eom-06_quantitative techniques for planning and decision making

7/30/2019 EOM-06_Quantitative Techniques for Planning and Decision Making

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CHAPTER 4

Quantitative Techniques forPlanning and Decision Making



4-2

Learning Objectives

1. Explain the use of forecasting techniques in planning.

2. Describe how to use Gantt charts, Milestone charts,and PERT planning techniques.

3. Describe how to use break-even analysis and decisiontrees for problem solving and decision making.

4. Describe how to manage inventory by using MaterialsRequirement Planning (MRP), the Economic OrderQuantity (EOQ), and Just-In-Time (JIT) techniques.



4-3

1. Data-based Decision Making

Data-driven management refers to the idea thatdecisions are based on facts rather thanimpressions or guesses

Many managers want to see the data before accepting a

suggestion from a subordinate.Data-driven management is more of an attitudeand approach than a specific technique, and it ishardly new.

Although data-driven management is preferable inmost situations, intuition and judgment stillcontribute to making major decisions



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2. Forecasting Methods

All planning involves making forecasts, orpredicting future events. Almost every large business or governmentagency performs some type of formalized

forecasting.The forecasts used in strategic planning areespecially difficult to make because they involvelong-range trends.

Forecasting approaches:QualitativeQuantitative



Quantitative Approaches A prediction based on historical data or models, such as atime-series analysis.

0

100

75

50

25

1990 1992 1994 1996 1998 2000 2002 2004 2006

% of people taking vacationsduring summer months

Qualitative Approaches A prediction based on a collection of subjective hunches.



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a. Types of Forecasts

Economic ForecastingStrategic planners in large organizations rely often oneconomic forecasts made by specialists they hire.Planners in smaller firms are more likely to rely on

government forecasts or speak to other business people.Sales Forecasting

Usually the primary planning document for a businessFeedback from the field sales force often provides usefulinput for forecasts

Technological ForecastingPredict what types of technological changes will take place.

Allow a firm to adapt to new technologies and thus staycompetitive


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b. Scenario Planning to Make Good Use of Forecasts

Scenario planning is the process of preparing responses to predicted changesin conditions. A good use of scenarioplanning would be to figure out in advancehow to…

deal with a serious disruption in business suchas that caused by a hurricane, orplan for a substantial increase in business suchas that caused by a hurricane



c. The Delphi Technique for Increasing the Accuracy of Forecasts

The Delphi Technique is a form of group decisionmaking designed to provide group members withone another’s ideas and feedback while avoidingsome of the problems associated with interacting

groups. A facilitator gathers the forecasts, as well as the reasonsfor them, from the specialists in the panel

All the panelists then receive each other’s forecasts and

reasons for the forecasts, and comment about thisinformation.

After several rounds of reviews, the forecasts are refinedand the facilitator submits the final forecast.



3. Planning Techniques

a. Gantt Charts

b. Milestone Charts

c. PERT Network



a. Gantt Chart: Opening a NightclubProduction 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 fornightclub talent

10. Open for business

Jun Jul Aug Sep Oct Nov Dec Jan

Scheduled

Completed

30 Nov



b. Milestone Chart: Opening a NightclubProduction Activities

01. Locate site

02. Get liquor license03. Hire contractors for renovation

04. Supervise renovation

05. Hire lighting contractor

06. Supervise lighting installation

07. 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 1011 12 13

14 15 16 17 18 19

20 21

22 23 24

25 2627 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



c. PERT Network: Opening a NightclubEstimated Time

in Weeks

530

13

30

6

13

8

14

8

1

Preceding Event

NoneA

A

C

D

E

B, F

G

G, H

I

Event

AB

C

D

E

F

G

H

I

J

Activity

Locate siteGet liquor licenseHire renovationcontractors

Supervise renovation

Hire lightinginstallationSupervise lightinginstallation

Begin advertising club

Hire club employees

Get booking agent

Open club for business

What is the shortest time to complete the project = 128 weeks?

