chapter-06 quantitative techniques for planning and decision making

CHAPTER-06

QUANTITATIVE TECHNIQUES FOR PLANNING AND DECISION MAKING

Dr. Gehan Shanmuganathan, (DBA)1

2

CATERPILLAR INC..

3

CATERPILLAR INC.. Managed raw materials based on

quantitative techniques Minimum order quantity management Demand management

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CHAPTER OBJECTIVES

6.1

LEARNING OBJECTIVES1 Explain how managers use data-based decision making 2 Explain the use of forecasting techniques in planning.3 Describe how to use Gantt charts, milestone charts, and

PERT planning techniques.4 Describe how to use break-even analysis and decision trees for problem solving and decision making.5 Describe how to manage inventory by using materials requirement planning (MRP), the economic order quantity (EOQ), and just-in-time (JIT) techniques.6 Describe how to identify problems using a Pareto diagram

6

DATA- BASED DECISION MAKING

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DATA- BASED DECISION MAKING

Data-Driven Management (DDM)

An attitude and approach to

management rather than a

specific technique that stems from

data-based decision making

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WHERE MANAGERS USE DATA-BASED DECISION MAKING? How much to invest? Buy or make decisions? Market size, demand, and potential? Number of employees needed? Sales targets? Quality controls? Cost controls? Best employees?

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FORECASTING METHODS

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FORECASTING METHODS Judgmental Forecasting (usually

bottom-up) A qualitative forecasting method based on a

collection of subjective opinions Time-Series Analysis (usually top-

down) An analysis of a sequence of observations

(historical data) that have taken place at regular intervals over a period of time (hourly, weekly, monthly, and so forth) Moving average and exponential smoothing

TYPES OF FORECASTING METHODS

QualitativeA prediction based on a collection of subjective hunches. QuantitativeA prediction based on historical data or models, such as a time-series analysis.

Adapted from Exhibit 7.2

0

100

75

50

25

1990 1992 1994 1996 1998 2000 2002 2004 2006

Annual Sales

Forecasted Data

7.2

12

TIME SERIES ANALYSIS- MOVING AVERAGE

13

TIME SERIES ANALYSIS-EXPONENTIAL SMOOTHING

14

ERRORS AND TRAPS MAKING FORECASTS OR ESTIMATES

Over confidence Prudence “to be on the safe side” Credibility of the past figures used Moving average will not take other factors

(customers, competitors, and suppliers) into consideration but the given figures to extrapolate

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TYPES OF FORECASTS

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TYPES OF FORECASTS

Economic forecasting – GDP, GNP, per capita

income, consumer confidence, inflation,

unemployment

Sales forecasting- weekly, monthly, annual,

geographically, per salesman, per brand

Technological forecasting – number of users,

computer literacy, use of e-commerce

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SCENARIO PLANNING TO MAKE GOOD USE OF FORECAST

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SCENARIO PLANNING The process of preparing responses to

predicted changes in conditions What the future might look like Worse and Best case scenario

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THE DELPHI TECHNIQUE FOR INCREASING THE ACCURACY OF FORECASTS

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THE DELPHI TECHNIQUE A form of group decision making designed to

provide group members with one another’s idea and feedback while avoiding some of the problems associated with interacting groups Includes series of decision making sessions until

they reach the final decision as pre-determined

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GANTT CHARTS AND MILESTONE CHARTS

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GANTT CHARTS

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GANTT CHARTS- HENRY GANTT (SCIENTIFIC MANAGEMENT) A chart that depicts the planned and actual

progress of work during the life of the project

GANTT CHART: OPENING A NIGHTCLUB

Production Activities

01. Locate site

02. Get liquor license03. Hire contractors forrenovation04. Supervise renovation

05. Hire lighting contractor06. Supervise lightinginstallation07. Begin advertising of club

08. Hire club employees09. Get booking agent for nightclub talent10. Open for business

Jun Jul Aug Sep Oct Nov Dec Jan

ScheduledCompleted

30 Nov

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MILESTONE CHARTS

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MILESTONE CHARTS An extension of the Gantt chart that provides

a listing of the sub-activities that must be completed to accomplish the major activities listed on the vertical axis

MILESTONE CHART: OPENING A NIGHTCLUB

Adapted from Exhibit 7.5

Production Activities01. Locate site02. Get liquor license03. Hire contractors for renovation04. Supervise renovation05. Hire lighting contractor06. Supervise lighting installation07. Begin advertising of club08. Hire club employees09. Get booking agent for nightclub talent10. Open for business

Jun Jul Aug Sep Oct Nov Dec Jan1 2 3

4 4 5 6 7 8 9 10

11 12 13

14 15 16 17 18 19

20 21

22 23 24

25 26

27 28 29 30

31 3233

Milestones to be Accomplished 27. Speak to friends and acquaintances about job openings28. Put ad in local newspapers29. Conduct interviews with applicants and check references of best candidates30. Make job offers to best candidates

33. Have grand-opening celebration 5 January

7.4

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PROGRAM EVALUATION AND REVIEW TECHNIQUE (PERT)

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PROGRAM EVALUATION AND REVIEW TECHNIQUE (PERT) A network model used track the planning

activities required to complete a large-scale, non-repetitive project. It depicts all of the interrelated events that must take place

