Quantitative Methods- Concepts and

Applications
Session 9

Stock Control Problem,

Project Management
Dr. Meera Mehrotra
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 Session Plan 9
• Finish Linear programming
• Stock control problem and EOQ model
• Explain why complex projects require planning
and management
• Develop network diagram for a project
• Gantt Diagram

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 Quiz
Suppose a firm produces two products X1 and X2. Each unit of
product X1 contributes Rs. 30 to profit and each unit of product
X2 contributes 40 to profits. The production of these products
require inputs A, B and C and their available quantities are 14, 10
and 4 respectively. It is given that production of one unit of
product X1 requires 2 units of input A, 1 unit of input B and does
not require input C. And the production of one unit of product
X2 requires 2 units of input A, 2 units of input B and 4 units of
input C. Formulate the above problem as a linear programming
problem.

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 Quiz - Answer
Suppose a firm produces two products X1 and X2. Each unit of product X1
contributes Rs. 30 to profit and each unit of product X2 contributes 40 to
profits. The production of these products require inputs A, B and C and their
available quantities are 14, 10 and 4 respectively. It is given that production of
one unit of product X1 requires 2 units of input A, 1 unit of input B and does
not require input C. And the production of one unit of product X2 requires 2
units of input A, 2 units of input B and 4 units of input C. Formulate the above
problem as a linear programming problem.
Maximise: π = 30 X1 + 40 X2 (objective function)
Subject to: 2 X1 + 2 X2 ≤ 14 (Input A constraint)
1 X1 + 2 X2 ≤ 10 (Input B constraint)
X2 ≤ 4 (Input C constraint)
X1, X2 > 0 (non-negativity constraint)

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 Case Study: Production of Washing Machines

• Beacon Co. is a manufacturer of washing machines. It currently sells

two models of washing machines: the Arkel and the Kallex. At the start
of every production cycle, Beacon must decide how many units of each
washing machine to produce, given its available resources.
• In the coming production cycle, Beacon faces key resource constraints.
In particular, it has only 3,132 hours of labor, 1,440 feet of rubber
hosing, and 200 drums available.
• Selling each Arkel unit earns the company a profit of $350 while selling
each Kallex unit earns the company a profit of $300. At the same time,
manufacturing each Arkel unit requires 18 hours of labor, 6 feet of
rubber hosing, and 1 drum, while manufacturing each Kallex unit
requires 12 hours of labor, 8 feet of rubber hosing, and 1 drum. Details
of the relevant facts are summarised in table "Summary of Production
of Washing Machines".
• Based on these facts and the assumption that 100% of production will
be sold, Beacon must decide how many units of each washing machine
to produce in the coming production run to maximise profits.
•

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Case Study: Production of Washing Machines ( contd)

Summary of production of washing machines

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Case Study: Production of Washing Machines ( contd)

where X1 and X2 represent the decision variables, that is, the number of Arkel
and Kallex units produced, respectively

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 Case Study: Production of Washing Machines ( contd)

• Beacon should produce 122 units of Arkel and 78 units of Kallex washing
machines leading to an optimised profit of $66,100
• An intuitive response might have been to focus all production on the
washing machine that provides the greater profits per unit (ie, Arkel).
• However, because of the resource constraints -> would not have led to a
situation where profits are maximised.
• Linear programming to analyse the business problem leads to a
production mix that definitively maximises profits.

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 Sensitivity analysis
Till now assumed- all the parameters of the LP model are known and
constant so that there is no provision of risk or uncertainty.
However, in reality- not true for eg.
In a production planning problem, changes in availability of resources;
unit profits may change due to changes in selling prices and cost of
production; resource requirements may change in response to changes
in technology and introduction of some new constraints.
So important for a manager- know how optimal solution would be
affected if any changes in input data used for model
Sensitivity analysis- used to analyse consequences of any changes in
the inputs used in optimal solution obtained
Some may not impact optimal solution, some may - a new optimal
solution involving different objective function value- substantial - even
make earlier solution infeasible

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 Sensitivity analysis
• Changes in the coefficients of the objective function
• Changes in the right side constraints of the constraints
• Changes in the left hand side constraints of the constraints
• Addition or deletion of a constraint

