Quantitative Models

for
Decision Making
Prepared by:
ELLEN-ZYRA R. CAPILLAS
 Quantitative Evaluation
 Numbers“Tell me what you learned.”
 Facts
 Experiments
 Objective ---Revision
Quizzes questions
Questionnaires
 Analyzing Facts
 Number Support Outcomes
Quantitative Methods for Decision
Making
o Inventory Models o Queuing Theory

o Network Models o Forecasting

o o Simulation
Regression Analysis Inventory Models

o Linear Programming o Sampling Theory

o Statistical Decision Theory

Help to decide:
- How much to order
- When to order
 ECONOMIC ORDER QUANTITY
MODEL
Assumptions:
Total cost =and
 Known Holding
Holding
constantCost
Cost + Ordering
demand OrderingCost
Cost
  This is used to calculatewhere:the number of items that

𝟐 𝑫𝑺
Known and constant lead time

√
 
should Annual Order
be   ordered
Holding Cost
at one
Cost
S = =Setup
time= to cost/Order
minimize the
costtotal
𝑸̽ =
yearly costTotal
Instantaneous Cost
of placing D== and
receipt
orders of material
carrying
Annual the items in
demand
Q 
𝑯No quantity
D = Annual
Order
inventory. discounts
Quantity
Demand H = Holding cost/Unit/Year
 Only order (setup) cost and holding cost
HQ = Holding
Order Quantity
Cost/Unit/Year
 No stockouts
S = Order Cost
 ECONOMIC ORDER QUANTITY
MODEL
A museum of natural history is having problems managing their
inventories. Low inventory turnover is squeezing profit margins
and causing cash-flow problems.
A Class A item, a birdfeeder is also a top-selling item.
Sales: 18 units/week
Purchase cost: $60
Order cost: $45
Annual holding cost: 25% of purchase cost
52-week year
Management has been ordering in lots of 390 units.
 ECONOMIC ORDER QUANTITY
MODEL
D = Total Demand
936/year
Q = Order Quantity
390/0rder
S = Setup/order cost
$ 45/order
H = Holding cost
=0.24 * 60
= $15/unit/year
ECONOMIC ORDER QUANTITY
MODEL
 PRODUCTION ORDER QUANTITY
MODEL
Assumptions:
 Known and constant demand
where:
𝟐 𝑫𝑺
ThisisKnown and constant lead time

√
an economic order Squantity
= Setup technique
cost/Orderapplied
cost
𝑸𝒑=  Partial orders.
to production receipt of material
D = Annual demand
𝑯 (𝟏− 𝒅 / 𝒑)
 No quantity discounts H = Holding cost/Unit/Year
 Only order (setup) cost
d =and holding
Daily costrate
demand
 No stockouts p = Daily production rate
 PRODUCTION ORDER QUANTITY
MODEL

A plant manager of a chemical plant must determine the lot size

for a particular chemical that has a steady demand of 30
barrels/day. The production rate is 190 barrels/day, annual
demand is 10,500 barrels, setup cost is $200, annual holding cost
is $0.21/barrel, and the plant operates 350 days/year. Determine
the production order quantity.
PRODUCTION ORDER QUANTITY
MODEL
 BACK ORDER INVENTORY
MODEL
This is an inventory model used for planned shortages.

where:
B = Unit Backorder Cost
𝟐 𝑫𝑺 𝑩+ 𝑯
𝑸𝒃=
√
𝑯 𝑩 ( ) D = Annual Demand
H = Holding Cost
S = Set-up/Order Cost
 QUANTITY DISCOUNT
MODEL

 Answers how much to order & when to order


AnAllows quantity
inventory modeldiscounts
used to minimize the total cost
– Reduced
when quantityprice whenare
discounts item is purchased
offered in larger
by suppliers.
quantities
– Other EOQ assumptions apply
 Trade-off is between lower price & increased holding
cost
Quantitative Methods for Decision
Making
o Inventory Models o Queuing Theory

o Network Models o Forecasting

o o
Regression Analysis Queuing Theory Simulation

o Linear Programming o Sampling Theory

o Statistical Decision Theory

 QUEUING
THEORY
Queue
ArrivalCharacteristics:
Service Mechanism:
Process:
 How, from the set of customers waiting for service, do we

TheA
Howdescription
queuing
customerstheory
ofarrive
theisresources
one that needed
describes
for service
how to
choose the one to be served next

determine
 begin
How thethe
arrivals
Do we have: number are of
distributed
service units
in time
that will minimize
Service to customers Economic considerations

both
How
Whether
customer
longthere
- balking the
waiting
service
is a finite
time
willand
population
takecost of service.
of customers or an
 The
infinite
number
number
- reneging of servers available
 Whether the servers are in series or in parallel
- jockeying
 Whether
- a queue of finite capacity
preemption or (effectively) of infinite
is allowed
capacity
 QUEUING
THEORY
Types of Queuing Systems:
 Single line – Multiple
Single phase
phase service

Arrivals Queue Served Units

Service/
Phase 1 Phase 2
Process
 QUEUING
THEORY
Types of Queuing Systems:
 Multiple line, Single phase service