= Critical Path (thick arrow)



c. PERT Network: Opening a Nightclub (cont.)

A

StartB G

H

C

D E

F

I

J

End

5

308

14

8

13

6

5

1330

8

1

= Critical Path (thick arrow)



Steps Involved in Preparing a PERTNetwork

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

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

3. Estimate the time required to complete each activity.

4. Calculate the critical path , the path through thePERT network that includes the most time-

consuming sequence of events and activities.



4. Decision Making Tools

a. Break-Even Analysis A method of determining the relationshipbetween total costs and total revenues atvarious levels of production or salesactivity.

b. Decision Tree A graphic illustration of the alternativesolutions available to solve a problem



The break-even point (Q BE) is the situation in whichtotal revenues equal fixed costs plus variable costs. Break-Even Formula

= −

whereP = selling price per unit

VC = variable cost per unit, the cost that varies with theamount producedFC = fixed cost, the cost that remains constant no matterhow many units are produced

a. Break-Even Analysis



Break-Even Chart: Adding a New Product

800700

600

500

400

300

200

100

10 2 3 4 5 6 7 8 9 10

Revenues and costs($ in thousands)

Sales (unitsin hundreds)

Total Revenues

TotalCosts

Profit

Loss

Fixed Costs

VariableCosts

Break-EvenPoint



Decision trees are designed to estimatethe outcome of a series of decisions.

As the sequences of the major decisionare drawn, the resulting diagramresembles a tree with branches.

Expected value:The average return on a particular decision

being made a large number of times.

b. Decision Tree



Example: First-Year Decision Tree for NightclubOwner

Possible Alternatives States of NatureConditional

ValuesExpected

Values

D e c

i s i o n

P o

i n t

$100,000

-$10,000

$150,000

-$30,000

$56,000

$78,000



5. Inventory Control Techniques

Just-in-Time (JIT) LIFO Versus FIFO

Economic-OrderQuantity (EOQ)



a. Economic Order Quantity

The economic order quantity(EOQ) is the inventory level thatminimizes both administrativecosts and carrying costs.

Administrative costs are the fixedcost of placing and receiving anorder

Carrying costs include:the cost of loans,the interest foregone because moneyis tied up in inventory, and

the cost of handling the inventory.



Graphical Illustration



b. Just-in-Time System(JIT)

A system designed to minimize inventoryand move it into the plant exactly whenneeded.

Advantages of the JIT Inventory System:The expenses associated with maintaining a largeinventory can be dramatically reduced.Lead to organizational commitment to quality indesign, materials, parts, employee – management

and supplier – user relations, and finished goods.With minimum levels of inventory on hand,finished products are more visible and defectsare more readily detected.



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b. JIT (cont.)

Disadvantages of the JIT Inventory System:a JIT system must be placed in a supportive orcompatible environment.

Product demand must be predictable with a minimum of surges in demand.Reliable suppliers are needed

Small companies with short runs of a variety of products often suffer financial losses from JITpractices.The savings from JIT management can be deceptive.

Suppliers might simply build up inventories in their ownplants and add that cost to their prices.JIT inventory practices leave a company vulnerable to work

stoppages, such as a strike.



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c. LIFO versus FIFO

Last In, First Out (LIFO)Selling an item first that was received last in inventory. Therationale here is that the newest is probably the mostexpensive.

First In, First Out (FIFO)Selling an item first that has been in inventory the longest.

In choosing between LIFO and FIFO, you have bothphysical and financial considerations:

Getting rid of older inventory first can be a good ideabecause… If the company has borrowed money to purchase inventory,you want to move the inventory you have been paying forthe longest.



Homework for group presentation

Prepare for a 15 minute grouppresentation on Case Problem 6-A: “Retro Is Our Future ”, page 222:

Describe shortly the case problem Answer all questions in the caseproblemEmail your files to the lecturer

eom-06_quantitative techniques for planning and decision making

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