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Managing Risks, Serving the Customer, Examining the Numbers
Lecture 1 MGMT 661 Decision Making: Managing Risks, Serving the Customer, Examining the Numbers
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What is this course about?
To understand Why do some companies thrive while others struggle or fail? Decision making What What resources/what amounts When Needed/scheduled/ordered Where Work to be done How Designed Who To do the work
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Basic Functions of Businesses
The management of systems or processes that create goods and/or provide services Organization Finance Operations Marketing
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Value-Added The difference between the cost of inputs and the value or price of outputs. Inputs Land Labor Capital Transformation/ Conversion process Outputs Goods Services Control Feedback Value added
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Food Processor Inputs Processing Outputs Raw Vegetables Cleaning
Canned vegetables Metal Sheets Making cans Water Cutting Energy Cooking Labor Packing Building Labeling Equipment
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Hospital Process Inputs Processing Outputs Doctors, nurses Examination
Healthy patients Hospital Surgery Medical Supplies Monitoring Equipment Medication Laboratories Therapy
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Production of Goods vs. Delivery of Services
Production of goods – tangible output Delivery of services – an act Service job categories Government Wholesale/retail Financial services Healthcare Personal services Business services Education
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Manufacturing vs Service
Characteristic Manufacturing Service Output Tangible Intangible Customer contact Low High Uniformity of input High Low Labor content Low High Uniformity of output High Low Measurement of productivity Easy Difficult Opportunity to correct quality problems High Low High
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Key Decisions of Businesses
What What resources/what amounts When Needed/scheduled/ordered Where Work to be done How Designed Who To do the work Operations Managers The operations function Consists of all activities directly related to producing goods or providing services
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Scope of Operations Management
Operations Management includes: Forecasting Capacity planning Scheduling Managing inventories Assuring quality Deciding where to locate facilities And more . . .
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Types of Operations Operations Examples Goods Producing
Farming, mining, construction , manufacturing, power generation Storage/Transportation Warehousing, trucking, mail service, moving, taxis, buses, hotels, airlines Exchange Retailing, wholesaling, banking, renting, leasing, library, loans Entertainment Films, radio and television, concerts, recording Communication Newspapers, radio and television newscasts, telephone, satellites
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Decision Making System Design Capacity Location
Arrangement of departments Product and service planning Acquisition and placement of equipment
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Decision Making System Operation Management of personnel
Inventory planning and control Scheduling Project Management Quality assurance
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Decision Making Steps of problem solving Models
(Simple) Numerical approaches Analysis of trade-offs
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Problem Solving and Decision Making
Steps of Problem Solving (First 5 steps are the process of decision making) Define the problem. Identify the set of alternative solutions. Determine the criteria for evaluating alternatives. Evaluate the alternatives. Choose an alternative (make a decision). Implement the chosen alternative. Evaluate the results.
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Models Tradeoffs A model is an abstraction of reality.
– Iconic Analog Mathematical Tradeoffs What are the pros and cons of models?
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A Simulation Model
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Quantitative Analysis and Decision Making
Potential reasons for a quantitative analysis approach to decision making The problem is complex The problem is very important The problem is new The problem is repetitive
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Mathematical Models Relate decision variables (controllable inputs) with fixed or variable parameters (uncontrollable inputs) Maximize or minimize some objective function subject to constraints Two types Stochastic if any of the uncontrollable inputs is subject to variation, Deterministic otherwise Generally, stochastic models are more difficult to analyze Values of the decision variables that provide the mathematically-best output referred to as optimal solution for the model Frequently a less complicated (and perhaps less precise) model is more appropriate than a more complex and accurate one due to cost and ease of solution considerations
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Inspection time per unit
Product Mix Example Type 1 Type 2 Profit per unit $60 $50 Assembly time per unit 4 hrs 10 hrs Inspection time per unit 2 hrs 1 hr Storage space per unit 3 cubic ft Resource Amount available Assembly time 100 hours Inspection time 22 hours Storage space 39 cubic feet
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A Linear Programming Model
Objective – profit maximization Maximize 60X1 + 50X2 Subject to Assembly 4X1 + 10X2 <= 100 hours Inspection 2X1 + 1X2 <= 22 hours Storage 3X1 + 3X2 <= 39 cubic feet X1, X2 >= 0 X1 = # of type 1 PC; X2 = # of type 2 PC
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Analysis of Trade-offs
How many more jeans would Levi need to sell to justify the cost of additional robotic tailors? Cost of additional robotic tailors vs Inventory Holding Cost
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Quantitative Models Cost-Revenue-Profit models
Simple break-even analysis Analysis of tradeoffs Linear programming: optimal allocation of resources Project models: planning, coordinating and controlling large scale projects Statistical models: forecasting Queuing models: analyze waiting lines Inventory models: management of inventory
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Models Are Beneficial Easy to use, less expensive Minimizes risk
Require users to organize Systematic approach to problem solving Increase understanding of the problem Enable “what if” questions: simulation models Specific objectives Power of mathematics Standardized format
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The Management Scientist Software
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Cost, Revenue and Profit Models (Course Pack - Chapter 1) (Custom Text – Chapter 5)
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Cost Classification of Owning and Operating a Passenger Car
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Cost-Volume Relationship
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Cost-Volume Relationship
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Cost-Volume Relationships
Amount ($) Q (volume in units) Total revenue Amount ($) Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC)
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Cost-Volume Relationships
Profit Total revenue Amount ($) Total cost Formula (5-8) of Course Text BEP units Q (volume in units)
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Example: Ponderosa Development Corp.
