CHAPTER-06
QUANTITATIVE TECHNIQUES FOR PLANNING AND DECISION MAKING
Dr. Gehan Shanmuganathan, (DBA)1
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CATERPILLAR INC..
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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
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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
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TIME SERIES ANALYSIS- MOVING AVERAGE
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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
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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?