1. Managing Risks, Serving the Customer, Examining the Numbers
Lecture 1
MGMT 661
Decision Making:
Managing Risks, Serving the Customer, Examining the Numbers

2. 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

3. Basic Functions of Businesses
The management of systems or processes that create goods and/or provide services
Organization
Finance
Operations
Marketing

4. 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

5. Food Processor Inputs Processing Outputs Raw Vegetables Cleaning
Canned vegetables
Metal Sheets
Making cans
Water
Cutting
Energy
Cooking
Labor
Packing
Building
Labeling
Equipment

6. Hospital Process Inputs Processing Outputs Doctors, nurses Examination
Healthy patients
Hospital
Surgery
Medical Supplies
Monitoring
Equipment
Medication
Laboratories
Therapy

7. 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

8. 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

9. 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

10. Scope of Operations Management
Operations Management includes:
Forecasting
Capacity planning
Scheduling
Managing inventories
Assuring quality
Deciding where to locate facilities
And more . . .

11. 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

12. Decision Making System Design Capacity Location
Arrangement of departments
Product and service planning
Acquisition and placement of equipment

13. Decision Making System Operation Management of personnel
Inventory planning and control
Scheduling
Project Management
Quality assurance

14. Decision Making Steps of problem solving Models
(Simple) Numerical approaches
Analysis of trade-offs

15. 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.

16. Models Tradeoffs A model is an abstraction of reality.–
Iconic
Analog
Mathematical
Tradeoffs
What are the pros and cons of models?

17. A Simulation Model

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. The Management Scientist Software

26. Cost, Revenue and Profit Models (Course Pack - Chapter 1) (Custom Text – Chapter 5)

27. Cost Classification of Owning and Operating a Passenger Car

28. Cost-Volume Relationship

29. Cost-Volume Relationship

30. 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)

31. Cost-Volume Relationships
Profit
Total revenue
Amount ($)
Total cost
Formula (5-8) of Course Text
BEP units
Q (volume in units)

32. 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.

33. 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

34. 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.

35. 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)

36. 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

37. 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

38. 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

39. 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.

40. 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