PERT NETWORK: OPENING A NIGHTCLUB

Estimated Time in Weeks Preceding Event

5 None

30 A

13 A

30 C

6 D

13 E

8 B, F

14 G

8 G, H

Event

A

B

C

D

E

F

G

H

I

J

Activity

Locate site

Get liquor licenseHire renovation contractorsSupervise renovationHire lighting installationSupervise lighting installationBegin advertising club

Hire club employees

Get booking agent

Open club for business 1 I

= Critical Path (thick arrow)Adapted from Exhibit

7.6

7.5

PERT NETWORK: OPENING A NIGHTCLUB (CONTINUED)

StartA

B GH

C

D E

F

I

J

5

3014

8

8

8

13

13

306

81

Adapted from Exhibit 7.6

7.6

EXAMPLE A,B are two activities, B cannot start until A is

finished. A takes 5 days and B takes 7 days

1 2 3A B5 days 7 days

EXAMPLE -2

B,C and D cannot start until A is completed

1 4

3

2

5

A

B

C

D

35

STEPS INVOLVED IN PREPARING PERT NETWORK

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STEPS INVOLVED IN PREPARING PERT NETWORK

1. Prepare a list of all activities and events necessary to complete the project

2. Design the actual PERT network, relating all the activities to each other in the proper sequence

3. Estimate the time required to complete each activity

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TIME IN PERT

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“TIME” IN PERT Expected Time- the time that will be used on the PERT

diagram as the needed period for the completion of an activity

Critical Path- the path through the PERT network that includes the most time-consuming sequence of events and activities

Optimistic Time (O)- the shortest time an activity will take if everything goes well

Pessimistic Time (P)- the amount of time an activity will take if everything goes wrong

Most Probable Time (M)- the most realistic estimate of how much time an activity will take

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CRITICAL PATH

10 7060

50

40

30

20A

B

D

C

E

F

G

H00

55

810

99

1011

1616 24

245

5

4

3 6

7

5

8

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BREAK-EVEN ANALYSIS

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BREAK-EVEN ANALYSIS A method of determining the relationship

between total cost and total revenues at various levels of production or sales activity No cost- no profit point

BREAK-EVEN CHART: ADDING A NEW PRODUCT

Adapted from Exhibit 7.7

80

70

60

50

40

30

20

10

100 20 30 40 50 60 70 80 90 100

Revenues and costs ($ in thousands)

Sales (units in

hundreds)

Revenues

Total Costs

Profit

LossFixed Costs

Variable Costs

Break-Even Point

7.7

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BREAK-EVEN FORMULA- UNITS

BE = _____________________FC

Unit Selling Price- Unit Variable Cost

BE = _____________________$ 300,000

$ 1,000 - $ 500= 600 Units

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DECISION TREES

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DECISION TREES

Decision Tree- A graphic illustration of the

alternative solutions available to solve a

problem

Expected value- the average return on a

particular decision being made a large

number of times

FIRST-YEAR DECISION TREE FOR NIGHTCLUB OWNER

Possible Alternatives States of NatureConditional Values

Expected Values

Dec

isio

n Po

int

Nightclub only

Nightclub and dinner restaurant

Good season

(0.6)

Good season

(0.6)

Poor season (0.4)

Poor season (0.4)

$100,000

-$10,000$150,000

-$30,000

$90,000

$120,000

7.8

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INVENTORY CONTROL TECHNIQUES

INVENTORY CONTROL TECHNIQUES

Just-in-Time (JIT)A system designed

to minimize inventory and move

it into the plant exactly when

needed.

Material-Requirement Planning (MRP)

A system designed to ensure that materials

handling and inventory control are efficient.

Economic-Order Quantity (EOQ)

The inventory level that minimizes both administrative and

carrying costs.

7.9

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ECONOMIC ORDER QUANTITY (EOQ) The inventory level that minimizes both

administrative costs and carrying costs

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JUST-IN-TIME SYSTEM (JIT) A system to minimize inventory and move it

into the plant exactly when needed This is a demand driven pull strategy used at

the manufacturing facility Short production lead time High inventory turnover

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LIFO VS. FIFO

Selling an item first that was received last in inventory

Selling an item first that has been in inventory the longest

LIFO- Last In, First Out FIFO- First In, First Out

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PARETO DIAGRAMS FOR PROBLEM IDENTIFICATION

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PARETO DIAGRAMS A bar graph that ranks types of output

variations by frequency of occurrence

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PARETO DIAGRAMS

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WRITE FIVE KEY THINGS (AREAS) THAT YOU CAN CRITICALLY REMEMBER IN TODAY’S DISCUSSION

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WHAT WE DISCUSSED TODAY?

6.1

LEARNING OBJECTIVES1 Explain how managers use data-based decision making 2 Explain the use of forecasting techniques in planning.3 Describe how to use Gantt charts, milestone charts, and

PERT planning techniques.4 Describe how to use break-even analysis and decision trees for problem solving and decision making.5 Describe how to manage inventory by using materials requirement planning (MRP), the economic order quantity (EOQ), and just-in-time (JIT) techniques.6 Describe how to identify problems using a Pareto diagram

58

MID-TERM TEST – PROGRESS?