)) eSlh-The Review School of laezowedtancy Managemend Advisory Services MAS-09: QUANTITATIVE TECHNIQUES QUANTITATIVE TECHNIQUES refer to the application of mathematics in actual business operations. It 1s also known as quantitative methods. OPERATIONS RESEARCH refers to the discipline of applying quantitative methods in organizational planning and control. TYPICAL QUANTITATIVE METHODS APPLICATIONS, Corporate planning models Forecasting mechanism Productivity and efficiency measure Inventory planning and control Resource allocation NETWORK MODELS NETWORK MODELS involve project scheduling techniques that are designed to aid large-scale projects that have many interrelated activities. These models aid management in pr controlling costs that pertain to certain projects or business activities. the planning and control of redicting and COMMON PROJECT SCHEDULING TECHNIQUES, 1. Gantt or bar chart 2. Program Evaluation and Review Technique (PERT) 3. Critical Path Method (CPM) SAMPLE APPLICATIONS: building constructions, book publishing, new product planning, feasibility studies, research and development projects, and audit planning and scheduling GANTT CHARTS: This is a graphical illustration of @ scheduling technique in the form of a horizontal bar chart. The project is divided into different sub-projects called activities or tasks (also called ‘milestones’). The starting and ‘completion time of activity is estimated and a bar chart is prepared showing each activity as a horizontal bar along a time scale. Tasks A 8 —_—— March April May June Queries: 1, Which task takes the longest time to finish? 2. All tasks are being done simultaneously in what particular month? PROGRAM EVALUATION AND REVIEW TECHNIQUE (PERT) - CRITICAL PATH METHOD (CPM) PERT is developed to aid managers in controlling large-scale, complex problems. PERT-RI it + PERT diagram is @ probabilistic diagram of the interrelationship of a complex series of activities; it is a free-form network showing each activity as line between events. += EVENTS - discrete moment in time representing the start or finish of an activity; they consume no resources. ‘+ ACTIVITIES - tasks to be accomplished; they consume resources (including time). > Series - an activity that cannot be done unless another activity is undertaken first. > Parallel ~ an activity that can be performed simultaneously with another activity. CPM, like PERT, is a network technique; however, CPM uses deterministic time and cost estimates; among its advantages include cost estimates plus the concept of crash efforts and costs. Page 1 of 6 pagesReSA- The Kewiew School of OccouTamey MAS-09 QUANTITATIVE TECHNIQUES CPM-RELATED TERMINOLOGIES + CRITICAL PATH ~ is longest path through the PERT network. + EXPECTED TIME (te) = is the average time an activity would require if it were repeated several times. te = (to + 4tmt to) +6 Where: to - optimistic time; tm ~ most likely time; ty ~ pessimistic time ‘+ SLACK TIME - the amount of time that can be added to an activity without increasing the total time Tequired on the critical path; the fength of time an activity can be delayed without forcing a delay for the entire project. + CRASH TIME - the amount of time to complete an activity assuming that, under rush or urgent condition, all available resources were acvoted to the task (e.g., overtime, extra labor, etc.); any rash time spent in an activity normally would incur crash cost. EXERCISES: PERT-CPM 4, Dayagsky Construction Firm, Inc. will soon begin to work on a building for US Tea that was initially started by another firm that has gone out of business. The construction firm's schedule of activities and related expected completion time for US Tea project are presented in the following time table: Activity Code Activity Description Estimated Time (i A-B Obtain on-site work permits 2 B-E Repair damages done by vandals 8 B-c Inspect construction materials left on site i C-E Order and receive construction materials 2 C-D Apply tor waiver to add new materiais 2 D-E Obtain waiver to add new materials 3 €-F Perform electric work 6 F-G ‘Complete interior partitions 4 REQUIRED: 'A) Prepare the PERT network fer the US Tes project. B) What is the critical path and its expected time in weeks? C) What is the shortest path and its siack time in weeks? 2. A company is faced with the following “ERT network situation for a certain project (time in days) @ oS GS) 22, 8-10-12 a ‘A) Determine the expected time (te) for each activity. 8) Identify the critical path(s). C) What is the shortest time to complete the entwe project? PROBABILITY ANALYSIS. PROBABILITY ANALYSIS is important to decision-making becouse of the unpredictability of future events. Decision-making involves: '* RISK - this occurs when the probability distr?>ution of the possible future state of nature is known. ‘© UNCERTAINTY - this occurs when the probebility distribution of possible future state of nature is not known and must be subjectively determined. ‘The probability of an event varies from 0 tw 1 (9% to 100%). 