FORECASTING

Reference Text:

■ William Stevenson, Operations Management —13th ed., McGraw Hill Education, NY

– Chapter-3: Forecasting
Introduction

Forecast: an estimate about the future value of a variable such as demand

Supply Demand

The primary goal of operations management is to match supply to demand.

 Demand Characteristics

Seasonal Peaks
1. Trend
2. Seasonality
3. Cyclical Element
4. Random Variation

Average demand over 4 years

Random Variations
Forecasting

■ Forecasting is (scientific) planning tool that helps the process of making predictions of
the future based on past and present data and most commonly by analysis of trends.

■ Types and Time Horizon

– Strategic Forecasts: Medium or long-term forecasts that are used for decisions
related to strategy and aggregate demand.
■ Facility location, new product plan, R&D investments etc.
– Tactical Forecasts: Short term forecasts used for making day-to-day decisions
related to meeting demand.
■ Purchasing, job scheduling, workforce planning etc.
Forecasting Approaches
■ Qualitative Method
– Involves intuition or experience
– When no or little data exists
– E.g., launch of new products, new technology etc.

■ Quantitative methods
– When historical data exists e.g. for existing product or technology
– The situation is ‘stable’
– Involves mathematical modelling
 How reliable/accurate is the forecasts?
■ It assumes that same underlying causal system of the past will persist
■ Forecasts are not perfect, allowances of error should be made
■ Forecasting Error = Actual Value − Forecasted Value

et = At − Ft Where t = Any given time period

■ Forecast accuracy decreases as the time horizon increases.

Steps in forecasting

1. Determine the objective of forecast

2. Determine the time horizon of the forecast
3. Select a Forecasting Technique
4. Collect, Clean and Analyze the Data
5. Make forecast
6. Monitor the forecasting errors
QUANTITATIVE FORECASTING
Time Series Forecasting
■ TSM looks at historical patterns of values of the same variable to make future prediction.
E.g., past sales figures are used to make future sales predictions

■ Time series observations are recorded at equal intervals (e.g. daily, weakly, monthly or
yearly basis)
■ Time is the one variable which is used to predict the other variable (e.g., sales) of interest.
■ Time series can be plotted on a two dimensional plane where X-axis represents the time
and the Y-axis represents the other variable such as demand or sales.
Associative Forecasting

■ This type of forecasting assumes that one values of one variable is influenced by the
values of another variable in the environment. E.g., Investment in advertisement is
used to predict future sales.

■ At least two different variables (other than time) are used where one variable acts as
predictor variable for the other which is predicted (or forecasted)
 Time Series Forecasting Stationary Time Series Indicates:
• Constant Mean
• Constant Variance
• No Trend or Seasonality
■ Simple Moving Average
– Normally done with 6-12 month data,
weekly data are often used,
– Data pattern is stationary (i.e. no trend or
seasonality)
■ Weighted Moving Average & Simple
exponential Smoothing
– 5-10 observations are needed to start,
– Data pattern is stationary
■ Linear Regression
■ Trends and Seasonal Models
Simple Moving Average Method

■ This is a series of arithmetic means used for smoothing

■ This method is used when there is little or no trend
Simple Moving Average
Graph of Simple Moving Average
Weighted Moving Average

Weights Period
Applied
3 Last Month
2 Two Months Ago
1 Three Months Ago
Total = 6

Assumes unequal weights given on

different time periods
 Exponential Smoothing
New Forecast = Last Period’s Forecast + α (Last period’s actual demand - Last period’s forecast)

■ An advanced form of weighted moving

average, that has limited use of historical
data
■ Most recent data is weighted the most
■ A smoothing constant ‘α’ is subjectively
chosen
■ Weights of the preceding periods decline
exponentially
 Exponential Smoothing
New Forecast = Last Period’s Forecast + α (Last period’s actual demand - Last period’s forecast)

■ An advanced form of weighted moving

average, that has limited use of historical
data
■ A smoothing constant ‘α’ is subjectively
chosen
■ Most recent data is weighted the most
■ Weights of the preceding periods decline
exponentially
Example
■ In June, an automobile dealer has predicted the July’s demand for
142 vehicles, the actual July’s demand is 153. The smoothing
constant is 0.20. Forecast the demand for August using the
exponential smoothing method:

– August forecast = 142+0.2(153-142) =144

Exponential smoothing

Ft-1 = α A t-2 + (1-α)Ft-2

= α A t-1 + (1-α) [α A t-2 + (1-α)F t-2]

= α A t-1 + α (1-α) A t-2 + (1-α)2F t-2

= α A t-1 + α (1-α) A t-2 + α (1-α)2A t-3 + (1-α)3F t-3

F t = α A t-1 + α (1-α) A t-2 + α (1-α)2A t-3 + (1-α)3F t-3 +……..+ (1-α)nF t-n
Impact of Smoothing Constant at Past Values

As alpha increases, the older values becomes less significant

Impact of different alpha

Choosing α:
The value which gives the lowest forecasting error

Ø H i g h va l u e o f a l p h a i s p r e fe r r e d w h e n
underlying average is likely to change

Ø L o w v a l u e o f a l p h a i s p r e fe r r e d w h e n
underlying average is likely to be stable
Forecasting Error
Compare the Forecasting Error
Compare the Forecasting Error
Computing Forecasting Error with Excel

Next Period Forecast = ?

 Exponential Smoothing with Trend

Step 1: Compute Ft : Make the forecast that is not adjusted for trend, by using
previous forecast and prev. actual demand

Step 2: Compute Tt: Estimate the trend using the previous trend estimate

Step 3: Make new forecast that includes trend by using step 2 & 3.
Exponential Smoothing with Trend

Ft = FITt-1 + t-1 t-1

t-1 = Ft-1 + Tt-1

t t-1 t t-1
Example
exponential smoothing trend smoothing
constant constant
Notes about Exponential Smoothing
■ Exponential smoothing should begin several periods back to enable forecasts to adjust to
the data, instead of starting one period back.
■ A number of different approaches can be used to obtain a starting forecast, such as
– the average of the first several periods,
■ using an average of, say, the first three values as a forecast for period 4 would provide a
better starting forecast
– a subjective estimate,
– A naïve approach
■ i.e., the first actual value (of period 1) as the forecast for period 2
Linear Regression Analysis: Trend Equation
■ A functional relationship between two or more correlated variables
■ Used to predict one variable by using the other
Associative Forecasting
Associative Forecasting
Standard Error of the Estimate

y – yc = Forecasting Error
Decomposition of a Time Series
■ Time series is a chronologically ordered data which contains more than one
components of data.
■ When demand has both seasonal and trend component:

Forecast including trend and Forecast including trend and

seasonal = Trend + Seasonal seasonal = Trend * Seasonal
 Seasonality
■ A firms has sold average of 1000 units each year:
– 200 Units in spring
– 350 Units in summer
– 300 Units in autumn
– 150 Units in winter

■ If the demand in the next year is expected to be 1100 units, compute the demand in
respective quarters
Seasonality: Simple Proportion

Period/ Past Sales Total Average Sales for Each Season Seasonal Factor
Season Sales (Total Sales /Number of Periods)

