Lecture 1 MGMT 661 Decision Making Managing Risks

Lecture 1 MGMT 661 Decision Making: Managing Risks, Serving the Customer, Examining the Numbers

What is this course about? · To understand · · Why do some companies thrive while others struggle or fail? Decision making · · · What resources/what amounts When Needed/scheduled/ordered Where Work to be done How Designed Who To do the work 2

Basic Functions of Businesses The management of systems or processes that create goods and/or provide services Organization Finance Operations Marketing

Value-Added The difference between the cost of inputs and the value or price of outputs. Value added Inputs Land Labor Capital Transformation/ Conversion process Outputs Goods Services Feedback Control Feedback

Food Processor Inputs Processing Outputs Raw Vegetables Metal Sheets Water Energy Labor Building Equipment Cleaning Making cans Cutting Cooking Packing Labeling Canned vegetables

Hospital Process Inputs Doctors, nurses Hospital Medical Supplies Equipment Laboratories Processing Outputs Examination Surgery Monitoring Medication Therapy Healthy patients

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 · 7

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

Key Decisions of Businesses · 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 · 9

Scope of Operations Management · Operations Management includes: Forecasting · Capacity planning · Scheduling · Managing inventories · Assuring quality · Deciding where to locate facilities · And more. . . · 10

Types of Operations Goods Producing Examples Farming, mining, construction, manufacturing, power generation Storage/Transportation Warehousing, trucking, mail service, moving, taxis, buses, hotels, airlines Exchange Retailing, wholesaling, banking, renting, leasing, library, loans Entertainment Films, radio and television, concerts, recording Communication Newspapers, radio and television newscasts, telephone, satellites

Decision Making · System Design Capacity · Location · Arrangement of departments · Product and service planning · Acquisition and placement of equipment ·

Decision Making · System Operation Management of personnel · Inventory planning and control · Scheduling · Project Management · Quality assurance ·

Decision Making Steps of problem solving · Models · (Simple) Numerical approaches · Analysis of trade-offs · 14

Problem Solving and Decision Making n 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. 15

Models A model is an abstraction of reality. – Iconic – Analog – Mathematical Tradeoffs What are the pros and cons of models?

A Simulation Model 17

Quantitative Analysis and Decision Making n 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 18

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 19

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 Resource Amount available Assembly time 100 hours Inspection time 22 hours Storage space 39 cubic feet 20

A Linear Programming Model · Objective – profit maximization Maximize 60 X 1 + 50 X 2 · Subject to Assembly 4 X 1 + 10 X 2 <= 100 hours Inspection 2 X 1 + 1 X 2 <= 22 hours Storage 3 X 1 + 3 X 2 <= 39 cubic feet X 1, X 2 >= 0 X 1 = # of type 1 PC; X 2 = # of type 2 PC 21

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 22

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

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 · 24

The Management Scientist Software 25

Cost, Revenue and Profit Models (Course Pack - Chapter 1) (Custom Text – Chapter 5) 26

Cost Classification of Owning and Operating a Passenger Car

Cost-Volume Relationship 28

Cost-Volume Relationship 29

lc ota T t s o C V = ta o T ) C t (V s o c e l b ia r a lv C F + Amount ($) Cost-Volume Relationships e u en ev r l a t o T Fixed cost (FC) 0 Q (volume in units) 30

Amount ($) Cost-Volume Relationships 0 ve a t o T e u n e r l t i f ro P st o c l a ot T Formula (5 -8) of Course Text BEP units Q (volume in units) 31

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 32 given on the next slide.

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 33

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. · 34

Example: Ponderosa Development Corp. Thousands of Dollars 1200 Total Revenue = 115, 000 x 1000 800 600 Total Cost = 40, 000 + 105, 000 x 400 200 Break-Even Point = 4 Houses 0 0 1 2 3 4 5 6 7 8 Number of Houses Sold (x) 9 10 35

Locational Break-Even Analysis Three locations: Fixed Variable Total City Cost Akron $30, 000 $75$180, 000 Bowling Green $60, 000 $45$150, 000 Chicago $110, 000 $25$160, 000 Selling price = $120 Expected volume = 2, 000 units Total Cost = Fixed Cost + Variable Cost x Volume 36

Locational Break-Even Analysis Annual cost Graph of Break-Even Points – $180, 000 – – $160, 000 – $150, 000 – urve – c t s o co $130, 000 – g a ic – Ch $110, 000 – n ee r – g G rve n i – wl t cu o $80, 000 – B cos t s – co n $60, 000 – ro rve k – A cu – Akron Bowling Green $30, 000 – lowest cost – cost $10, 000 – | | | – 0 500 1, 000 1, 500 2, 000 Volume Chicago lowest cost | | 2, 500 3, 000 37

Example: Step Fixed Costs A manager has the option of purchasing 1, 2 or 3 machines · Fixed costs and potential volumes are as follows: · # of machines 1 2 3 Total annual FC ($) 9600 15000 20000 Range of output 0 – 300 301 – 600 601 – 900 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? · 38

Break-Even Problem with Step Fixed Costs Total Cost C T C= V + FC Total Revenue + FC TC = C V BEVs 3 machines C T = C F V + C 2 machines 1 machine Quantity Step fixed costs and variable costs. 39

Assumptions of Cost-Volume Analysis 1. 2. 3. 4. 5. 6. One product is involved Everything produced can be sold Variable cost per unit is the same regardless of volume Fixed costs do not change with volume Revenue per unit constant with volume Revenue per unit exceeds variable cost per unit 40