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

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Basic Functions of Businesses
The management of systems or processes that
create goods and/or provide services
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Value-Added
The difference between the cost of inputs and
the value or price of outputs.
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Food Processor
Outputs
Inputs
Processing
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Hospital Process
Inputs
Processing
Outputs
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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

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Manufacturing vs Service
Characteristic
Manufacturing
Service
Output
Tangible
Intangible
Customer contact
High
Low
Uniformity of input
Low
High
Labor content
Low
High
Uniformity of output
Low
High
Measurement of productivity
Easy
Difficult
Opportunity to correct quality problems
Low
High
High
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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

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Scope of Operations Management

• Operations Management includes
• Forecasting
• Capacity planning
• Scheduling
• Managing inventories
• Assuring quality
• Deciding where to locate facilities
• And more . . .

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Types of Operations
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Decision Making

• System Design
• Capacity
• Location
• Arrangement of departments
• Product and service planning
• Acquisition and placement of equipment

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Decision Making

• System Operation
• Management of personnel
• Inventory planning and control
• Scheduling
• Project Management
• Quality assurance

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Decision Making

• Steps of problem solving
• Models
• (Simple) Numerical approaches
• Analysis of trade-offs

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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.

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Models
A model is an abstraction of reality.
Tradeoffs
What are the pros and cons of models?
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A Simulation Model
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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

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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

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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 3 cubic ft
Resource Amount available
Assembly time 100 hours
Inspection time 22 hours
Storage space 39 cubic feet
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A Linear Programming Model

• Objective profit maximization
• Maximize 60X1 50X2
• Subject to
• Assembly 4X1 10X2 lt 100 hours
• Inspection 2X1 1X2 lt 22 hours
• Storage 3X1 3X2 lt 39 cubic feet
• X1, X2 gt 0

X1 of type 1 PC X2 of type 2 PC
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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

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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

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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

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The Management Scientist Software
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Cost, Revenue and Profit Models(Course Pack -
Chapter 1)(Custom Text Chapter 5)
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Cost Classification of Owning and Operating a
Passenger Car
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Cost-Volume Relationship
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Cost-Volume Relationship
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Cost-Volume Relationships
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Cost-Volume Relationships
Profit
Total revenue
Amount ()
Total cost
Formula (5-8) of Course Text
0
BEP units
Q (volume in units)
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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.

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Example Ponderosa Development Corp.

• Employee Monthly Salary
• President 10,000
• VP, Development 6,000
• VP, Marketing 4,500
• Project Manager 5,500
• Controller 4,000
• Office Manager 3,000
• Receptionist 2,000

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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.

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Example Ponderosa Development Corp.
1200
Total Revenue 115,000x
1000
800
600
Thousands of Dollars
Total Cost 40,000 105,000x
400
200
Break-Even Point 4 Houses
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0
1
2
3
4
5
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7
8
9
10
Number of Houses Sold (x)
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Locational Break-Even Analysis
Three locations
Total Cost Fixed Cost Variable Cost x Volume
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Locational Break-Even Analysis Graph of
Break-Even Points
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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
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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.
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Assumptions of Cost-Volume Analysis

1. One product is involved
2. Everything produced can be sold
3. Variable cost per unit is the same regardless of
   volume
4. Fixed costs do not change with volume
5. Revenue per unit constant with volume
6. Revenue per unit exceeds variable cost per unit