S1 200 1000/4 = 250 (200/250 =) 0.8

S2 350 250 (350/250 =) 1.4

1000
S3 300 250 (300/250 =) 1.2

S4 150 250 (150/250 =) 0.6

Seasonality: Simple Proportion

Period/ Forecasted Total Average Sales for Each Season Seasonal Factor
Season Sales Sales (Total Sales /Number of Periods)

S1 ?275*0.8=220 1100/4 = 275 0.8

S2 ?275*1.4=385 1100/4 = 275 1.4

1100
S3 ?275*1.2=330 1100/4 = 275 1.2
S4 ?275*0.6=165 1100/4 = 275 0.6
 Monitoring Forecasting Errors
■ Forecasting Errors may result due to:

– The omission of an important variable

– The appearance of a new variable
– A change or shift in the variable that the model cannot deal (seasonality)
– Irregular variations due to weather, natural calamities, breakdowns etc.
– Random variations for which causes can’t be assigned
Detecting Non-Random Errors: Control Charts

z = Number of
standard deviations
from the mean
 Detecting Non-Random Errors
■ Control Charts:
Tracking Signal
■ Detects any bias in errors over time, ie. When a overcast is consistently low or high
■ Indicates whether a forecast average is keeping pace with genuine upward of
downward changes in demand.

■ Tracking Signal : TS = RSFE/MAD where

– RSFE = Running Sum of forecast Errors (or Cumulative Error)
– MAD is mean absolute deviation (error)
RSFE MAD=∑|e|/n TS
4 4/1=1 4/1 = 4
11 11/2=5.5 11/5.5 = 1.46
15 15/3=5 15/5=3
19 19/4=4.75 19/4.75 = 4
14 24/5=4.8 14/4.8 =2.91
12 26/6=4.33 12/4.33=2.77
4 34/7=4.85 4/4.85=0.82
-8 46/8=5.75 -8/5.57=-1.39
-18 56/9=6.22 -18/6.22=-2.89
-20 58/10 =5.8 -20/5.8=-3.45

& Determine 2s control limits

to plot the control chart
MANAGEMENT OF QUALITY
Reference Text

■ Chapter 9: Management of Quality

– William Stevenson, Operations Management — 13th ed., McGraw Hill
Education, NY
Understanding Quality
Quality means “fitness for use;” -- Joseph Juran,
■ Perfection
Quality means “conformance to requirements” -- Philip Crosby
■ Satisfaction
■ Reliable “Degree to which a set of inherent characteristics fulfils
■ Speed of delivery requirements -- ISO 9000
■ Consistency
■ Usability
Calculate
■ Durability
■ Distinctive characteristics
■ Brand Image
■ Cost
■ Etc. Appreciate
Quality Perspectives

Manufacturer’s Perspective Customer’s Perspective

The product should meet or

The product should meet its
exceed the customer’s
specifications
expectations
 Why quality is important ?

■ Demanding customers
– Looking for more than just satisfaction
– More knowledgeable
– Risk of negative reviews
– Liability ■ Business advantages
– High Customer Loyalty
– Positive Recommendation
– High Social Reputation
– Lower Marketing Cost
– Competitive advantage
– Quality is a source of differentiation
Modern Quality Management Gurus
GURUS Key Contributions

Walter Shewhart Control Charts, Shewhart Cycle

W. Edwards Deming Causes of Variation - special cause vs common causes; 14 Points in Quality
Management

Joseph M. Juran Quality Trilogy, Application of Pareto Principles

Philip Crosby ‘Do it right the first time’; zero defects, ‘quality is free’

Genichi Taguchi Loss function

Kaoru Ishikawa Cause-and-effect diagrams

Ohno and Shingo Continuous improvement

 Dimensions of Quality
Product Quality

■ Performance (e.g., Long battery life, HD pictures, should not heat up, etc. )
■ Aesthetics (e.g., design)
■ Features (e.g., additional functions, GPS, compass, Apps, etc.)
■ Conformance (e.g., adequate storage space, etc.)
■ Reliability (e.g., no sudden reboots/shut down, less numbers of repair etc.)
■ Durability (e.g., it should last for x years without any loss of performance)
■ Perceived Quality or Reputation (e.g., brand, purchased by many, etc.)
■ Serviceability (e.g., easy to repair)
■ Consistency (quality claims doesn’t vary from product to product)
 Dimensions of Quality
Service Quality

■ Tangibles—the physical appearance of facilities, equipment, personnel, and communication

■ Convenience—availability and accessibility
■ Reliability—the ability to perform a service dependably, consistently, and accurately
■ Responsiveness—the willingness of service providers to help customers in unusual situations
■ Time—the speed with which service is delivered
■ Assurance—the knowledge exhibited by personnel who come into contact with a customer and
their ability to convey trust and confidence
■ Empathy—the way customers are treated by employees who come into contact with them
■ Consistency—the ability to provide the same level of good quality repeatedly
■ Expectations—meet (or exceed) customer expectations
 Cost of Quality
■ Appraisal costs: Cost of inspection & testing of defective units.
– cost of inspectors, testing, test equipment, labs, quality audits, and field testing.

■ Prevention costs : Cost of running quality improvement programs

■ Failure costs:

– Internal failures : Occur during the production process; costs include rework costs,
problem solving, material and product losses, scrap, and downtime

– External failures: Occur after delivery; costs include cost of returned goods, warranty
costs, loss of goodwill, liability claims and penalties.
QUALITY MANAGEMENT
TOOLS
 Quality Management Tools
(American Society for Quality)

1. Stratification
2. Fishbone diagram
3. Check Sheets
4. Histogram
5. Pareto chart
6. Scatter diagram
7. Control chart
 Stratification
• Stratification: The act of into
.
(American Society for Quality)

• Systematically segregated and sorted data can reveal the patterns for managerial decision making

100

99.8
Process 1 Process 2 Process 3
Input (x) Output (y) Input (x) Output (y) Input (x) Output (y) 99.6

1 0.45 98.95 1 0.6 98.85 1 0.5 98.25

99.4
2 0.27 99.05 2 0.63 98.95 2 0.4 98.35
3 0.26 99.3 3 0.21 99.45 3 0.45 98.6 99.2

4 0.1 99.3 4 0.29 99.55 4 0.34 98.65 99

5 0.24 99.4 5 0.34 99.55 5 0.29 98.75

98.8
6 0.4 99.55 6 0.24 99.65 6 0.21 98.75
7 0.22 99.55 7 0.25 99.75 7 0.31 98.85 98.6

8 8 8 0.22 98.85 98.4

9 9 9 0.13 98.95
98.2
1
0 10 10 0.11 99.05
98
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
 Stratification

■ Which data require stratification:

■ When to use stratification:
(American Society for Quality)

– Equipment
– When data come from several sources or
conditions, such as shifts, days of the week, – Shifts
suppliers, or population groups. – Departments
– Materials
– When data analysis may require separating – Suppliers
different sources or conditions – Day of the week
– Time of day
– Products
 Flow Charts

■ Flowchart demonstrates the

process flow by identifying the
each intermediate step where
operations are performed. Each
intermediate step has an input
and an output which are brought
into management attention for
review and analysis.
 Ishikawa Diagram (Cause-Effect Diagram)
• This is also known as Cause–and-effect Diagram, or Fishbone Diagram or Ishikawa diagram is used for
identifying the which are causing an undesired effect. causes may also vary.