100% or probability of 1.0 means that event is certain to occur while zero probability means the event cannot occur under any circumstances. ‘THE CONCEPT OF EXPECTED VALUE The expected value of an action 1s found by multiplying the probability of each outcome by its pay-off and summing up the products. A decision tree diagram 1s normally devised to show several possible decisions or acts and the possible consequences (outcome or events) of each act. Page 2 16 ages >)ReSla- The Review School of Uecommitoney MAS-09 QUANTITATIVE TECHNIQUES PROGABILITY-RELATED TERMINOLOGIES ‘+ Objective probabilities - calculated from either logic or actual experience. Subjective probabilities - estimates, based on judgment, of the likelihood of future events. Two events are said to be mutually exclusive if they cannot occur simultaneously. Two events are said to be independent if occurrence of ane has no effect on probability of another. The joint probability of two events is the probability that both will occur. The conditional prooability of two events is the probability that one will occur given that the other has already occurred. EXERCISES: PROBABILITY ANALYSIS Moyito Club sells cold sodas at Far Western University’s home basketball games. troquency of distribution of the demand for cups of sodas per day is presented below: In the year 2018, the Sales Volume Frequency 2,000 cups 48 days (15%) 4,000 cups 80 days (25%) 6,000 cups 144 days (45%) 8,000 cups 32 days (10%) 10,000 cups 16 days (5%) 320.days REQUIRED: Determine the projected daily demand for sodas in 2019 using: A) Deterministic approach (based on most likely event) B) Expected value approach an initial cash investment of P 440. 2. Ube-AM Rita-PM Company plans to introduce a news product that requires if the product If the product becomes successful, the net cash inflow is forecasted at P 800. However, becomes a failure, net cash inflow is estimated at P 200, REQUIRED. 'A)_ If the probability of success is 70%, what 1s the value of act "to invest?” 8) What probability-percentages should be assigned to the events ‘success’ and ‘failure’ to be indifferent between the two actions “to invest” and “not to invest?” LEARNING CURVE LEARNING CURVE describes the efficiencies arising from experience, because with experience comes increased productivity. This productivity increases with production size, but at a decreasing rate as diagrammed below: time required to perform a given task becomes ‘gressively shorter, but this is applicable only to the early stages of production. Units produced ‘The curve is expressed as a percentage of reduced time per day (vsually between 60% and 80 %) to complete a task of each doubling of cumulative production. Hence, the time required is reduced by 20% to 40% each time cumulative production is doubled. Cumulative Production IMPORTANT NOTES IN LEARNING CURVE ANALYSIS ‘The cumulative average time per unit is reduced by 2 certain percentage each time production doubles. Incremental unit time (time to produce the last unit) is reduced when production doubles. EXERCISES: LEARNING CURVE 1. A particular manufacturing job is subject to an estimated 80% experience (learning) curve. The first unit required 20 labor hours to complete. REQUIRED: ‘A) What is the cumulative average time per unit after four (4) units are completed? 8) How many hours are required to produce a total of two (2) units? ©) How many hours are required to produce the second unit? 2. Which of the following unfavorable variances would be directly affected by the relative position of & production process on the learning curve? a. Material price Labor rate b. Material usage 4d. Labor efficiency Page 3 of 6 pagesRel - The Review School of llevrvnt MAS-09 QUANTITATIVE TECHNIQUES INVENTORY MODELS INVENTORY MODELS are usually devised to minimize the costs associated with inventory while maintaining certain level of inventories needed to sustain: smaoth operations. COMPONENTS OF INVENTORY COSTS The total inventory costs are comprised of: ® CARRYING COSTS: This cost inc-eses with order size or quantity of inventory on hand. Example: Storage costs, i urance on inventory, normal spoilage, record keeping, security © ORDERING COSTS: This cost cecraases with order size or quantity of inventory on hand. Example: Delivery costs, inspection, handling, purchasing, receiving, quantity discount lost ECONOMIC ORDER QUANTITY (E0Q) 0Q refers to the number of units that should be placed every order to economize on the sum of ordering costs and carrying costs. Where: 6 9 Costs of placing one order 2Do ‘D> Annual demand or usage in units £0Q ¢ = Cast of carrying one unit for one year ¢ ‘At E0Q, a firm incurs the lowest total inventory coxis computed as follows: Total costs um = 892 (e+ ~gGGq- MAXIMUM LEAD TIME - this adds to normal lead time a reasonable allowance for further delay. NORMAL LEAD TIME USAGE = narmal lead time x average usage SAFETY STOCK = (maximum "ead tine - normal lead time) x average usage RE-ORDER POINT (without safety stock) = Normai tea¢ time usage RE-ORDER POINT (with safety stock) = Norine! lead time usage + safety stock = maximuin lead time x average usage OQ APPLICATION: ECONOMIC LOT SIZE When applied to production operations, the E0Q formuta is used to compute the Economic Lot Size (ELS) Where: 1) > Ann:a! production requirement 2Do0 + Set-up cost per batch of production é <9 Cost of carrying one unit for one year es. Page 4 of 6 pages ©RSQ. The Review School of Oecourctamey MAS-09 QUANTITATIVE TECHNIQUES EXERCISES: INVENTORY MODELS 1. Erin Company requires 40,000 shells for sts signature product, "Pearly Shirl.” The shells will be used evenly throughout the year. The cost to place one crder is P 20 while the cost to carry the shells in inventory for ‘one year is P 0.40, REQUIRED: ‘A) What is the optimal order quantity (E0Q)? 