1. C HAPTER -06 QUANTITATIVE TECHNIQUES FOR PLANNING AND DECISION MAKING Dr. Gehan Shanmuganathan, (DBA) 1

2. C ATERPILLAR I NC.. 2

3. Managed raw materials based on quantitative techniques Minimum order quantity management Demand management 3

4. C HAPTER OBJECTIVES 4

5. 6.1 L EARNING O BJECTIVES 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. D ATA - BASED DECISION MAKING 6

7. Data-Driven Management (DDM) An attitude and approach to management rather than a specific technique that stems from data-based decision making 7

8. W HERE 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? 8

9. F ORECASTING METHODS 9

10. 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 10

11. T YPES OF F ORECASTING M ETHODS Qualitative A prediction based on a collection of subjective hunches. Quantitative A prediction based on historical data or models, such as a time-series analysis. Adapted from Exhibit 7.2 0 100 75 50 25 199019921994199619982000200220042006 Annual Sales Forecasted Data 7.2

12. T IME SERIES ANALYSIS - M OVING AVERAGE 12

13. T IME SERIES ANALYSIS -E XPONENTIAL SMOOTHING 13

14. E RRORS 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 14

15. T YPES OF FORECASTS 15

16. T YPES 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 16

17. S CENARIO PLANNING TO MAKE GOOD USE OF FORECAST 17

18. S CENARIO PLANNING The process of preparing responses to predicted changes in conditions What the future might look like Worse and Best case scenario 18

19. T HE D ELPHI T ECHNIQUE FOR INCREASING THE A CCURACY OF F ORECASTS 19

20. T HE D ELPHI T ECHNIQUE 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 20

21. G ANTT CHARTS AND M ILESTONE CHARTS 21

22. G ANTT CHARTS 22

23. G ANTT CHARTS - H ENRY G ANTT ( SCIENTIFIC MANAGEMENT ) A chart that depicts the planned and actual progress of work during the life of the project 23

24. G ANTT C HART : O PENING A N IGHTCLUB 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 employees 09. Get booking agent for nightclub talent 10. Open for business JunJulAugSepOctNovDecJan Scheduled Completed 30 Nov

26. M ILESTONE CHARTS 26

27. M ILESTONE 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 27

28. M ILESTONE C HART : O PENING A N IGHTCLUB 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 employees 09. Get booking agent for nightclub talent 10. Open for business JunJulAugSepOctNovDecJan 1 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. P ROGRAM E VALUATION AND R EVIEW T ECHNIQUE (PERT) 29

30. P ROGRAM E VALUATION AND R EVIEW T ECHNIQUE (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 30

31. PERT N ETWORK : O PENING A N IGHTCLUB Estimated Time in Weeks Preceding Event 5None 30A 13A 30C 6D 13E 8B, F 14G 8G, 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 installation Supervise lighting installation Begin advertising club Hire club employees Get booking agent Open club for business 1I = Critical Path (thick arrow) Adapted from Exhibit 7.6 7.5

32. PERT N ETWORK : O PENING A N IGHTCLUB ( CONTINUED ) StartA B G H C D E F I J 5 30 14 8 8 8 13 30 6 8 1 Adapted from Exhibit 7.6 7.6

33. E XAMPLE A,B are two activities, B cannot start until A is finished. A takes 5 days and B takes 7 days 1 2 3 AB 5 days 7 days

34. E XAMPLE -2 B,C and D cannot start until A is completed 1 4 3 2 5 A B C D

35. S TEPS INVOLVED IN PREPARING PERT NETWORK 35

36. S TEPS 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 36

37. T IME IN PERT 37

38. “T IME ” 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 Pat h- 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 38

39. 39 C RITICAL PATH 10 70 60 50 40 30 20 A B D C E F G H 0 0 5 5 8 1010 9 9 10 11 16 24 5 5 4 3 6 7 5 8

40. B REAK - EVEN ANALYSIS 40

41. B REAK - 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 41

42. B REAK -E VEN C HART : A DDING A N EW P RODUCT Adapted from Exhibit 7.7 80 70 60 50 40 30 20 10 02030405060708090100 Revenues and costs ($ in thousands) Sales (units in hundreds) Revenues Total Costs Profit Loss Fixed Costs Variable Costs Break-Even Point 7.7

43. B REAK - EVEN FORMULA - U NITS 43 BE = _____________________ FC Unit Selling Price- Unit Variable Cost BE = _____________________ $ 300,000 $ 1,000 - $ 500 = 600 Units

44. D ECISION TREES 44

45. D ECISION 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 45

46. F IRST -Y EAR D ECISION T REE FOR N IGHTCLUB O WNER Possible AlternativesStates of Nature Conditional Values Expected Values Decision Point Nightclub only Nightclub and dinner restaurant Good season (0.6) Poor season (0.4) $100,000 -$10,000 $150,000 -$30,000 $90,000 $120,000 7.8

47. I NVENTORY CONTROL TECHNIQUES 47

48. I NVENTORY C ONTROL T ECHNIQUES 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. E CONOMIC ORDER QUANTITY (EOQ) The inventory level that minimizes both administrative costs and carrying costs 49

50. J UST -I N -T IME S YSTEM (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 50

51. LIFO V S. FIFO 51 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 OutFIFO- First In, First Out

52. P ARETO DIAGRAMS FOR PROBLEM IDENTIFICATION 52

53. P ARETO DIAGRAMS A bar graph that ranks types of output variations by frequency of occurrence 53

54. P ARETO DIAGRAMS 54

55. W RITE FIVE KEY THINGS ( AREAS ) THAT YOU CAN CRITICALLY REMEMBER IN TODAY ’ S DISCUSSION 55

56. W HAT WE DISCUSSED TODAY ? 56

57. 6.1 L EARNING O BJECTIVES 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. M ID - TERM TEST – P ROGRESS ? 58