TUM School of Management

Production and Supply Chain Management

Prof Martin Grunow Technische Universität München

Correlation

Professor Holly Ott

Production and Supply Chain Management
Chair: Prof. Martin Grunow
TUM School of Management

Holly Ott 1
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Learning Objectives
• Explain what is correlation and how correlation is used to
investigate the linear relationship between inputs to a process and
its outputs.
• Understand the meaning of positive, negative and no correlation
between two variables.
• Explain the Pearson Product Moment Coefficient of Correlation,
rxy, and what information it conveys about a linear relationship.

Holly Ott 2
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Buying a Used Car

Age of Total
Automobile kilometers
(Years) driven (km)
1.2 25
5.3 75
4.6 92
0.7 13
2.1 110
2.5 64
1.9 29
4.3 105
6.4 233
3.8 126
2.2 57
5.4 115
Holly Ott 3
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Buying a Used Car

Holly Ott 4
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Buying a Used Car

Holly Ott 5
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Correlation
Correlation analysis is a method to study the linear relationship
between random variables.

http://www.tylervigen.com/spurious-correlations

Holly Ott 6
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Spurious Correlations
• When two or more variables are not causally related but appear
related due to a “lurking” variable.

Holly Ott 7
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Correlation Analysis

©2012 from "A First Course in Quality Engineering: Integrating Statistical

and Management Methods of Quality" by K.S. Krishnamoorthi. Reproduced
by permission of Taylor and Francis Group, LLC, a division of Informa plc.
Holly Ott 8
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Buying a Used Car

Holly Ott 9
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Correlation Coefficient
The correlation coefficient of two random variables X and Y is
defined as

ρXY =

The empirical analog of this theoretical quantity, obtained from n

sample observations of (x, y) is given by the Pearson Product
Moment Coefficient of Correlation:

©2012 from "A First Course in Quality Engineering: Integrating Statistical

and Management Methods of Quality" by K.S. Krishnamoorthi. Reproduced
by permission of Taylor and Francis Group, LLC, a division of Informa plc.
Holly Ott 10
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Correlation Coefficient
It can be shown that ρXY and rXY lie in the interval [-1, 1].

©2012 from "A First Course in Quality Engineering: Integrating Statistical

and Management Methods of Quality" by K.S. Krishnamoorthi. Reproduced
by permission of Taylor and Francis Group, LLC, a division of Informa plc.
Holly Ott 11
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Buying a Used Car

Holly Ott 12
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Correlation– Example
Drying Oven: Humidity vs Drying Capability

©2012 from "A First Course in Quality

Engineering: Integrating Statistical and
Management Methods of Quality" by
K.S. Krishnamoorthi. Reproduced by
permission of Taylor and Francis
Group, LLC, a division of Informa plc.
Holly Ott 13
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Correlation Coefficient

rxy  +1 Strong positive linear relationship

rxy  0 No linear relationship

rxy  -1 Strong negative linear relationship

Holly Ott 14
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Correlation Coefficient

Holly Ott 15
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

What does Correlation not tell us?

Holly Ott 16
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Non Linear Relationship

Holly Ott 17
 TUM School of Management
Production and Supply Chain Management
Prof Martin Grunow Technische Universität München

Correlation

Professor Holly Ott

Production and Supply Chain Management
Chair: Prof. Martin Grunow
TUM School of Management

Holly Ott 18