Cashier 1
Arrivals Queue Served Units

Cashier 2
 QUEUING
THEORY
Types of Queuing Systems:
 Multiple line, Multiple phase service
Phase 1 Phase 2 Served
Arrivals Queue Units
Check in 1

Check in 2
 QUEUING
THEORY
Types of Queuing Systems:
 Single line, Multiple phase service
Phase 1 Phase 2
Arrivals Queue Check in Waiting for Service

Service
Served
Units
Quantitative Methods for Decision
Making
o Inventory Models o Queuing Theory

o Network Models o Forecasting

o o
Regression Analysis Network Models Simulation

o Linear Programming o Sampling Theory

o Statistical Decision Theory

These are models where large
complex tasks are broken into
smaller segments.
 THE PROGRAM EVALUATION REVIEW
EVALUATION (PERT)

A technique which enables engineer managers to

schedule, monitor, and control large and complex projects
by employing three time estimates for each activity.
 THE PROGRAM EVALUATION REVIEW
EVALUATION (PERT)
Steps on PERT planning:

1. Identify activities and milestones

2. Determine the proper sequence of the activities
3. Construct a network diagram
4. Estimate the time required for each activity
5. Determine the critical path
6. Update the PERT chart as the project progresses
 THE PROGRAM EVALUATION REVIEW
EVALUATION (PERT)

The optimistic time - the minimum time required to

complete a task

The pessimistic time - the maximum time required to

complete a task

The most likely time - an estimate of how long the task

will actually take
THE PROGRAM EVALUATION REVIEW
EVALUATION (PERT)

ET = (optimistic time + (4 x most likely time) + pessimistic time) / 6

 THE CRITICAL PATH METHOD (CPM)

This is a network technique using only one time factor per

activity that enables engineer managers to schedule,
monitor, and complex projects.
 THE CRITICAL PATH METHOD (CPM)

Steps on CPM planning:

1. Specify individual activities

2. Determine the sequence of activities
3. Draw the network diagram
4. Estimate the time required for each activity
5. Determine the critical path
6. Update the CPM diagram as the project progresses
THE CRITICAL PATH METHOD (CPM)

CPM’s Four Key Elements:

 Critical Path Analysis
 Float Determination
 Early Start & Early Finish Calculation
 Late Start & Late Finish Calculation
 THE CRITICAL PATH METHOD (CPM)

Critical Path
Analysis

Start Activity 1 Activity 3 Activity 4 Finish

Start Activity 2 Activity 3 Activity 4 Finish
Start Activity 2 Activity 5 Activity 4 Finish
 THE CRITICAL PATH METHOD (CPM)

Float Determination

5+7+2 = 14 5+7+2 = 14
14 - 12 = 2 14 - 9 = 5
 THE CRITICAL PATH METHOD (CPM)

Early Start and

Early Finish
Calculation

Forward Pass

EF = ES + Duration - 1 ES = EF (Previous Act.) + 1 EF = ES + Duration - 1

EF = 1 + 5 – 1 = 5 ES = 5 + 1 = 6 EF = 6 + 7 – 1 = 12
 THE CRITICAL PATH METHOD (CPM)

Late Start and Late

Finish Calculation

Backward Pass

LF = EF LF = LS (Previous Act.) – 1 LS = LF – Duration + 1

LS = LF – Duration + 1 LF = 13 – 1 = 12 LS = 12 – 7 + 1 = 6
LS = 14 – 2 + 1 = 13
Quantitative Methods for Decision
Making
o Inventory Models o Queuing Theory

o Network Models o Forecasting

o Regression Analysis Forecasting o Simulation

o Linear Programming o Sampling Theory

o Statistical Decision Theory

 FORECASTING

It may be defined as “the collection of past and current

information to make predictions about the future.”
Quantitative Methods for Decision
Making
o Inventory Models o Queuing Theory

o Network Models o Forecasting

o o Simulation
Regression Analysis Regression Analysis

o Linear Programming o Sampling Theory

o Statistical Decision Theory

 REGRESSION ANALYSIS

This is a forecasting method that examines the association

between two or more variables. It uses data from previous
periods to predict future events.
Quantitative Methods for Decision
Making
o Inventory Models o Queuing Theory

o Network Models o Forecasting

o Regression Analysis Simulation o Simulation

o Linear Programming o Sampling Theory

o Statistical Decision Theory

 SIMULATION

This is a model constructed to represent reality, on which

conclusions about real-life problems can be used.
Quantitative Methods for Decision
Making
o Inventory Models o Queuing Theory

o Network Models o Forecasting

o Regression Analysis Linear o Simulation

Programming
o Linear Programming o Sampling Theory

o Statistical Decision Theory

 LINEAR PROGRAMMING

This is used to produce an optimum solution within the

bounds imposed by constraints upon the decision.
 LINEAR PROGRAMMING

o Linear Equation a0 + a1 x1 + a2 x2 + a3 x3 + . . . + an xn = 0

o Decision Variables
o Objective Function
o Constraints
o Non-negativity Constraints
 LINEAR PROGRAMMING

Linear Programming Problem Formulation

1. Identify the decision variables;

2. Formulate the objective function; and
3. Identify and formulate the constraints.
4. A trivial step, but one you should not forget, is writing
out the non-negativity constraints.