Statistics, Data Analysis, and Decision Modeling: James R. Evans

Fifth Edition
STATISTICS, DATA ANALYSIS,

AND DECISION MODELING
James R. Evans
University of Cincinnati
International Edition contributions by
Ayanendranath Basu
Indian Statistical Institute, Kolkata
PEARSON
Boston Columbus Indianapolis New York San Francisco Upper Saddle River
Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto
Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
CONTENTS
Preface 21
Part I
STATISTICS AND DATA ANALYSIS
Chapter 1 DATA AND BUSINESS DECISIONS

Introduction
25
27
28
Data in the Business Environment

Sources and Types of Data
28
30
Metrics and Data Classification 31

Statistical Thinking
35
Populations and Samples 36

Using Microsoft Excel
37
Basic Excel Skills 38

Skill-Builder Exercise 1.1 38
Copying Formulas and Cell References
38

Functions
40

Other Useful Excel Tips
Excel Add-lns
42
43
Displaying Data with Excel Charts
45
Column and Bar Charts 45

Line Charts
47

Pie Charts
47

Area Charts
48
Scatter Diagrams
48

Miscellaneous Excel Charts
Ethics and Data Presentation
49
49

f/
Basic Concepts Review Questions

Problems and Applications
51
51
Case: A Data Collection and Analysis Project
52
10
Contents
Chapter 2 DESCRIPTIVE STATISTICS AND DATA ANALYSIS
55
Introduction 56
Descriptive Statistics 56
Frequency Distributions, Histograms, and Data Profiles
57
Categorical Data 58
Numerical Data 58
Skill-Builder Exercise 2.1
62
62
Data Profiles 62
Descriptive Statistics for Numerical Data
63
Measures of Location 63
Measures of Dispersion 64
Measures of Shape
66
67
Excel Descriptive Statistics Tool

68
Measures of Association
69
71
68
Descriptive Statistics for Categorical Data

71
72
Visual Display of Statistical Measures
73
Box Plots 73
Dot-Scale Diagrams 73
73
Outliers 74
Data Analysis Using PivotTables
77
77
74
Basic Concepts Review Questions 78

Problems and Applications 78
Case: The Malcolm Baldrige Award 81
83
84
Chapter 3 PROBABILITY CONCEPTS AND DISTRIBUTIONS

Introduction 90
Basic Concepts of Probability 90
Basic Probability Rules and Formulas 91
Conditional Probability 92
89
94
Random Variables and Probability Distributions

Discrete Probability Distributions 97
94
Expected Value and Variance of a Discrete Random Variable 98
Contents
Bernoulli Distribution 99
Binomial Distribution 99
Poisson Distribution 100
Continuous Probability Distributions
Uniform Distribution
102
104
Normal Distribution
105

Triangular Distribution
108
Exponential Distribution 109

Probability Distributions in PHStat 110
Other Useful Distributions 110
Joint and Marginal Probability Distributions 113
Case: Probability Analysis for Quality Measurements
Chapter 4 SAMPLING AND ESTIMATION
Introduction
118
123
124
Statistical Sampling
124
Sample Design 124

Sampling Methods 125
Errors in Sampling 127
Random Sampling From Probability Distributions
Sampling From Discrete Probability Distributions
127
128

Sampling From Common Probability Distributions 129
A Statistical Sampling Experiment in Finance 130
Sampling Distributions and Sampling Error
131

Applying the Sampling Distribution of the Mean 134
Sampling and Estimation
134
Point Estimates 135

Unbiased Estimators 136
Interval Estimates 137
Confidence Intervals: Concepts and Applications
137
Confidence Interval for the Mean with Known Population Standard