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Case Study: Production of Washing Machines ( contd)

where X1 and X2 represent the decision variables, that is, the number of Arkel
and Kallex units produced, respectively

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 The Stock-Control Problem- Case study –
Computer Repairs company
• Assume that we have been asked to assist the manager of a company with a
stock-control problem. The company specialises in the maintenance and repair
of business PC systems and much of its market consists of local small- and
medium-sized businesses which have taken out an annual contract with the
repair company. Under this contract the repair company guarantees to repair a
customer's PC within 24 hours or to provide an equivalent replacement until
the repair is effected. The company prides itself on customer service, so it is
keen to ensure that its 24-hour target is met wherever possible. No other local
company offers this type of guarantee and the company sees this as a major
part of its competitive advantage in the marketplace. However, in order to
meet this target, the company has to have an efficient and effective stock
system so that adequate supplies of spare parts are readily available. Clearly if
the service engineer finds that a PC requiring repair needs a specific
replacement part - say a new graphics card - then the company cannot afford
to be in the position of having to order this from the supplier and wait for
delivery if it is to meet its guaranteed repair time.

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 The Stock-Control Problem- Case study –
Computer Repairs company

• The company can purchase these from the supplier at £100 each and
anticipates that over the coming 12 months 250 cards will be needed. The
supplier will supply any quantity we require and because the supplier is
local, delivery of the order is immediate. The company, however, also
realises that placing an order incurs certain costs: someone has to find the
time to get the order sent off, when the order is received it has to be
checked to ensure that what was ordered has been supplied, payment
then has to be authorised and so on. The best guess of the company is
that all of this 'costs' the company £50 each time an order is sent. The
basic problem the company currently faces is: how many of these cards
should be ordered now from the supplier?
• Can you advise the company on a suitable decision?

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 The Stock-Control Problem- Case study –
Computer Repairs company

• One approach: order the quantity of cards now require over the next 12
months- guarantee we will have the card in stock when required.
• However, problem- company will have to spend £25 000 (250 x £100) on the
stock now and this capital will be tied up in the stock for most of the year.
• Problem- looking after the stock over this period - costs relating to security,
insurance, obsolescence, etc.
• Alternative: placing several orders throughout the year.
• Now for 50 cards; further order, every 2 months.
• Adv: capital invested in stock lower but increases the chance of not having a
card in stock when needed.
• Classic dilemma of manager with stock-control responsibility: on the one hand
trying to minimise the costs incurred and other trying to ensure that a
'stockout' (running out of stock) does not occur

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 Costs Involved in Stock Control

• Order Costs: costs incurred whenever a stock order is generated.

Administrative and managerial activities linked to the order process; costs
of transportation; receiving and inspecting orders; finance and accounting
support.
• Often assumed to be fixed, regardless of the size of the order, in stock-
control models.
• In our problem the order cost is assumed to be £50.
• Real life this cost may be difficult to quantify and the full cost may be
hidden

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 Costs Involved in Stock Control

• Purchase Cost: actual cost of purchasing the stock item from the supplier.
• Simpler stock-control models - assumed to be constant.
• Sophisticated models - build in discount systems, i.e. lower unit purchase
cost with larger orders.
• We shall assume a fixed cost of £100 per item.
• Holding Costs: associated with the company holding a fixed quantity of
stock over a given period of time. Such costs can include the cost of capital
tied,
• one graphics card in stock for one year it would cost £15 (made up of the
opportunity cost of the £100 purchase cost, security costs and the like).

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 Costs Involved in Stock Control

• Stockout Costs: incurred when stock is not available.

• Made up of two elements.
(1) Cost incurred in obtaining supplies of the item at short notice- another
supplier who charges a higher price or by sending someone to supplier's
premises to collect directly
(2) a 'goodwill' cost: more difficult to quantify - customer may in future take
their business elsewhere or complain to other customers' ultimately leading
to a loss of business
- basic stock-control model we shall ignore

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 The Stock-Control Decision

• Decision: What quantity of stock to order at any one time.

