Quantitative Techniques of Decision Making

Decision-making is the most fundamental function of management professionals. Every manager has to take decisions related to his or her field of work. Therefore, this is an all-pervasive function of basic management. There are various methods for the process of decision-making. The Quantitative Technique of decision-making helps in making these methods more convenient and efficient.  

Almost every function of a typical manager will require him or her to make decisions on a routine basis. These decisions mostly depend on the nature as well as the scope of his or her work. Also, it depends on the authority and the powers of the manager.

A decision is a judgment of a course of actions that are always aiming to achieve a specific result. For every task a person wants to achieve, decision forms the foundation of it.

The manager often chooses the best option from a range of alternatives for every task that he or she has to complete within a given time. Every decision has many consequences. Therefore, choosing the right decision is very important. 

It can be said that the entire decision-making involves selecting a course of action from various alternatives. This is a very curial function that all the managers have to carry out routinely.

What are the Quantitative Techniques of Decision Making?

While making a decision there are several Techniques that a manager of a company or an organization can employ. Quantitative Techniques help the manager to take decisions objectively and in an efficient way. Such Techniques rely on a scientific and statistical approach to make a good decision. The six important quantitative Techniques of decision making are as follows. 

  1. Linear Programming

This Technique helps in maximizing an object that is under limited resources. The main objective can be either optimization of a utility or minimizing of a disutility. In simple words, one can say that it helps in utilizing a resource or a constraint to its maximum potential.   

Usually, all managers use this Technique only under conditions that involve certainty. Therefore, this might not be very useful to the manager when circumstances are uncertain or unpredictable. 

  1. Probability Decision Theory 

Probability decision theory is a Technique that lies in the case, where the probability of an outcome can only be predicted. In simple words, one cannot always predict the exact outcome of any course of action. 

The managers use this approach to determine the probabilities of an outcome using the available information, firstly. The managers can also rely on their subjective judgment for this purpose. Next, they use this data of probabilities to make their decisions. They often use the decision tree or the pay-of matrices for this purpose. 

  1. The Game Theory

Often, the managers use certain quantitative Techniques only while making decisions pertaining to their business rivals. The game theory approach is one such kind of Technique. 

This Technique stimulates the rivalries or conflicts between businesses as a game. The main aim of the managers of a company under this Technique is to find ways of gaining at the expense of their rivals. In order to do this, they can use two people or 3 people or even ‘n’ number of people games. 

  1. Queuing Theory

Each and every business often suffers waiting for periods or queues pertaining to their personnel, equipment, resources, or services. For example, sometimes a manufacturing company may gather a stock of unsold goods due to irregular demands. This theory aims to solve such types of problems. 

The main aim of this theory is to minimize such waiting periods and also reduce the investments in such expenses. For example, the departmental stores often have to find a balance between the unsold stock and the purchasing of fresh goods. The managers in such examples can employ the queuing theory to minimize their expenses. 

  1. Stimulation

The stimulation Technique observes several outcomes under hypothetical or artificial settings. The managers try to understand how their decisions will work out under diverse circumstances.

Then they finalize accordingly on the decision that is likely to be the most beneficial to them. Understanding the outcomes under such stimulated environments instead of natural settings reduces the risk drastically.

  1. Network Techniques

All the complex activities often require concentrated efforts by the personnel in order to avoid the waste of time, energy, and also money. This Technique basically aims to solve by creating strong network structures for the work.

  1. Mathematical Programming

Other than calculus, several other techniques can be used to solve decision-making issues. Mathematical programming is one such technique that can be used when several factors affect the choice of strategies. For example, if the aim is to reduce the total cost, no constraint can affect our choice of strategies. If there are constraints, they might limit the funds which can be spent on the inventory, the space for inventory set up or the highest number of orders that can be placed by the buyer or purchasing department.

In this case, it can become an issue in constrained minimization. However, mathematical programming can be a solution for it.

The constraints form an environment where decision-makers can minimize or maximize the goals to be achieved.

Constraint minimization and maximization is the best feature of mathematical programming. It is one of the most suitable frameworks for analyzing business problems.

  1. Cost Analysis Or Break-Even Analysis

All managers want to make profits. The objective of cost analysis or break-even analysis is to determine the break-even points or the optimum levels on which the profits are maximum. In decision-making, managers must pay attention to profit-making opportunities of alternative courses of action. This requires that the cost of these alternatives must be assessed properly. A significant cost analysis is made between fixed and variable costs.