Deviation 138
11
12
Contents
Confidence Interval for the Mean with Unknown Population Standard
Deviation 140
Confidence Interval for a Proportion 142
Confidence Intervals for the Variance and Standard Deviation 143
Confidence Interval for a Population Total 145
Using Confidence Intervals for Decision Making 146
Confidence Intervals and Sample Size 146
Prediction Intervals 148
Additional Types of Confidence Intervals 149
Differences Between Means, Independent Samples 149
Differences Between Means, Paired Samples 149
Differences Between Proportions 150
Case: Analyzing a Customer Survey 153
Chapter 5 HYPOTHESIS TESTING AND STATISTICAL INFERENCE
Introduction 163
Basic Concepts of Hypothesis Testing
Hypothesis Formulation 164
Significance Level 165
163
Decision Rules 166

Spreadsheet Support for Hypothesis Testing 169
One-Sample Hypothesis Tests 169
One-Sample Tests for Means 169
Using p-Values 171
One-Sample Tests for Proportions 172
One Sample Test for the Variance 174
Type II Errors and the Power of A Test 175
Two-Sample Hypothesis Tests 177
Two-Sample Tests for Means 177
Two-Sample Test for Means with Paired Samples 179
Two-Sample Tests for Proportions 179
Hypothesis Tests and Confidence Intervals 180
Test for Equality of Variances 181
Anova: Testing Differences of Several Means
182
Assumptions of ANOVA 184

-T-..I vr=mar MIiitinle Comoarison Procedure 184
162
Contents
Chi-Square Test for Independence
186

Case: HATCO, Inc.
188
188
191

Chapter 6 REGRESSION ANALYSIS
Introduction 197
Simple Linear Regression
196
198

Least-Squares Regression 200
A Practical Application of Simple Regression to Investment
Risk 202
Simple Linear Regression in Excel
203

Regression Statistics 204
Regression as Analysis of Variance 205
Testing Hypotheses for Regression Coefficients 205
Confidence Intervals for Regression Coefficients 206
Confidence and Prediction Intervals forX-Values 206
Residual Analysis and Regression Assumptions 206
Standard Residuals 208
Checking Assumptions 208
Multiple Linear Regression 210
Interpreting Results from Multiple Linear Regression 212
Correlation and Multicollinearity 212
Building Good Regression Models 214
Stepwise Regression 217
Best-Subsets Regression 217
The Art of Model Building in Regression 218
Regression with Categorical Independent Variables
Categorical Variables with More Than Two Levels 223
Ski11-Builder Exercise 6.7 225
Regression Models with Nonlinear Terms
Case: Hatco 231
228
225
220
13
14
Contents
Chapter 7 FORECASTING 237
Introduction 238
Qualitative and Judgmental Methods
Historical Analogy 239
238
The Delphi Method 239

Indicators and Indexes for Forecasting 239
Statistical Forecasting Models 240
Forecasting Models for Stationary Time Series
242
Moving Average Models 242

Error Metrics and Forecast Accuracy 244
Exponential Smoothing Models 246
Forecasting Models for Time Series with a Linear Trend
248
Regression-Based Forecasting 248

Advanced Forecasting Models 249
Autoregressive Forecasting Models 250
Forecasting Models with Seasonality 252
Incorporating Seasonality in Regression Models 253
Forecasting Models with Trend and Seasonality 255
Regression Forecasting with Causal Variables 255
Choosing and Optimizing Forecasting Models Using
CB Predictor 257
The Practice of Forecasting 262
Case: Energy Forecasting 265
263
Chapter 8 INTRODUCTION TO STATISTICAL QUALITY CONTROL

Introduction 272
The Role of Statistics and Data Analysis in Quality
Control 273
Statistical Process Control 274
Control Charts 274
x- and R-Charts 275
Analyzing Control Charts 280
Sudden Shift in the Process Average 281
Cycles 281
272
Contents
Hugging the Center Line 281
Hugging the Control Limits 282
Control Charts for Attributes 284
Variable Sample Size 286
Process Capability Analysis 288
Case: Quality Control Analysis 291
Part II Decision Modeling and Analysis 293

