Principles of business management

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CHAPTER6.pptx

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Essentials of Management 10e by Andrew J. DuBrin

CHAPTER 6

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 management is an attitude, and approach rather than a specific technique.

Data-driven managers want to see the data supporting a suggestion.

Intuition and judgment still contribute.

Forecasting Methods

Qualitative and Quantitative Approaches

Qualitative forecasts are based on subjective hunches.

Judgmental forecast based on collection of subjective opinions.

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

Overconfidence trap—people overestimate accuracy of their forecasts.

Prudence trap—people make cautious forecast “just to be on safe side.”

Recallability trap—forecasts influenced by recall of extremely positive or negative incidents.

Forecasting Methods, continued (Types of Forecasts)

Rolling forecasts are those that are updated regularly.

Economic forecasts predict general level of future business activity.

Sales forecasts are primary planning document for business. Should be based on several types of data.

Technological forecasts predict what type of technological changes will take place such as digitizing all paper forms.

Forecasting Methods, continued

Scenario Planning to Make Good Use of Forecasts

Prepares responses to predicted changes in conditions based on forecasts, such as dramatic decrease or increase in demand.

Could help figure out in advance how to deal with serious business disruption, such as hurricane.

Delphi Technique for Increasing Accuracy of Forecasts

Gather forecasts from group of people.

Panelists react to the forecasts of the other panelists, and make necessary revisions.

Gantt Chart

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

Gantt Charts, continued

Can be considered a time-and-activity chart.

Especially useful for scheduling one-time projects, such as constructing a building.

Valuable and widely-used control technique.

Can depict dependent activities that must be completed in sequence.

Milestone Charts

Extends the Gantt chart by listing sub-activities needed for major activities. For example, sub-activities for finding tenants would include:

Get model office available for inspection.

Advertise in newspapers and online.

Spread word through own network.

Check credit histories of applicants.

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.

Before an activity can begin, its preceding activity must be completed.

Steps Involved in Preparing a PERT Network

List activities and events needed to complete project.

Design the network, relating activities in proper sequence.

Estimate the expected time required for each activity.

Calculate critical path—most time consuming sequence of activities/events.

Monitor to see if critical events occur on time.

Calculation of Expected Time in PERT

Expected time = O + 4M + P

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

PERT networks often specify hundreds of events and activities.

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.

Resources and cost estimates: The amount of resources and costs required are estimated, as with time estimates.

Break-Even Analysis

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.

BE =	Total Fixed Costs
	Price per Unit – Variable Cost

Break-Even Analysis, continued

Advantages and Limitations of Break-Even Analysis

Keeps focus on volume of activity necessary to justify new expense (e.g. equipment replacement).

Validity depends on accurate estimates of costs and revenues.

Relationship between variable costs and sales may be complicated.

In reality, unit costs may decrease with increased volume.

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.

Conditional values are expected outcomes that depend on external factors such as reliability of equipment.

Inventory-Control Techniques

Economic Order Quantity (EOQ)

EOQ = inventory level that minimizes both administrative and carrying costs.

EOQ = square root of 2DO

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.

Referred to as lean manufacturing because “fat” is minimized.

All members of the supply chain synchrony.

Reducing waste is core JIT philosophy.

Just-in-Time System Procedure and Techniques

Short production lead times. (Minimize the time between arrivals of raw materials or components and shipment of products.)

High inventory turnover. (Goal is zero inventory and stockless production.)

Neatness counts. (A JIT plant that follows the Japanese tradition is immaculate. The factory floor is a clean and neat as the showroom.)

Advantages and Disadvantages of the JIT Inventory System

Expenses associated with maintaining large inventory can be greatly reduced.

JIT controls can lead to organizational commitment to quality in many ways including finished goods.

JIT must be placed in a supportive environment.

JIT only applicable to highly repetitive manufacturing.

Suppliers might simply build up inventories in their own plants an add that cost to their prices.

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

Pareto Diagram