The factors are generally classified under:

• Method, Manpower, Machinery and Material

• Policy, Procedure, People and Plant

• Surroundings, Suppliers, System, Skills

These factors can be subdivided further to

identify precisely the actual cause of the effect.
 Check Sheets
• A structured, prepared form for collecting and
analyzing data; a generic tool that can be adapted
for a wide variety of purposes.

• A check sheet or check list is a data gathering tool

where measurements (e.g., number of quality
errors or defects) are recorded for a given list of
items.

• Helps to make fact based decisions instead of

anecdotal evidence
Check Sheets

▪ When to use check sheets:

➢ When data can be observed and collected repeatedly by the same person or at the same
location
➢ When collecting data on the frequency or patterns of events, problems, defects, defect
location, defect causes, or similar issues
➢ When collecting data from a production process
 Histograms
Use Histograms when you need to know:
• Central Tendency of the distribution
• Variation in the distribution
• Compare the two different
distribution
• If the shape of the distribution is
normal What if there
• if the data is falling in a are two peaks
predetermined pattern
 Pareto Charts

• A Pareto chart is a bar graph.

• The lengths of the bars represent
frequency of the quality attribute, and
are arranged with longest bars on the
left and the shortest to the right. In
this way the chart visually depicts
which situations are more significant.
Pareto Charts

■ The assumption:
– Often referred to as the 80–20 rule, the Pareto concept states that
approximately 80 percent of the problems come from 20 percent of the items.
For instance, 80 percent of machine breakdowns come from 20 percent of the
machines, and 80 percent of the product defects come from 20 percent of the
causes of defects.
■ When to use pareto Chart:
– When analyzing data about the frequency of problems or causes in a process
– When there are many problems or causes and you want to focus on the most
significant
– When analyzing broad causes by looking at their specific components
 Pareto Charts

Type of Defect Frequency of % Total Cumulative %

Defect
Button Defect 23 39 39
Pocket Defect 16 27.1 66.1
Collar Defect 10 16.9 83
Cuff Defect 7 11.9 94.9
Sleeve Defect 3 5.1 100
Total 59 100
Scatter Diagram
• Scatter diagram depicts the relationship
between two variables X & Y.

• E.g., X can be humidity and Y can be

number of errors per hour detected during
and operation.
Scatter Diagram
■ When to use scatter diagram?

– When you have paired numerical data which are related

– When your dependent variable may have multiple values for each value of your
independent variable
– When trying to identify potential root causes of problems
– After brainstorming causes and effects using a fishbone diagram to determine
objectively whether a particular cause and effect are related
– When determining whether two effects that appear to be related both occur
with the same cause
 Control Charts
• A control chart is used to study how a process changes over time.

• Comparing current data to historical control limits leads to conclusions about whether the process
variation is consistent (in control) or is unpredictable (out of control, affected by special causes of
variation).

• It can help detect the presence of correctable causes of variation.

Statistical Chart of a time ordered values of a sample statistic

QUALITY CONTROL
Reference Text

■ Chapter 10: Quality Control

– William Stevenson, Operations Management — 13th ed., McGraw Hill
Education, NY
 Introduction
■ Quality control is a process by which one can evaluate the output of a
process based on the pre-stablished standards and corrective actions are
taken when output doesn’t meet those standards.

■ When can we apply quality control ?

– When there is a way to measure quality in terms of specific parameters
– When we have preestablish quality standards
– When we have check points to monitor the quality

■ Preventive or corrective ?
 Quality Appraisal

■ Inspection:
– Inspection is an appraisal activity that compares goods or services to a
given standard.

■ Three important questions:

– What to inspect ?
– Where to inspect ?
– How much to inspect ?
Points of inspection

Process Control

Quality of Inputs Quality of Transformation Quality of Outputs

Pre-production Production Post-production

Acceptance Sampling
Statistical Sampling to determine where to
accept or reject the production lot.
Inspection Methods

Non-destructive test

Destructive testing
 How much inspection is adequate ?
■ How much effort one should make in inspection ?

– The amount of inspection can range 0% to 100%

– 100% inspection? Manufacturers typically

use to pull 1-10% of the
■ Inspection cost will be very high items for inspection
■ Inspection time will be long
■ Infeasible choice in destructive testing Ø Low cost high volume items requires little
inspection. e.g., paper clips, roofing nails,
and wooden pencils
– 0% inspection ?
■ Cost of passing the defectives will be very high Ø High-cost, low-volume items requires more
intensive inspection
 Statistical Process Control (SPC)
■ SPC evaluates a process output to decide if a process is “in control” or if corrective action is needed.
– It involves a set of techniques to ensure that the process conforms to the requirements.

■ Acceptance Sampling
– Used to infer the quality of a batch of products by sampling a specified number of items for testing.
– Collect Sample for measurement (one or multiple random samples)
– Size of sample and number of samples depend on how much risk is assiciated with the product

■ Process Control
– Define the type of measurements
– Variables: Measures on a continuous scale (e.g., 23.5mm, 0.35 gms, 36 seconds. )
– Attributes: Measured on a discrete scale (e.g., pass-fail, fraction of defectives, number of defects on
a surface, etc.)
 Process Variability

■ Random Variations
– Chance or common causes inherent in every process
– Deviation in the process output are natural in every
process
– Created by countless minor factors

■ Non-Random Variations
– Deviations in the process output can be clearly identified
and managed
– Systematic or assignable causes present in the preocess
– Process need a corrective actions
– In manufacturing set-ups, some of the causes are variation
primarily include - operational inputs such as raw materials,
personnel, equipment, measurement methods, etc. and the
environmental conditions.
 Statistical Process Control (SPC)
■ Periodic samples of process output are taken
■ Sample statistics, (e.g., sample means) are measured.
■ For example, if you have taken n = 50 samples, having a sample size of 100 units
– Their means may be denoted by �1, �2, �3, … �50,
– The variability in sampling statistics (��)can be described by its sampling distribution.

Sampling distribution is a (theoretical) probability distribution obtained through a large

number of samples that describes the random variability of sample statistics.
Sampling Distribution

Sampling distribution

Distribution of process output

Sampling Distribution:

§ The variability of sample statistic can be described by its sampling distribution,

§ It is a theoretical distribution that describes the random variability of sample statistic.

 Sampling Distribution Acceptable Region (± 3σ)

Acceptable Region (± 2σ)

■ A sampling distribution serves as the theoretical Acceptable

Region (± σ)
basis for distinguishing between random and
non-random values of a sampling statistic.

■ Limits are selected within which most values of a

sample statistic should fall if its variations are
random (e.g. ± 3σ, ± 2σ etc.)