Ponderosa Development Corporation (PDC) is a small real estate developer that builds only one style house. The selling price of the house is $115,000. Land for each house costs $55,000 and lumber, supplies, and other materials run another $28,000 per house. Total labor costs are approximately $20,000 per house. Ponderosa leases office space for $2,000 per month. The cost of supplies, utilities, and leased equipment runs another $3,000 per month. The one salesperson of PDC is paid a commission of $2,000 on the sale of each house. PDC has seven permanent office employees whose monthly salaries are given on the next slide.
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Example: Ponderosa Development Corp.
Employee Monthly Salary President $10,000 VP, Development ,000 VP, Marketing ,500 Project Manager ,500 Controller ,000 Office Manager ,000 Receptionist ,000
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Example: Ponderosa Development Corp.
Identify all costs and denote the marginal cost and marginal revenue for each house. Write the monthly cost function c (x), revenue function r (x), and profit function p (x). What is the breakeven point for monthly sales of the houses? What is the monthly profit if 12 houses per month are built and sold? Determine the BEP for monthly sale of houses graphically.
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Example: Ponderosa Development Corp.
1200 Total Revenue = 115,000x 1000 800 Thousands of Dollars 600 Total Cost = 40, ,000x 400 200 Break-Even Point = 4 Houses 1 2 3 4 5 6 7 8 9 10 Number of Houses Sold (x)
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Locational Break-Even Analysis
Three locations: Akron $30,000 $75 $180,000 Bowling Green $60,000 $45 $150,000 Chicago $110,000 $25 $160,000 Selling price = $120 Expected volume = 2,000 units Fixed Variable Total City Cost Cost Cost Total Cost = Fixed Cost + Variable Cost x Volume
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Bowling Green cost curve Bowling Green lowest cost
Locational Break-Even Analysis Graph of Break-Even Points – $180,000 – $160,000 – $150,000 – $130,000 – $110,000 – $80,000 – $60,000 – $30,000 – $10,000 – Annual cost | | | | | | | ,000 1,500 2,000 2,500 3,000 Volume Bowling Green cost curve Akron cost curve Chicago cost curve Akron lowest cost Chicago lowest cost Bowling Green lowest cost
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Example: Step Fixed Costs
A manager has the option of purchasing 1, 2 or 3 machines Fixed costs and potential volumes are as follows: Variable cost = $10/unit and revenue = $40/unit If the projected annual demand is between 580 and 630 units, how many machines should the manager purchase? # of machines Total annual FC ($) Range of output 1 9600 0 – 300 2 15000 301 – 600 3 20000 601 – 900
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Break-Even Problem with Step Fixed Costs
Total Cost FC + VC = TC Total Revenue BEVs FC + VC = TC 3 machines FC + VC = TC 2 machines 1 machine Quantity Step fixed costs and variable costs.
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Assumptions of Cost-Volume Analysis
One product is involved Everything produced can be sold Variable cost per unit is the same regardless of volume Fixed costs do not change with volume Revenue per unit constant with volume Revenue per unit exceeds variable cost per unit
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