• Following this decision - a subsequent decision - on how frequently to order
stock.
• Inherent conflict between the order costs involved and the holding costs
involved in the decision, since both of these will vary depending on the
quantity ordered each time.
• Both - affected differently by order-quantity decision.
• Larger the quantity ordered at any one time - lower the total order costs over
a year- fewer orders
• Holding costs will increase with order size, since larger quantities of stock will
be held at any one time
• Manager - Minimise the total costs involved - sum of both order costs and
holding costs

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 Example

• Determine the total order costs if the manager decides:

a. to place orders for 10 units at a time b. to place orders for 250 units at
a time.
If Q 10:
Require- 25 (250/10) orders through the year at a cost of £50 each order
-> Total order cost, OC, of £1250.
If Q = 250 : require only 1 order each year -> Total order costs = £50.

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 Example
Holding costs
• Calculate the average number of items held in stock at any one time and then
multiply this by Ch.
If Q = 10 scenario, 10 items will arrive from the supplier- Gradually over time
used up.
Manager would like to see is that on the day that the last of these 10 items is used
the next order for 10 items arrives from the supplier so that no stockout ever
occurs, while at the same time ensuring we are not carrying too many stock items.
So, at any one time, the average number of items held in stock will be Q/2
- since at the beginning have Q items; at the end have 0 items
• The holding cost:
• Q/2 × Ch= 10/2 × £15 = £75
• So, with an order size of 10 units, OC will be £1250 and HC £75.

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 Example

• Calculate holding costs when Q = 250.

• HC = 250/2 x £15 = £1875
• and OC = £50 for this value of Q.
• Numerically, the two cost elements move in opposite directions as we
alter Q, the size of our stock order.
• Order costs will decrease as Q increases but holding costs increase.
• Need some compromise position between the two.

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Order costs and holding costs

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 Order costs and holding costs

OC and HC take equal values when Q is around 40 units.

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 Order costs,
Total holding
Cost costs and Total cost

Total cost will be minimised where OC = HC.

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 The Economic Order Quantity Model
• Economic order quantity model: establishing the value for Q
that minimises total cost.
• This value for Q is referred to as the economic order quantity
(EOQ).
• To determining the value of Q - EOQ formula-
• Optimum quantity of stock to order where OC = HC.

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 The Economic Order Quantity Model

• The manager to consider trying to minimise the total costs involved both
the order costs and the holding costs.
• Effect of different decisions
• D - the annual demand for the item, here 250
• Co - the cost of placing each order, £50
• Ch - the cost of holding an item for one year, £15
• Q - the size of the order to be placed (currently unknown).

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 Example
• Using the appropriate values for the variables shown, calculate the EOQ for
this problem.

( )
• = 40.82

• So, EOQ = 40.82 units is the order size that will minimise the total costs
involved and balance the conflict between order costs and holding costs.
• Show: these two costs will be equal at this value of Q:

• Order cost: X × £50 = £306.22

.

.
• Holding cost: : X £15 = £306.15

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 Project Management

• Why complex projects require planning and managing?

• Develop a network diagram for a project
• Incorporate time information into a network diagram and identify the
critical path for a project
• Gantt charts for a project
• Project- large or small, need detailed planning

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 Characteristics of a Project

Projects
• have clearly defined aims and objectives- top management
• have a set completion date;
• involve a set of related activities which comprise the project;
• have resources allocated specifically to them in form of a project budget –
financial or resources like manpower
• involve a team of people
• Project management has to be within time limit, within budget and in
terms of aims and objectives and quality

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 Importance of Project Management

Important for the manager to

o Ensure timely completion- that individual activities are completed on time
so that later activities - and the project completion - are not delayed;
o Identify potential problems – before they occur or soon
o Have effective monitoring system- progress can be tracked
o React quickly to accidental deviations
o Plan resource requirement – critical and timebound resources
o Prioritise between different activities and their resource requirements

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 Business Example
• As part of its new overall corporate strategy, a local authority is keen to ensure
that the services it provides to local citizens match the needs and aspirations
of the local community. As part of this matching process it has been decided to
undertake a survey of citizens' current attitudes to the services provided. This
will enable managers in the local authority to develop a view of customers'
perceptions of current services as well as trying to identify needs not currently
being met. You have been put in charge of the survey and are under pressure
from both senior managers and elected officials to get this 'project' completed
as soon as possible. Naturally, the 'quality' of the information collected must
not be compromised and, understandably, the resource costs of this project
will need to be carefully monitored and controlled.
• A sequence of tasks.
1. Identify the key activities that will make up the project.
2. Determine the estimated time each individual activity will take to complete.
3. Identify the sequencing of activities in terms of their interdependencies.