■ If the value of a sample statistic falls outside

those limits, there are high probability that
assignable causes might be present
– or, in other words, there is only a small
probability that the value reflects randomness. - 3σ - 2σ -σ -σ + 2σ - 3σ
Sampling Distribution
Using Sampling Distribution for Control Charts

Non random
Variation
LCL: Lower Control Limit

Zone of random/Acceptable variation

*
*

*
(for ± 3σ)
values

*
*

*
*

*
*
LCL: Lower Control Limit
Non random Sample ID (sample number/time order)
Variation

Control Limits are based on

sampling distribution
Control Chart
■ A time-ordered plot of sample statistic.
■ It is used to distinguish between random variability and non-random variability.
■ Elements of a control chart:
– Centerline (generally the the meanvalue of the sampling distribution)
– Control Limits (UCL & LCL)

Sample no. 12 is out of

control Variation due to assignable causes

Variation due to
random/chance causes

Variation due to assignable causes

 Type 1 and Type 2 Errors
■ Type 1 Error:
– Probability that a value will fall outside the limits even
though only random variations are present
There is always a small probability that a value will
fall outside the limits even though only random
– Concluding that variations are present.

■ non-random variations are present even though only

random variations are present
■ a process is not in control when it actually is. Non-Random Non-Random

– Also known as
■ producer’s risk Normal
■ false rejection (Random)

■ false fail α: Probability of making type 1 error

■ false positive = sum of probabilities in the two tails
 Type 1 and Type 2 Errors

■ There is always a probability that a value will fall inside the limits even though non-random variations are
present.

■ Type 2 Error:
– Concluding
■ non-random variations are not present, when they are
■ a process is in control when it is really out of control
– Also known as
■ consumer’s risk
■ false pass
§ The costs of making each error should be balanced by their
■ false acceptance probabilities
■ false negative
§ In practice, two-sigma limits and three-sigma limits are commonly
used as reference.
 The Control Process
■ Define: The set of characteristics which are suppose to be controlled
■ Measure: Establish the measurement method
■ Compare: With the quality standard (e.g., upper and lower control limits)
■ Evaluate: Establish a definition of ‘out of control’
– Distinguish random from non-random variability
– Non-random variability indicates that the process is out of control
■ Correct: Eliminate the cause of non-random variability
■ Monitor: To ensure that corrective action has a sustained effect
 Statistical Stability of a process

Which process is stable over time ?

Process is Stable over time Process Unstable over time

What to do if the process is unstable?

Process variability Vs Customer Specifications

Voice of the Process Voice of the Customer

(VoP) (VoC)

■ Each process shows some random ■ Provides the acceptable level of

variability variability
■ One can define control limits on ■ One can define specification limits on
the basis of sampling distribution the basis of customer’s requirements
■ UCL is the upper control limit and ■ USL is the upper specification limit
LCL is the lower control limit and LSL is the lower specification limit.
 Type 1 and Type 2 Errors

■ There is always a small probability that a value will fall

outside the limits even though only random variations
are present. Non-Random Non-Random

■ Type 1 Error:
– Probability that a value will fall outside the limits Normal
even though only random variations are present (Random)
– Concluding that non-random variations are
present even though only random variations are
present
– Concluding a process is not in control when it α: Probability of making type 1 error
actually is. = sum of probabilities in the two tails
– Also known as producer’s risk
 Type 1 and Type 2 Errors

■ There is always a probability that a value will fall inside the limits even though non-random
variations are present.

■ Type 2 Error:
– Concluding non-random variations are not present, when they are
– Concluding a process is in control when it is really out of control
– Also known as consumer’s risk
Control Charts

■ Control chart detects variation in processing and warns if there is any deviation from the specified control
limit (Voice of the Process)

■ The purpose is to monitor and stabilize the process through detecting and controlling the non-random
causes of variations.

■ What to monitor ?
– Variable data: Measured (usually on a continuous scale amount of time needed to complete a task,
length or width of a component)
– Attribute data: Counted (e.g., the number of defective parts in a sample, the number of calls per
day)

■ Sampling for variables:

– Each sample must be taken at random
– The size of sample is generally kept as 5 but 10 to 15 units can be taken for sensitive control
charts.
Types of Control Charts

Control
Charts

Control
Control Chart
Charts for
for Attributes
Variables

Fraction of Defects per

Mean chart Range chart
defectives unit
 Control charts for variables
§ “x-bar” chart: Control chart for mean; monitors the of the process)
§ ‘R’ -chart: Control chart for range; monitors the dispersion of the process)

Mean is shifting Range is shifting

 Control charts for attributes

• p-chart • c-chart
• np-chart • U-chart

• When items are classified in two categories: • When items can’t be classified in two categories:
• e.g.; good/bad; pass/fail, acceptable & unacceptable, • e.g., number of accidents per year, number of bacterea in a
conforming & non-conforming, defective/nondefective water sample, number of scrateches on a polished surface, etc.
etc.

§ p-chart: Percentage/Fraction of defects ---------for varied sample

§ np-chart: Percentage/Fraction of defects------- for constant sample
§ c-chart: Defects per unit----------------------------------- for constant sample
§ U-chart: Defects per unit----------------------------------- for varied sample
 Illustration:
A quality inspector took five samples, each with four observations, of the length of time for glue to
dry. The analyst computed the mean of each sample and then computed the grand mean. All values
are in minutes. Use this information to obtain three-sigma control limits for means of future times. It
is known from previous experience that the standard deviation of the process is .02 minute.

Is the Process in control ?

Sample Average n = sample size

Grand Average
 x-bar (mean) chart: When Process Deviation is not known

A2 = .73 for n = 4 (from the reference table).

Sample Average

Sample Range R
Results are similar to the earlier case when
Average of process deviation was known
Sample
Range
 Example: Range Charts
Control Limits for the Range Charts Control Limits for the Range Charts when
process Standard Deviation is known

Sample Range of
five samples are

The values are R are Within the Control Limits

 Using Mean and Range Charts Together

■ Mean charts are sensitive to shifts in the

process mean, it fails to detect the dispersion

■ Range charts are sensitive to changes in

process dispersion, it fails to detect the shift in
mean

■ Thus, use of both charts provides more

complete information than either chart alone
 Control Chat for Attributes: p-chart

■ Used to monitor the proportion of defectives

§ When the data consists of multiple samples of n observations each

§ Theoretical basis is Binomial Distribution (when sample size is small)

§ The centerline on a p-chart is the average fraction defective in the population, p.

§ Control limits are obtained on the basis of about 20-25 samples and standard deviation
from the samples is calculated for further production control.
p-chart continued
Control limits:
Where, ‘p’ is fraction defective in the population

If p is unknown:
§ it can be estimated from samples
§ p̅replaces p in the preceding formulas
 Example:
An inspector counted the number of defective monthly billing statements of a telephone company in
each of 20 samples. Using the following information, construct a control chart that will describe 99.74
percent of the chance variation in the process when the process is in control. Each sample contained
100 statements.

?
 Control Chat for Attributes: c-chart

§ In manufacturing, sometime it is required to control burns, cracks, voids, dents, scratches,

missing and wrong components, rust etc.

§ Used to monitor the occurrences of defectives; Non-concurrences cannot be counted

§ Works with count type data, e.g. total number of nonconformities per unit

§ The underlying sampling distribution is the Poisson distribution.

§ Assumes that defects occur over some continuous region and that the probability of more than
one defect at any particular point is negligible.
Control Chat for Attributes: c-chart
c = number of occurrences (e.g., defects) per unit

If the value of c is unknown, use ̅c

̅c is the ratio between the total number of defects

found in all samples and the total number of samples
inspected.
Example:

?
 Are all variations within the control limit random ?

