterol level Height Age Time to complete a homework assignment

Generally, continuous data come from measurements.

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Who Cares?

The type(s) of data collected in a study determine the type of statistical analysis used.

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For example ...

Categorical data are commonly summarized using percentages (or proportions).
31% of students have a passport 2%, 33%, 39%, and 26% of the students in class are, respectively engineers, science, commerce and arts graduates

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And for example

Measurement data are typically summarized using averages (or mean
Average weight of male students of this batch is 75 kg. Average weight of female students of this batch is 55 kg. Average growth rate of sales of a company is 18%.

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Basic Definitions
Constant: A Characteristic that never changes its Value (Your Height after 20) Variable: A Characteristic that assumes different Values (Your Weight after 20) Discrete Variable: Cannot take a Value Between Any Two Values (Staff Strength) Continuous Variable: Can take a Value Between Any Two Values (P-E Ratio)
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Ratios and Percentages

Distribution Ratio: Ratio of a Part in Total to the Total (Example?) Inter-Class Ratio: Ratio of a Part to another Part in Same Total (Example?) Time Ratio: Ratio of a Variables Value At One Time to Its Value At Another Time (?) They are Free of Units of Measurement
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Ratios and Percentages (Contd.)

Association Ratio: Ratio of a Variables Value to the Value of Some Logically Associated Variable (Example?) Example: Productivity Ratio, EPS Unit of Measurement: Tons per Employee, Rs. per Employee, Tons per Million Rs. Invested. (Nil if Both Numbers have Same Unit of Measurement Like P-E Ratio)
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Course Coverage
Essential Basics for Business Executives Data Classification & Presentation Tools Preliminary Analysis & Interpretation of Data Correlation Model Regression Model Time Series Model Forecasting Uncertainty and Probability Sampling Techniques Estimation and Testing of Hypothesis
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Quantitative Methods
Data Classification and Presentation Tools

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Data Classification
First Step: Organize Data Systematically Arrange the Data According to a Common Characteristic Possessed by All Items Methods: Array Frequency Array Frequency Distribution

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Example: Number of Sales Orders Booked by 50 Sales Execs April 2006

09 04 11 00 02 34 10 11 03 08 11 16 02 06 07 07 07 09 10 28 43 03 08 02 05 05 06 12 17 03 14 24 04 00 06 19 08 15 09 09 04 01 30 05 00 06 09 08 21 00
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Array
0, 0, 0, 0, 1, 2, 2, 2, 3, 3, 3, 4, 4, 4, 5, 5, 5, 6, 6, 6, 6, 7, 7, 7, 8, 8, 8, 8, 9, 9, 9, 9, 9, 10, 10, 11, 11, 11, 12, 14, 15, 16, 17, 19, 21, 24, 28, 30, 34, 43 Array: Arrangement of Data in Order of Magnitude

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Frequency Array
A Table Showing the Number of Times Each Value Occurs

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Frequency Array
Orders: SEs 00: 04 01: 01 02: 03 03: 03 04: 03 05: 03 06: 04 07: 03 08: 04 09: 05 10: 02 Orders: SEs 11: 03 12: 01 13: 00 14: 01 15: 01 16: 01 17: 01 18: 00 19: 01 20: 00 21: 01
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Orders: SEs 22: 00 23: 00 24: 01 25: 00 26: 00 27: 00 28: 01 29: 00 30: 01 31: 00 32: 00

Orders: SEs 33: 00 34: 01 35: 00 36: 00 37: 00 38: 00 39: 00 40: 00 41: 00 42: 00 43: 01
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Frequency Distribution
A Table Showing the Number of Times Each Cluster of Values Occurs

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Constructing Frequency Distribution

Find Maximum & Minimum Values in Data. Make Sub-Intervals to Cover Entire Range They are Called the Class Intervals. Class Intervals Need Not Be of Equal Length. But, it is Useful if They Are. Note the Number of Observation that Belong to Each Class Interval. They are Called the Frequencies.
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Frequency Distribution
Number of Orders 00 04 05 - 09 10 14 15 19 20 24 25 29 30 34 35 39 40 44 TOTAL
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Number of SEs 14 19 07 04 02 01 02 00 01 50
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In This Example
What is the Variable? Sales Executives or Sales Orders? Is it Nominal, Ordinal or Cardinal? Is it Discrete or Continuous? What are the frequencies (sometimes called as frequency values or score)?