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Activities, Time to be taken, Dependencies

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Simple network diagram

- One start node and one end node

- Each event must have at least one preceding activity.
- Each event must have at least one subsequent activity.
- Any two events can be joined by only one activity

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Creating a network diagram

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 Stage 1

• Diamond shape is used for start and end of the project

• Event 1 in circle marks completion of activity A

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 Stage II

After completion of A- B,C and D can start

Length of the line has nothing to do with the time required to
complete the activity.
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 Stage III

After completion of C – F can start, but E requires both B and D

to be completed. How link E to B and D both?

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• m

Cannot join both B and D to E so use dummy or shaded line

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 Final Diagram

• At event 1 both B and D start; then At event 4 both are completed and E
can start.

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 Developing network diagram for project
management

1. Incorporate time information - estimated duration of each

activity
2. Calculate earliest finish time for every activity
3. Calculate latest finish time for every activity
4. Identify critical path through the network

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 Calculate Earliest Finish Time (EFT)

• To calculate EFT, begin from the start of the project and

assign 0 to start point
• Then work out for each event
• E.g. event 1-3 days, event 2 - 7 days
• Event 3 can be reached by 2 ways, via B and via C
• Take the longest route.

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 Calculate latest finish time (LFT)

• Calculation is same like EFT - working backwards

• Total days required for completion 64
• Event 11 should be over by day 62
• Event 10 should be over by day 52
• For event 9, take longest route - day 47

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 Identify critical path

• With the information of EFT and LFT, we can determine those activities
which are critical and which are non-critical
• Critical - those without which project will not be completed in time
• E.g. Activity A - critical
• Activity B-critical
• Activity C - non-critical - has 2 days extra which is called float time.
• An activity have same EFT and LFT will have no float time

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Network Diagram for survey question

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Critical and Non critical Activities

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 Using the Network Diagram

• Determine the project duration

• Prioritise between activities and their relative importance
• Assess the impact of any changes in activity duration on the
project duration
• Use the diagram as a monitoring tool to check actual progress
against planned as the project develops

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 Using the Network Diagram- Use Case 1

• As project manager you are approached by the person responsible

for printing the questionnaire: Activity H. This individual indicates
that if you are willing to pay the workforce a bonus they can
complete this activity ahead of schedule and take only three days to
complete this, rather than the estimated five.
• Should you?
• From diagram - Activity H is non critical and 3 days float associated
with it. Completing this activity early will be of no benefit in terms
of completing the entire project any earlier. If critical activity -
considered the option of reducing its duration. For eg regarding
data entry, Activity K, then consider

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 Using the Network Diagram- Use Case 2

• The IT Department, which will be responsible for data entry, is

understaffed and the departmental manager is trying to plan staff
requirements over the next few months. You are approached as project
manager and asked exactly when you will require the data-entry staff to
be available for your project.
• From the diagram we see that - as long as everything goes according to
plan - the data-entry activity, K, is scheduled to start on Day 47 and end on
Day 52. - when these staff needed.
• From IT Department manager's perspective, this indicates that it will serve
no purpose having these staff available early: this will not help completion
of this project.

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 Gantt Charts

• Similar information in a different way.

• Constant monitoring of activity is possible.
• horizontal axis - duration of the project in days, up to the
expected completion date of 64 days
• vertical axis - Each activity.
• A bar drawn for each activity, starting at EST and ending
at EFT
• If the activity has float time associated with it - also
added
• Actual duration is shown as a solid bar with any float
time as a dotted bar.

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Gantt Chart

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