Trend

Types of non-random patterns

Cycle

Bias

High Dispersion

Next, go for a ‘Run test’

Cluster
 Run Test
■ A run is defined as a sequence of observations with a certain characteristic,
followed by one or more observations with a different characteristic.
■ It analyzes the occurrence of similar events that are separated by events that are
different

How does it work ?

■ For example, a series of 20 coin tosses might produce the following sequence of
heads (H) and tails (T).
– HHTTHTHHHHTHHTTTTTHH
■ Check for patterns in a sequence of observations
– The number of runs for this series is = nine.
 Run Test

■ Two useful run tests involve examination of:

– The number of runs up (U) and down (D) (The first value does not receive either a U or a D
■ U/D Runs =3 because nothing precedes it.)

– The number of runs above (A) and

below (B) the median (or mean) Median = 36.5
■ A/B (Median) Runs =3
Illustration: Run chart (number of runs)

7 runs

8 runs
Run Test
■ Transform the data into both As and Bs and Us and Ds
■ Count the actual number of runs (r) in for N observations
■ Calculate the expected number of runs (Er)
■ Calculate the standard deviation of number of runs (σ)
■ Calculate the z-score
■ Decide on the basis of z-score (assuming acceptable limit lies between +2 to -2)

Expected Number of Median Runs Expected Number of Up/Down Runs

Run Test
■ Calculating Z –score

For Up/Down Runs For Median Runs

N = Total number of observations
r = Observed number of runs
 Example:
Twenty sample means have been taken from a process. The means are shown in the following
table. Use median and up/down run tests with z = 2 to determine if assignable causes of variation are
present. Assume the median is 11.0.

Number or observations ?

N =20

Number or runs ?
Process Capability
At any given instance, the output of a process may or may not conform to
specifications even though the process may be in statistical control

Voice of the Process Voice of the Customers

▪ A range of acceptable values established by

▪ Limits of manufacturing abilities engineering design or customer requirements
▪ Includes random process variability ▪ Translated down to target value and
Specification Limits (USL & LSL)

• Process capability refers to the inherent variability of process output relative to the variation allowed by
the design specifications

• If the random variations that a process is capable to produce lies within an acceptable specifications,
the process is said to be “capable.” If it is not, the manager must decide how to correct the situation.
Capability Analysis
Voice of the Process Voice of the Customers

Example: a) LSL = 8.5 & USL = 11.5

Process Av is = 10 & Process SD is =0.5

• 3σ control limits would be 10 ± 1.5) b) LSL = 7 & USL = 13

• UCL = 11.5
• LCL=8.5 c) LSL = 9 & USL = 11

Process capability index

Comparing
VoP & VoC
Process Width = UCL – LCL
= 6𝜎 (-3σ to + 3σ)
▪ Cp ≥ 1.33 is used as industry standard
Specification Width = USL − LCL
 Capability Analysis
Lower Upper
Lower Upper Specification Specification
Specification Specification

8.5 10 11.5
8.5 10 11.5
a) LSL = 8.5 & USL = 11.5 b) LSL = 7 & USL = 13
LCL= 8.5 & UCL = 11.5
LCL= 8.5 & UCL = 11.5

Lower Upper
Specification Specification
Process capability index a) Cp= 3/3 = 1
b) Cp= 6/3 = 2
c) Cp= 2/3 = 0.67

8.5 10 11.5
c) LSL = 9 & USL = 11
LCL= 8.5 & UCL = 11.5
 Only B is capable (Cp ≥ 1.33)

Process capability index

Process Width = 6𝜎
Specification Width = USL − LCL
= 0.80
 Three-sigma versus Six-Sigma capability

▪ The goal of 6σ 𝐶𝑎𝑝𝑎𝑏𝑖𝑙𝑖𝑡𝑦isachieving a process

variability so small that the design specifications
represent six standard deviations above and
belowthe process mean.

▪ Achieving a process capability index equal to 2.00

 If a process is not centred
■ Cp index computation does not involve the process mean
– The assumption is that, target value (i.e., process mean) is centred between the upper
and lower specifications

■ Cpk index is used instead of Cp

■ Cpk = Smaller of
,

i.e., Smaller of [Cpu , Cpl]

 Mean
Check

7.5
Process mean is centred between USL & LSL
4.6

6.1 Process mean is not centred between USL & LSL

▪ Calculate Cp index for processes 1 & 2

▪ Calculate Cpk index for the process 3

= Smaller of
capable

Not capable
Not capable
In order to be capable, Cp & Cp k must be at least 1.33
INVENTORY MANAGEMENT
Reference Text:

■ Chapter 13: Inventory Management

– William Stevenson, Operations Management — 13th ed., McGraw Hill
Education, NY
 Defining Inventory

▪ All organizations hold inventory in one form or the other

▪ Inventory is an array of raw materials, consumables, partially finished goods, finished goods
(both, in-stock & in-transit), spare parts, defective parts, scrap etc.

▪ Inventory can include small things (such as safety pins) to large items (such as trucks and
airplanes).
Different Types of Inventory
The different kinds of inventories include :

MRO inventory:
■ Raw materials and purchased parts. Chemicals, lubricants, gaskets,
cleaners, Office supplies
■ Partially completed goods, called work-in-process
Repair tools, hand tools
(WIP).
Safety equipment, Gloves,
■ Finished-goods inventories (manufacturing firms) or cloaks and workwear
merchandise (retail stores). Batteries, Furniture, fixtures
Compressors, valves, pumps,
■ Maintenance, repairs & overhauling (MRO) belts, motors, Computer
inventory. equipment, computerized tools
■ Goods-in-transit to warehouses, distributors, or Etc.
customers (pipeline inventory).
Importance of Inventories
Why is it important to pay attention at Inventory Management ?

• Inventory requires proper allocation of space (e.g. stores and warehouses).

• Inventory may be perishable such a fruits and vegetables
• Inventory may be critical for saving life (such as drugs supplies and blood banks)
• Inventory requires a substantial investments in working capital
 Functions of Inventory
1. To satisfy the ‘anticipated demand’
2. To smooth production in ‘seasonal demands’
3. To insulate production from disruption (of
supplies) – (Maintain Buffer inventory ) Little’s law (to quantify the pipeline inventory):
4. To reduce the risk of stock outs (sudden rise in
demand) (Maintain Safety stocks) Pipeline inventory in a system =
5. To take advantage of the order cycles
Average rate at with inventory leaves the system
6. To take advantage of quantity discounts (i.e. Avg. demand) * Average time a unit is in the
7. To hedge against price increases system.

