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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?
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