8) How many orders should be placed within the year? ©) What is the average inventory in units? Based on an EQ analysis, the optimal order quantity is 4,000 units. Annual inventory carrying costs equal 30% of the average inventory level. The company pays P 20 per unit to buy the product and P 800 to place an order. The monthly demand for the product is §,000 units. REQUIRED: Determine the following, A) Annual inventory carrying costs. 8) Annual inventory ordering costs, ©) Total inventory costs. 3. Asher subsidiary purchases 7,500 units of laundry soap per annum. The company works 300 days per year. The average or normal purchase lead time is 7 working days while maximum lead-time is 10 working days, REQUIRED: ‘A) How many units should Asher maintain as safety (buffer) stock? 8) What is Asher’s reorder point for the laundry soaps? 4, Each stock-out of a product sold by Fermina Curmpany costs P 2,000 per occurrence. The carrying cost per unit of inventory is P 5 per year and the company orders 1,500 units of product 18 times a year at a cost of 200 per order. The probability of a stock-out at various levels of safety stock is: Inits of Safety Stock Probability of a Ste 0 50% 200 30% 400 14% 600 5% 800 1% What is the optimal level of safety stock for the company? ‘a. 200 units c. 600 units b. 400 units d. 800 units ‘SOLUTION GUIDE: Safety Stock Carrying Cost + Stock-OutCost = Total Costs ° ee 200 units 400 units 600 units 800 units Carrying Cost: P 5.00 per unit (given) Maximum Stock-Out Cost: P 2,000 x 18 orders. 36,000 5. Marka Bookstore publishes a book about accounting. Set-up cost is P 10. Marka prints 675 copies of the book evenly throughout the year. The optimal production run (economic lot size) is 30. REQUIRED: ‘How much is the unit carrying cost per year? ‘SOLUTION GUIDE eis =30= \/(2x675x 10) =¢ Page 5 of € pagesReSQ- The Review School of CccowAnmey MAS-09 QUANTITATIVE TECHNIQUES LINEAR PROGRAMMING LINEAR PROGRAMMING is a mathematical tecimique ti:st helps managers to determine the volume of various products to produce when resources are iimited or scarcy sn order to maximize net income. It is a technique used to optimize an objective function (maximize revenue of profit function, or minimize a cost function), subject to constraints (such as scarce resources, minimum/maxirnum levis of production, performance, etc.) Moximize revenue OBJECTIVE 2pieces pieces 120 pieces Material Y- 4 meters 2meters 80 meters REQUIRED: Determine the following ‘A) Objective function - involving maximization of the company’s contribution margin. 8) Constraint function for Material x ©) Constraint function for Material Y D) Optimal product mix 2. Neo Corporation produces a product in S0-galion hatches. The basic ingredients used for material B are costing P 20 per gallon and for Material 4, costing P 10 per gallon. No more than 1 gallon of A can be used, and at least 15 gallons of B must be used, REQUIRED: How would the objective function {minimization of product cost) be expressed? WRAP-UP EXERCISES (TRUE OR FALSE: MULTIPLE-CHOICE) 1. Quantitative techniques help management in decision-making by way of employing various mathematical applications 'n actual business situations, 2. The critical path through a network 1s the path that has tme highest stack time. 3. Which of the following ts heavily weighted in calculating PERT’s expected time? a. Idealistic time b. Most likely time c. Optimistic time d. Pessimistic time ‘A quantitative technique useful in projecting z firm's sales and profits is the learning curve. ‘An 80% learning curve means that ‘a. The incremental time for each unit 's 80% of the time of the unit before it b. The cumulative average time is 80% vf the cumulative average time at the previous unit As production doubles, the incrementai time for @ unit is 80% of the time at the previous doubling point {As production doubles, the cumulative average time 1s 80% of the time at the previous doubling point 6. The purpose of economic order quantity (£0Q) is to minimize ‘a. the safety stock b. the inventory quantities the sum of the demand costs ard the back fog costs d. the sum of the ordering costs and noiding carrying) costs 7. The time a company should place an order 1s when inventory level has reached zero. 8. The term ‘constraints’ in a linear programming model aeneratly refers to 2. Costs Scarce resources b. Inefficiencies 4. Dependent variables c ‘age 5 of 6 pages