8. To permit operations – WIP (pipeline inventory)

 Inventory Costs
■ Unit cost :
– The amount paid to buy an inventory
■ Holding/Carrying cost for a length of time
– Includes insurances, taxes, depreciation, obsolescence, deterioration, tracking cost, picking
and warehousing cost, etc.
■ Ordering Cost
– Cost of ordering and receiving an inventory
– Includes preparing invoices, quality inspections, temporary storage of received items etc.
■ Set-Up Cost
– When a firm produces its own inventory instead of ordering it from a supplier
– Includes setting up the equipment for the job by adjusting the machine, changing tools etc.
■ Shortage Cost
– Result when demand exceeds the supply of inventory on hand.
– Includes opportunity cost, loss of customer goodwill, late charges etc.
 Inventory Management Tasks
■ Fundamental tasks:
1. Record Keeping
■ Have reasonable estimates of inventory holding costs, ordering cost, and shortage costs

2. Decide when and how much to order (Ordering Policy)

■ Have a reliable forecast of the demand
■ Be aware of your lead time Lead time: The time between ordering a
good or service and receiving it.
■ Know your lead time and variability in lead times
■ Have an inventory classification system (e.g., ABC classification)

3. Measuring the performance of inventory management

Inventory Turnover = COGS (i.e. cost of goods sold)/Avg Inventory Cost
 Inventory Counting Systems
■ Periodic Systems
– Counting weekly, monthly etc. in order to decide how much to
order of each item
– Seasonal inventory count- e.g., in clothing business

■ Perpetual inventory system (Continuous review system)

– Keeps track of removals from inventory on a continuous basis,
When the amount on hand reaches a predetermined minimum, a
fixed quantity, Q, is ordered
– Uses UPC/bar codes & RFID Codes
■ Increases speed and accuracy of real time demand information
■ Reduce the need of periodic review and order size determination
 Inventory Classification
A B C Classification:
A firm holds a large variety of inventory items or stock keeping units (SKUs), each of which may have
different value and annual consumption. Applying same degree of control on all the items is not
desirable.

• High Value Inventory Items:

• Generally consists of 10-20% of SKUs
• 60%-70% of annual dollar spend

• Moderate Value Inventory Items

• Generally consists of 20-30% of SKUs
• 40%-50% of annual dollar spend

• Low Value Inventory Items:

• Generally consists of 60-70% of SKUs
• 10%-15% of annual dollar spend
 Steps to perform ABC analysis:
Dollar
Item Unit Cost Usage The table
Usage contains figures on the monthly volume and unit costs for a
Category
K34 10 200 random sample
2,000 C of 15 items for a list of 2,000 inventory items.
K35 25 600 15,000 A
K36 36 150 5,400 B
M10 16 25 400 1. ForC each item, multiply annual volume by unit price to get the
M20 20 80 1,600 annual
C dollar value.
Z45 80 250 16,000 2. Arrange
A annual dollar values in descending order.
F14 20 300 6,000 B
F95 30 800 24,000 3. TheA few (10 to 20 percent) with the highest annual dollar
F99 20 60 1,200
value
C
are A items. The most (about 20 to 30 percent) with the
D45 10 550 5,500
lowest
B
annual dollar value are B items. Those in between
(about 50-70 percent) are C items.
D48 12 90 1,080 C
D52 15 110 1,650 C
D57 40 120 4,800 B
N08 30 40 1,200 C
P05 16 500 8,000 B
P09 10 30 300 C
 Please note that share of dollar value is
used to determine the share of item types
for classification under A, B or C category
(SKUs) Dollar Dollar
Item Unit Cost Usage Usage Category Item Unit Cost Usage Usage Category
K34 10 200 2,000 C K34 10 200 2,000 C
K35 25 600 15,000 A K35 25 600 15,000 A
K36 36 150 5,400 B K36 36 150 5,400 B
M10 16 25 400 C M10 16 25 400 C
M20 20 80 1,600 C M20 20 80 1,600 C
Z45 80 250 16,000 A Z45 80 250 16,000 A
F14 20 300 6,000 B F14 20 300 6,000 B
F95 30 800 24,000 A F95 30 800 24,000 A
F99 20 60 1,200 C F99 20 60 1,200 C
D45 10 550 5,500 B D45 10 550 5,500 B
D48 12 90 1,080 C D48 12 90 1,080 C
D52 15 110 1,650 C D52 15 110 1,650 C
D57 40 120 4,800 B D57 40 120 4,800 B
N08 30 40 1,200 C N08 30 40 1,200 C
P05 16 500 8,000 B P05 16 500 8,000 B
P09 10 30 300 C P09 10 30 300 C
 Summarizing ABC analysis
Inventory Type Annual Consumption/Usage Share of SKUs (%) Record Accuracy Control Required Forcasting Accuracy
Value (%)
Type A 60% -70% (High) 10-20% High Tight Control High

Type B 20% -30% (Medium) 40%-50% Medium Medium Control Medium

Type C 10%-15% (Low) 60%-70% Basic Basic/Standard Basic

Annual consumption/usage value = Annual number of items sold x Cost per item

ABC analysis based inventory classification system improves:

• Optimizing the inventory levels by prioritizing attention

• Inventory forecasting
• Record keeping
• Space Allocation
 Inventory Ordering Policies
■ The Scenario:

You are managing a particular item. The item is important enough to your customers that you want to
carry enough inventory to avoid stocking out. However, the item is also expensive enough that you also
want to minimize the amount of cash tied up in inventory. The process of ordering replenishment stock
is expensive and cumbersome that you also want to minimize the number of purchase orders. You also
have a limited space in your organization to store the items. Demand for the item is unpredictable.
 Inventory Ordering Policies
Key Inventory Management Decisions :
1. How much should you order?
▪ Specify the optimal order quantity
2. When to place an order ?
▪ Orders may be triggered by time
▪ Orders may be triggered by quantity (currrent inventory level)

Key Inputs:
1. Updated forcast
2. Current inventory level
3. Inventory cost estimates
4. Lead time
Inventory Cycle
✓ A cycle begins with receipt of an order of Q (=350) units, which are
withdrawn at a constant rate (50 units per day) over time.

✓ When the quantity on hand is just sufficient to satisfy demand during

lead time, an order for Q units is submitted to the supplier.

Average Inventory
= Q/2 =175
Order Size Vs Order Frequency
In which case the average inventory is high; with high order frequeny or low order frequency
?
Order Size is Inversely Proportional to Order Frequency

Inventory
Average
Inventory
Average
Economic Order Quantity (EOQ)
■ The EOQ provides a model for calculating the appropriate reorder point and the optimal reorder
quantity to ensure the instantaneous replenishment of inventory with no shortages

– EOQ identifies the ‘fixed’ order size which can the annual (inventory) cost
– The two main cost components are involved –
A. Inventory Carrying cost
B. Ordering Cost

Note: EPQ model is applied in case of in-house inventory production

 Basic EOQ Model
A. Inventory carrying cost:

– If Q is the periodic order quantity, and

– H is the annual inventory carrying (holding) cost per unit,
– Inventory Carrying Cost (Annual) = Carrying cost * Average Inventory = H * Q/2

Where, Average Inventory =

(Beginning Inventory + Ending Inventory) / 2
= (Q+0) /2 = Q/2

Carrying cost is thus a linear function of Q:

Basic EOQ Model
B. Ordering Cost

■ If D is the annual demand, and Q is the order size,

– number of orders will be D/Q
■ Ordering cost is treated as a constant per order
– If S is the ordering cost/order,
– Total Ordering Cost = S * D/Q
Total Cost and EOQ

Total Cost =

Carrying Cost

Ordering Cost
What will the lenght of reorder cycle ?
(Time between two consecutive orders)

= Q0/D
Cost Components
 Length of Order Cycle (Q0/D)
= 100 / 3600 per year
= 12/36 month
= 1/3 month
Hence;
Order Frequency = Thrice a month