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Data Presentation
Some People are Averse to Numbers They Cant Grasp Tabulated Data Pictures Speak with Them; Figures Dont. Pictures Tell Them What A Thousand Numbers Cant. If your Boss Fits in This Category, You Must Learn the Art and Methods of Data Presentation.
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For Nominal & Ordinal Variables

Bar Chart: Horizontal Diagram of Bars of Equal Width But of Different Heights Bars Stand on a Common Base Line Horizontal Axis: Nominal/Ordinal Variables Vertical Axis: Their Frequencies Height of Bar is Prop. to Frequency Value Bars are Separated by Equal Distance
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Plant wise Production

Tons Per Month April 2006

P la n t

P la n t

P la n t

P la n t

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For Nominal & Ordinal Variables

Component Bar Chart: Illustration of A Total Divided Into Parts Divide Simple Bars Into Component Parts Part Prop. to Component Freq. Value Multiple Bar Chart: Direct Comparison Among Variables Draw Bars By the Side of Each Other
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Multiple Bar Chart

8

a t e t rth

tr

tr

r
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For Nominal & Ordinal Variables

Pie Chart: Divide A Circle Into Sectors (Pie) Area of Each Sector Proportionate to Component Frequency Value Also called Pizza Chart

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A Pie Chart

11 ( s r r es)

15

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Example
What are the Occasions to Explain the Facts Using a Pizza Chart?

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For Cardinal Variables

Histogram: A Graph of Columns, Each Having a Class Interval as Base and Frequency as Height Plot Class Intervals Along Horizontal Axis Erect A Rectangle On Each Class Interval Area of Rectangle Prop. to Freq. Value Rectangles Touch Each Other
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Histogram

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For Cardinal Variables

Frequency Polygon: Plot Mid Points of Class Intervals Along Horizontal Axis Concerned Frequencies on Vertical Axis Joins All These Points Frequency Curve: Join All These Points by a Smooth Curve
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Frequency Polygon & Curve

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Normal Distribution

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Visual Characteristics of Frequency Distributions

Skewness Kurtosis Modality

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Skewness
Symmetrical Distribution (Normal Distn.) Asymmetrical Distribution: Positively Skewed or Negatively Skewed Symmetrical Distributions are Easy to Handle Mathematically. But, Asymmetric Distributions Are More Commonly Found. That Is Why We Need Statistical Methods.
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Shapes of Frequency Distribution

Draw Histogram on Paper. Fold Paper In Half the Long Way. If Distribution Is Symmetrical, the Left Side of Histogram Would Be Mirror Image of the Right Side. Life is Rarely Symmetrical. If Distribution Is Asymmetrical, Two Sides Will Not Be Mirror Images of Each Other.
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Positively Skewed Distribution

Frequencies Cluster Toward the Lower End of The Scale (That Is, The Smaller Numbers). Increasingly Fewer Scores At the Upper End of The Scale (That Is, The Larger Numbers).

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Positively Skewed Distribution

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Negatively Skewed Distribution

Negatively Skewed Distribution Is Exactly The Opposite. Most of The Scores Occur Toward The Upper End of The Scale (That Is, The Larger Numbers). Increasingly Fewer Scores Occur Toward The Lower End (That Is, The Smaller Numbers).
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Negatively Skewed Distribution

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Kurtosis
Relative Concentration of Scores in the Center, the Upper and Lower Ends and the Shoulders of a Distribution Platykurtic: Flatter Curve Leptokurtic: More Peaked Mesokurtic : Medium Peaked

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Modality
Unimodal: Only One Major "Peak" in the Distribution of Scores When Represented as a Histogram Bimodal: Two Major Peaks Multimodal: More Than Two Major Peaks

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Bimodal Distribution

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