A cost can be classified as fixed or variable in terms of the frequency of changes occurring in them at a particular period. However, in the long run, all costs are variable.

Fixed costs are those which remain constant irrespective of the production or sales. For instance, a manager's salary will not change irrespective of the goods produced or sold out. On-road tax on a vehicle doesn’t change with its annual mileage covered. Whereas, variable costs change with time. It highly depends on factors like the number of goods produced, sales in the financial year, or any similar factor. Some of its examples include sales commission concerning sales occurred, petrol prices in relation with distance traveled, labour wages based on hours worked, etc.

From a decision-making point of view, it is significant to know whether the cost will vary or not as a result of the decision.

The total cost can be determined by adding the variable cost to the fixed cost of various levels of activity (for example, the number of items produced).

  1. Cost-Benefit Analysis

It is a mathematical Technique for quantitative decision-making. This Technique is used to calculate the economic costs and the social advantages linked with a particular course of action. In this Technique, efforts are made to calculate the costs and benefits, not only for those that can be expressed in rupees but also the less effectively calculated outcomes of the decision.

Usually, this technique is used for making decisions on public projects in which social benefits, social costs, and actual out of the pocket costs are considered. Here, the cost analysis is associated with the economy of the entire society besides considering the benefits of individuals or a particular group. The goal of this analysis is to get maximum profits for society. 

There are two most crucial quantitative Techniques under this approach. These include the Critical Path Method and the Programme Evaluation and the Review Technique. These techniques are effective because they segregate the work efficiently under the networks. They also drastically reduce time and money. 

Characteristics of Quantitative Techniques

  • The quality of the solution can be improved by quantitative Techniques but it is not necessary that the solution is perfect. These Techniques help in finding the solution to the problem.

  • The quantitative Techniques are related to the optimization theory. One can find the best solution to the given situation.

  • Models are used in quantitative Techniques. By doing mathematical analysis and experiments, a good decision can be made.

  • To perform quantitative Techniques, a group of people having different skills is required so that they can estimate the pros and cons of the solution to the problem. Executives must show a willingness to participate in the decision-making.

  • The complexity of the situation gets reduced when managers use quantitative Techniques to find an easy solution. They can even innovate solutions to the most complicated and costly functions.

FAQs (Frequently Asked Questions)

1. What is the Role of Quantitative Techniques in Decision Making?

Some of the roles of quantitative techniques in decision-making are as follows.

  • These techniques provide executives with a more precise description of the cause and effect of the relationship. It also risks the underlying business operations in measurable terms. It eliminates the conventional, intuitive, and also subjective basis on which the management used to formulate their decisions in the past.

  • It provides solutions for several business problems.

  • It also enables the proper deployment of the resources.

  • It helps in the minimization of waiting time and the servicing costs.

  • It assists in choosing an optimum strategy.

  • It greatly helps in optimum resource allocation.

  • It enables the management to decide when to buy and how much to buy.

  • They also facilitate the process of decision-making.

2. What are Decision Trees?

The decision trees always show the complete picture of a potential decision and also allow a manager to graph alternative decision paths. Decision trees are a very useful way to analyze hiring marketing, investments, equipment purchases, pricing, and also similar decisions that involve a progression of smaller decisions. Usually, the decision tree is used to evaluate the decisions under the conditions of risk.

The term decision tree originates from the graphic appearance of a technique that starts with the initial decision shown as the base. Decision trees also force a manager to be explicit in analyzing the conditions associated with future decisions.

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4. What is the meaning of the term "waiting line theory"?

The waiting line theory is also known as the queuing theory. According to this theory, the manager makes decisions of establishing the service facilities to fulfill the irregular demands. It is an O.R. technique that is applied to a situation where there is a need of producing a balance between the cost of increased available service and the cost of letting units wait. The O.R. team and the manager must determine the time required for servicing and the breakdown rate to bring out the best number of service facilities.

5. What do you understand by "cost-benefit analysis"?

The cost-benefit analysis is one of the quantitative techniques of decision-making. This technique is used to estimate the social benefits and economic costs associated with some public projects. This technique is a little bit complicated. A company works for the welfare and is concerned with the economy of a society with the help of this technique. In this technique, the cost and benefits are not only expressed in rupees but are also associated with the less calculated effects of a given decision. Cost-benefit analysis is also associated with a small company.