Observation: Cost of ordering and cost of

carrying inventory are equal at EOQ
Basic EOQ Model

Assumptions:
– Annual demand is known and demand rate is constant
– Inventory ordering and usage occur in cycles.
– Ordering costs are constant
– Price per unit is constant What if we relax this assumption of the basic EOQ Model ?
– The usage rate and the lead time do not vary
– The order will be received at the precise instant that the inventory on hand falls to
zero
– Inventory holding cost is based on average inventory
– All demand for the product will be satisfied (i.e., no backorders are allowed)
– There are no quantity discounts
■ Given: Annual Demand (D) = 1000 units

Ordering Cost (S) = $5 per order

Holding Cost (H) = $1.25 per unit per year
Cost per unit (C) = $ 12.50
Lead Time (L) = 5 days
Reorder Point (ROP)= Avg. Daily Demand*L
Find:
1) EOQ,
Average Daily demand (d)= 1000/365 = 2.74 units
2) Total Inventory Cost (Annual) and
3) Reorder point
ROP = (1000/365)*5 = 13.7 units

Total Inventory cost (TC)

= Annual Purchasing Cost + Carrying Cost + Ordering Cost
EOQ = Q0 = P*D + (Q0/2)H + (D/Q0)*S
= √ [(2*1000*12.50)/1.25]
= 89.4 units ~ 89 units = 1000*12.50 + (89/2)*1.25 + (1000/89)*5
= $12,611.80

Inclusion of unit price in the total-cost computation in that case would merely increase the total cost by the amount P*D.
Impact of Unit Price (or Purchase Cost) on EOQ

Purchase cost
Impact of Unit Price (or Purchase Cost) on EOQ

Purchase cost
 Quantity Discounts

■ Determination of EOQ does not involve the purchasing cost because of the assumption that
under no quantity discounts, price per unit is the same for all order sizes.

■ If quantity discounts are available, Manager must think of the following concerns:
– Availability of storage space for additional items
– Issue of obsolescence and deterioration
– Availability of fund to invest in additional inventory
 Quantity Discounts
■ When quantity discounts are offered, there is a
separate U-shaped total-cost curve for each unit
price.

■ Each curve will apply to a portion of the quantity

range.

■ Each of these TC curves will have their own minima.

■ The result is a total-cost curve with steps at the

price breaks.

■ Even though each curve has a minimum, those

points are not necessarily feasible to obtain the
EOQ.
 Determining the optimal order quantity when there are :
1. Quantity discounts &
2. Carrying Costs are Constant

Given: D = 816 cases per year; S = $12; H = $4 per case per year
Given: D = 816 cases per year; S = $12; H = $4 per case per year

Optimal Order Quantity =

100 cases

Total Cost = $13,354

 Determining the optimal order quantity when there are :
1. Quantity discounts &
2. Carrying costs are expressed as a percentage of price

Given: D = 4000 switches per year; S = $30; H = 0.4P

 1. Calculate the minimum order quantity (Q) for the given price slabs
starting from the lowest unit price slab till you get a feasible value

Infeasible

Given: D = 4000 switches per year;

S = $30; H = 0.4P Feasible

2. Check the total cost at 840 units, and compare it

with the total cost of next lower price slab

3. Optimal Order Quantity = 1000

Switches
Total Cost = $3480
 Economic Production Quantity (EPQ)
■ When a company manage to meet its demand by producing in-house, EPQ model is employed to calculate
optimal production lot size
■ Production is carried out in batches (Production runs)
■ Production capacity exceeds the usage rate
■ Inventory build up rate = Production rate (p)– Usage Rate (d)

Run Time Run Time

Q0
(Run Size.)

I max
Maximum Inventory
Economic Production Quantity (EPQ)
Objective: Minimize the total cost
[Annual Set up Cost + Annual Holding Cost + Annual Production Cost ]

Key Question: How many units to produce per production run

 Economic Production Quantity (EPQ)
■ Calculating Annual Inventory Carrying (holding) Cost
■ Average Inventory, Iavg = Imax/2
■ Imax = Number of days in a production run * Inventory Build up rate
Imax = Q0/p * (p - u)
 Economic Production Quantity (EPQ)
■ Imax = Number of days in a production run * Inventory Build up rate
= Q0/p * (p - u)

Q0
Run (Batch) Size

I max
Maximum Inventory
Economic Production Quantity (EPQ)

Run time = Qp / p Cycle time = Qp / u

Qp
Run (Batch) Size

I max
Maximum Inventory
Economic Production Quantity (EPQ)
■ Imax = (p - u) * Q0/p
■ Carrying Cost = ( Imax/ 2 ) H
■ Number of Production Runs
= D/Q0 Where, D = annual demand,
■ Set Up Cost
= (Number of Production Runs * Set Up cost per Production Run) = (D/Q0)S

■ TC = Carrying cost + Setup cost = ( Imax/ 2 ) * H + (D/Q0)S

= ½*(Q0/p) *(p - u)*H + (D/Q0)S

■ Minimize TC with to get the economic run quantity

PROJECT MANAGEMENT
Reference Text:

■ William Stevenson, Operations Management —13th ed., McGraw Hill Education, NY

– Chapter-17: Project Management
 Introduction
■ Examples: Building Dams, Bridges, Railways lines, Expressways, Airports, ERP Installations,
Research Projects, Space Stations, Olympic Games, Managing Natural Disasters, Making
Movies, Machine/Capacity Installations, Setting up a new manufacturing/Service unit,
organizing an event, etc.

■ Projects –Unique, one-time operations designed to accomplish a set of objectives in a limited

time frame.
Time estimates of specific activities
– Time bound specific objectives

Key Metrics
Cost estimation
– Resource requirement Performance targets
Quality goals
 Project Lifecycle

➢ Scheduling ➢ Managing individual activities

➢ Goal Specification
➢ Budgeting ➢ Status Tracking ➢ Project Reports
➢ Feasibility Study
➢ Resource Allocation ➢ Quality monitoring ➢ Transfer Deliverables
➢ Outline the costs,
➢ Deliverables ➢ Monitor milestones, goals, and activities ➢ Train Customers
benefits, and risks
➢ Quality Plan ➢ Take corrective actions and changes ➢ Release Resources
➢ Assign Responsibilities
➢ Risk Management
Tools of Project Management

1. Work breakdown structure: An initial planning tool that is needed to develop a list of
activities, activity sequences, and a realistic budget

2. Project Scheduling
– Gantt charts: A visual aid used to plan and monitor individual activities

3. Network diagram: A “big picture” visual aid that is used to estimate project duration,
identify activities that are critical for timely project completion, identify areas where
slack time exists, and develop activity schedules

4. Risk management: Analyses of potential failures or problems, assessment of their

likelihood and consequences, and contingency plans
WORK BREAKDOWN
STRUCTURE
 Level-1

Level-2

Level-3

Illustration:
Work Breakdown Structure
 WORK BREAKDOWN STRUCTURE

■ Work breakdown structure (WBS):

■ A hierarchical listing of meaningful components what must be done during a project.
■ It provides a basis for project planning, performance measurement, and project control.
■ This methodology establishes a logical framework for identifying the required activities for the project
Types of Work Breakdown Structure (WBS)

Deliverable Based Process Based

■ A deliverables-oriented WBS defines a ■ A process-oriented WBS, on the other hand,

project in terms of tangible deliverable defines the project scope of work in terms of
components. process steps (i.e., work phases, or functions)
which are sequential in nature
■ e.g., products, services etc. ■ E.g., design, renovation, finishing, etc. in a
renovation project.
Why to use WBS ?

