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

4

CHAPTER OBJECTIVES

6.1

LEARNING OBJECTIVES

1 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

7

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

8

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?

9

FORECASTING METHODS

10

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

15

TYPES OF FORECASTS

16

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

17

SCENARIO PLANNING TO MAKE GOOD USE OF FORECAST

18

SCENARIO PLANNING

The process of preparing responses to

predicted changes in conditions

What the future might look like

Worse and Best case scenario

19

THE DELPHI TECHNIQUE FOR INCREASING THE ACCURACY OF FORECASTS

20

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

21

GANTT CHARTS AND MILESTONE CHARTS

22

GANTT CHARTS

23

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 license

03. Hire contractors forrenovation

04. Supervise renovation

05. Hire lighting contractor

06. Supervise lightinginstallation

07. Begin advertising of club

08. Hire club employees

09. Get booking agent for nightclub talent

10. Open for business

Jun Jul Aug Sep Oct Nov Dec Jan

Scheduled

Completed30 Nov

26

MILESTONE CHARTS

27

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 Activities

01. Locate site

02. Get liquor license

03. Hire contractors for renovation

04. Supervise renovation

05. Hire lighting contractor

06. Supervise lighting installation

07. Begin advertising of club

08. 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 32

33

Milestones to be Accomplished

27. Speak to friends and acquaintances about job openings

28. Put ad in local newspapers

29. Conduct interviews with applicants and check references of best candidates

30. Make job offers to best candidates

33. Have grand-opening celebration 5 January

7.4

29

PROGRAM EVALUATION AND REVIEW TECHNIQUE (PERT)

30

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 license

Hire renovation contractors

Supervise renovation

Hire lighting installationSupervise lighting installation

Begin 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 G

H

C

DE

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

36

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

37

TIME IN PERT

38

“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

39

CRITICAL PATH

107060

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

40

BREAK-EVEN ANALYSIS

41

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

43

BREAK-EVEN FORMULA- UNITS

BE = _____________________FC

Unit Selling Price- Unit Variable Cost

BE = _____________________$ 300,000

$ 1,000 - $ 500

= 600 Units

44

DECISION TREES

45

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

Decis

ion

Poin

t

Nightclub only

Nightclub and dinner restaurant

Good season

(0.6)

Good seaso

n

(0.6)

Poor season

(0.4)

Poor season (0.4)

$100,000

-$10,000$150,000

-$30,000

$90,000

$120,000

7.8

47

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

49

ECONOMIC ORDER QUANTITY (EOQ)

The inventory level that minimizes both

administrative costs and carrying costs

50

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

51

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

52

PARETO DIAGRAMS FOR PROBLEM IDENTIFICATION

53

PARETO DIAGRAMS

A bar graph that ranks types of output

variations by frequency of occurrence

54

PARETO DIAGRAMS

55

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

56

WHAT WE DISCUSSED TODAY?

6.1

LEARNING OBJECTIVES

1 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?