Quantitative Techniques for Planning and Decision Making

Data-Based Decision Making Decision are based on facts rather than impression or guesses. Data-driven management uses high quality information. Data-driven managers want to see the data supporting a suggestion. Intuition and judgment still contribute.

Forecasting Methods Qualitative and Quantitative Approaches a. Qualitative forecasts are based on subjective hunches. b. Judgmental forecast based on collection of subjective opinions. c. Time-series analysis (a quantitative technique) estimates future based on past trends, such as average growth per year.

Forecasting Methods, continued Forecasting errors or traps for both qualitative and quantitative approaches a. Overconfidence trap—people overestimate accuracy of their forecasts. b. Prudence trap—people make cautious forecast “just to be on safe side.” c. Recallability trap—forecasts influenced by recall of extremely positive or negative incidents.

Forecasting Methods, continued (Types of Forecasts) 1. Economic forecasts predict general level of future business activity. 2. Sales forecasts are primary planning document for business. Should be based on several types of data. 3. Technological forecasts predict what type of technological changes will take place such as digitizing all paper forms.

Forecasting Methods, continued Scenario planning prepares responses to predicted changes in conditions based on forecasts, such as dramatic decrease or increase in demand. Delphi technique is used to gather forecasts from group of people. Forecasts are revised as panelists react to the forecasts of the other panelists.

Gantt Chart Compares planned and actual progress on project. Can be complex; basic version is presented below.

Milestone Charts Extends the Gantt chart by listing subactivities needed for major activities. For example, subactivities for finding tenants would include: 1. Advertise in newspapers and online. 2. Spread word through own network. 3. Check credit histories of applicants. 4. Prepare leases for accepted applicants.

Program Evaluation and Review Technique (PERT) PERT uses a network model to schedule activities and events. An event (or milestone) is a point of decision or the accomplishment of a task. An activity is a time-consuming aspect of a project, or simply a task that must be performed.

Steps Involved in Preparing a PERT Network 1. List activities and events needed to complete project. 2. Design the network, relating activities in proper sequence. 3. Estimate the expected time required for each activity. 4. Calculate critical path—most time consuming sequence of activities/events. 5. Monitor if critical events occur on time.

Calculation of Expected Time in PERT Expected time = O + 4M + P 6 O = optimistic time M = most probable time P = pessimistic time ( Denominator is 6 because O counts for 1, M for four, and P for 1.)

Nucleus of PERT Total time for three tasks = Completion time for project

Advanced Considerations in PERT 1. Refined calculation of expected times: The optimistic, pessimistic, and most probable times are based on a frequency distribution. Optimistic and pessimistic times become upper and lower ten percentiles. 2. Resources and cost estimates: The amount of resources and costs required are estimated, as with time estimates.

Break-Even Analysis Total Fixed Costs BE = _______________________ Price per unit – Variable cost Break-even analysis must be calculated frequently because fixed and variable costs may change suddenly. Break-even analysis keeps eye on volume of activity needed to justify expense.

Decision Trees Graphically illustrates alternative solutions available to solve a problem. Designed to estimate the outcome of a series of decisions, such as expanding operations. Expected value is average value if decision is made many times under certain conditions. Multiplying conditional values by payouts results in the expected values.

Inventory-Control Techniques Economic Order Quantity (EOQ) EOQ = square root of 2DO C D = annual demand in units for product O = fixed costs of handling the order C = annual carrying cost per unit

Inventory Control Techniques, continued Just-in-Time System Purpose is to minimize inventory and move it into the plant exactly when needed. Key principle is to eliminate excess inventory by producing or purchasing exact amount of items, only when needed. Reducing waste is core JIT philosophy.

Just-in-Time System Procedure and Techniques 1. Kanbans (cards for requirements) 2. Demand-driven pull system 3. Short production lead times 4. High inventory turnover (goal is zero inventory) 5. Designated areas for receiving 6. Designated containers for storage 7. Neatness counts

LIFO versus FIFO Accounting method that relates to stocking inventory. Last in, first out (LIFO) means that you sell first the last item received in stock. First in, first (FIFO) out means that you sell first the inventory you had in stock the longest. LIFO and FIFO have storage (such as aging inventory) and tax implications.

Pareto Diagram: Often used to identify most important problems or cause that affect quality. Here are data on credit-card applications.