Chapter 9 BUILDING AND USING DECISION MODELS
295
Introduction 295
Decision Models 296
Model Analysis 299
What-lf Analysis 299
Model Optimization 302
Tools for Model Building 304
Logic and Business Principles 304
Common Mathematical Functions 305
Data Fitting 306
Spreadsheet Engineering 308
Spreadsheet Modeling Examples
309
New Product Development 309

Single Period Purchase Decisions 311
Overbooking Decisions 312
Project Management 313
Model Assumptions, Complexity, and Realism
315

Case: An Inventory Management Decision Model
321
15
16
Contents
Chapter 10 DECISION MODELS WITH UNCERTAINTY AND RISK
Introduction
324
325
Spreadsheet Models with Random Variables

Monte Carlo Simulation 326
Monte Carlo Simulation Using Crystal Ball
325
327
Defining Uncertain Model Inputs 328

Running a Simulation 332
Saving Crystal Ball Runs 334
Analyzing Results 334
Crystal Ball Charts 339
Crystal Ball Reports and Data Extraction 342
Crystal Ball Functions and Tools 342
Applications of Monte Carlo Simulation and Crystal Ball
Features 343
Newsvendor Model: Fitting Input Distributions, Decision Table Tool,
and Custom Distribution 343
Overbooking Model: Crystal Ball Functions 348
Cash Budgeting: Correlated Assumptions 349
New Product Introduction: Tornado Chart Tool 352
Project Management. Alternate Input Parameters and the
Bootstrap Tool 353
Case: J&G Bank
358
359
362
Chapter 11 DECISIONS, UNCERTAINTY, AND RISK

Introduction
367
368
Decision Making Under Certainty
368
Decisions Involving a Single Alternative 369

Decisions Involving Non-mutually Exclusive Alternatives 369
Decisions Involving Mutually Exclusive Alternatives 370
Decisions Involving Uncertainty and Risk
371
Making Decisions with Uncertain Information 371

Decision Strategies for a Minimize Objective 372
Contents
Decision Strategies for a Maximize Objective 374
Risk and Variability 375
Expected Value Decision Making
Analysis of Portfolio Risk 378
377

The " Flaw of Averages" 380
Decision Trees 381
A Pharmaceutical R&D Model 381
Decision Trees and Risk 382
Sensitivity Analysis in Decision Trees 384
The Value of Information 384
Decisions with Sample Information 386
Conditional Probabilities and Bayes's Rule 387
Utility and Decision Making 389
Exponential Utility Functions 393
Case: The Sandwich Decision 399
Chapter 12 QUEUES AND PROCESS SIMULATION MODELING
Introduction 402
Queues and Queuing Systems
403
Basic Concepts of Queuing Systems 403

Customer Characteristics 404
Service Characteristics 405
Queue Characteristics 405
System Configuration 405
Performance Measures 406
Analytical Queuing Models 406
Single-Server Model 407
Little's Law 408
Process Simulation Concepts 409
Process Simulation with SimQuick 410
Getting Started with SimQuick 411
A Queuing Simulation Model 412
402
17
18
Contents
Queues in Series with Blocking 417
Grocery Store Checkout Model with Resources 418
Manufacturing Inspection Model with Decision Points 421
Pull System Supply Chain with Exit Schedules 424
Other SimQuick Features and Commercial Simulation Software 426
Continuous Simulation Modeling
427
430

Case: Production/Inventory Planning
Chapter 13 LINEAR OPTIMIZATION
434
435
Introduction 435
Building Linear Optimization Models 436
Characteristics of Linear Optimization Models 439
Implementing Linear Optimization Models on Spreadsheets
Excel Functions to Avoid in Modeling Linear Programs 441
Solving Linear Optimization Models 442
Solving the SSC Model Using Standard Solver 442
Solving the SSC Model Using Premium Solver 444
Solver Outcomes and Solution Messages 446
Interpreting Solver Reports 446
How Solver Creates Names in Reports 451
Difficu Ities with Solver 451
Applications of Linear Optimization
451
Process Selection 453

Blending 454
Portfolio Investment 456
Transportation Problem 457
Interpreting Reduced Costs 461
Multiperiod Production Planning 461
Multiperiod Financial Planning 463
c
A Model with Bounded Variables 464

A Production/Marketing Allocation Model 469
How Solver Works 473
474
440
Contents
474
Case: Haller's Pub & Brewery
481
Chapter 14 INTEGER, NONLINEAR, AND ADVANCED OPTIMIZATION

METHODS 482
Introduction 482
Integer Optimization Models 483
A Cutting Stock Problem 483
Solving Integer Optimization Models 484
486
Integer Optimization Models with Binary Variables
487
Project Selection 487

Site Location Model 488
Computer Configuration 491

494
A Supply Chain Facility Location Model 494

Mixed Integer Optimization Models 495
Plant Location Model 495
A Model with Fixed Costs 497
Nonlinear Optimization 499
Hotel Pricing 499
Solving Nonlinear Optimization Models 501
Markowitz Portfolio Model 503
506
Evolutionary Solver for Nonsmooth Optimization

Rectilinear Location Model 508
Job Sequencing
508
509
512
Risk Analysis and Optimization 512

Combining Optimization and Simulation
A Portfolio Allocation Model 515
Using OptQuest 516
524

Case: Tindall Bookstores 530
Appendix
Index
545
533
524
515
506
19

Statistics, Data Analysis, and Decision Modeling: James R. Evans

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Fifth Edition

STATISTICS, DATA ANALYSIS,

STATISTICS AND DATA ANALYSIS

Chapter 1 DATA AND BUSINESS DECISIONS

Data in the Business Environment

Metrics and Data Classification 31

Populations and Samples 36

Basic Excel Skills 38

Skill-Builder Exercise 1.2 39

Skill-Builder Exercise 1.3 42

Skill-Builder Exercise 1.4 44

Displaying Data with Excel Charts

Column and Bar Charts 45

Skill-Builder Exercise 1.6 47

Skill-Builder Exercise 1.7 47

Skill-Builder Exercise 1.8 48

Skill-Builder Exercise 1.9 50

Basic Concepts Review Questions

Case: A Data Collection and Analysis Project

Skill-Builder Exercise 2.2

Excel Descriptive Statistics Tool

Skill-Builder Exercise 2.5

Descriptive Statistics for Categorical Data

Visual Display of Statistical Measures

Skill-Builder Exercise 2.9

Basic Concepts Review Questions 78

Skill-Builder Exercise 2.11

Chapter 3 PROBABILITY CONCEPTS AND DISTRIBUTIONS

Random Variables and Probability Distributions

Expected Value and Variance of a Discrete Random Variable 98

Skill-Builder Exercise 3.4 108

Exponential Distribution 109

Sample Design 124

Skill-Builder Exercise 4.1 129

Skill-Builder Exercise 4.3 134

Point Estimates 135

Confidence Interval for the Mean with Known Population Standard

Decision Rules 166

Assumptions of ANOVA 184

Skill-Builder Exercise 5.3 188

Skill-Builder Exercise 5.4 193

Skill-Builder Exercise 6.1 199

Skill-Builder Exercise 6.3 204

The Delphi Method 239

Moving Average Models 242

Regression-Based Forecasting 248

Chapter 8 INTRODUCTION TO STATISTICAL QUALITY CONTROL

Part II Decision Modeling and Analysis 293

New Product Development 309

Skill-Builder Exercise 9.8 317

Spreadsheet Models with Random Variables

Defining Uncertain Model Inputs 328

Chapter 11 DECISIONS, UNCERTAINTY, AND RISK

Decision Making Under Certainty

Decisions Involving a Single Alternative 369

Making Decisions with Uncertain Information 371

Skill-Builder Exercise 11.3 380

Basic Concepts of Queuing Systems 403

Basic Concepts Review Questions

Problems and Applications 431

Chapter 13 LINEAR OPTIMIZATION

Process Selection 453