■ To get estimated cost of each activities and hence the total cost of the project
■ Identify the precedence rule or dependencies of activities on each other
■ Develop a schedule for each activity
■ Assign roles and responsibilities
■ Track the progress of each activity
■ Identify project risks.
PROJECT SCHEDULING
 Gantt Charts (Schedule Chart)
■ Gantt chart is a list of the activities mapped with is a suitable time scale at the right.
■ Each activity is represented by a bar; the position and length of the bar reflects the start date, duration and
end date of the activity.

✓ What type of activities are there ?

✓ When each activity begins and ends ?
A manager can see at a glance: ✓ How long each activity is scheduled to last ?
✓ Where activities overlap with other activities, and by how much?
✓ The start and end date of the whole project?
 Making a Gantt Chart
Input Information: List of activities with
their start date, end date and duration
Illustration: Event Planning
Limitation of Gantt Chart:

■ Can it answer the following questions ?:

▪ Which activities are the most critical to timely project completion ?

▪ How long any activity can be delayed without delaying the project?
NETWORK DIAGRAM
 PERT and CPM

■ PERT (program evaluation and review technique)

■ CPM (critical path method)

– A graphical display of project activities

– An estimate of how long the project will take
– An indication of which activities are the most critical to timely project completion
– An indication of how long any activity can be delayed without delaying the project
 The Network (Precedence) Diagram
▪ AON (Activity on Node) Diagram: The arrows show only the
sequence in which certain activities must be performed

▪ AOA (Activity on Arrow) Diagram: Nodes represent start

time and end time of activities
 The Network (Precedence) Diagram
■ Events: The starting and finishing points (of time) of activities

■ Activities: Project steps that consume resources and/or time

■ Critical path: The longest path; determines expected project duration

■ Critical activities: Activities on the critical path.

■ Slack: It reflects the difference between the length of a given path and the length of the
critical path.
 Network Conventions

Condition Representation

▪ Activities must be completed in a sequence

▪ A and b must be completed before c starts

▪ Activity a must be completed before b or c can start.

▪ Both a and b must be completed before c or d can start.

Network Conventions
Using Dummy Activities

(AOA)
Separate activities that have same
starting and ending nodes
Example: AON

f
a
d
Start End

b e g
Example: AOA

1 c 3
a
f
Start

b d
2 4
e
5
Example: AOA

1 c
a
f
3
Start

b d End
2
e
g
4
Example: AOA

1 c
a
3 f
Start d
End
b
2
e g

4
 Critical Path (AOA)
• Critical path the longest possible path in the network diagram;
• This is a path with zero slack;
• If activity any activity on the critical path is delayed, the entire project will be delayed.

■ Path Lengths
1. Path I: 1-2-4-5-6 = 18 Weeks 4
2. Path II: 1-2-5-6 = 20 Weeks Critical Path 2
3. Path III: 1-3-5-6 = 14 Weeks
■ Expected Length of The Project= 20 Weeks
g
■ Amount of slack time: 1 5 (1 week) 6
■ Slack = Length of Critical Path - Length of Selected
Path
– Path I : Slack = 20 – 18 = 2 Weeks 3
– Path II : Slack = 20 – 20 = 0 Slack = 0 for the Critical Path
– Path III : Slack = 20 – 14 = 6 Weeks
Critical Path (AON)

■ Path Lengths:

1. A-C-D = 3+4+2 =9 Weeks

2. B-E-F = 4+1+3 =8 Weeks
3. B-C-D = 4+4+2 =10 Weeks Critical
Path
Computing Algorithm (AOA)
Earliest Start Time (EST) Earliest Finish Time (EFT)
Expected Activity Duration (t)

Start Time Finish Time

Latest Start Time (LST) Latest Finish Time (LFT)

 Computing Algorithm (AOA)
Forward Pass
. 4
2
▪ Begin at the left side of the precedence diagram and
moving to the right side.
g
▪ Determine ES & EF (where EF = ES + t) 1 5 (1 week) 6

▪ Use an ES of 0 for all starting activities

▪ ES for activities 1-2 & 1-3 will be 0 3

▪ Calculating Earliest Finish Time

▪ EF1-2 = 0 + 8 = 8
▪ EF1-3 = 0 + 4 = 4
 Computing Algorithm (AOA)

▪ The EF time for an activity becomes the ES time for 4

2
the next activity to follow
▪ ES2-4 = EF1-2 = 8
▪ ES2-5 = EF1-2 = 8 g
1 5 (1 week) 6
▪ ES3-5 = EF1-3 = 4

▪ EF2-4 = 8 + 6 = 14 3
▪ EF2-5 = 8+11 = 19
▪ EF3-5 = 4 + 9 = 13
 Computing Algorithm (AOA)
4
2
▪ ES4-5 = EF2-4 = 14
▪ EF4-5 = ES4-5 + 3 = 14 + 3 = 17
g
ES5-6 = ? 1 5 (1 week) 6
▪ EF2-5 = 8+11 = 19
▪ EF3-5 = 4 + 9 = 13
3
 Computing Algorithm (AOA)
4
2
▪ EF2-4 = 8 + 6 = 14 = ES4-5
▪ EF4-5 = ES4-5 + 3 = 14 + 3 = 17
ES5-6 = 19 g
Largest of 1 5 (1 week) 6
▪ EF2-5 = 8+11 = 19 EF4-5, EF2-5 & EF3-5
▪ EF3-5 = 4 + 9 = 13
3
▪ EF5-6 = 19 + 1 = 20
Computing Algorithm (AOA)

Backward Pass
Computing Algorithm (AOA)
Backward Pass

■ LF5-6 = EF5-6 = 20
■ LS5-6 = LF5-6 – 1 = 20 – 1 = 19
Computing Algorithm (AOA)
■ LF4-5 = ? ; LF2-5 = ?; LF3-5 = ?
■ LF4-5 = LF2-5 = LF3-5 = LS5-6 = 19
■ LS4-5 = ? ; LS2-5 = ?; LS3-5 = ?
■ LS4-5 = 19 – 3 = 16
■ LS2-5 = 19 – 11 = 8
■ LS3-5 = 19 – 9 = 10
 Computing Algorithm (AOA)
■ Follow the same approach to compute the LS or preceding activities

If an activity has multiple following activity, its LF will be equal to the smallest of LS of the following activities
Activity on Node
Activity on Node
Forward Pass Backward Pass
Computing Slack Times
■ Slack = LS − ES or LF − EF
Critical Activities
■ Slack times for activities on the critical
path will be zero.
■ Critical activities are: 1-2; 2-5; & 5-6

1. Path I: 1-2-4-5-6 = 18 Weeks

2. Path II: 1-2-5-6 = 20 Weeks (Critical Path)
3. Path III: 1-3-5-6 = 14 Weeks
 Total Slack

■ Path I: 1-2-4-5-6 = 18 Weeks

■ Slack of activities on this path:
– Slack 1-2 = 0
– Slack 2-4 = 2
– Slack 4-5 = 2
– Slack 5-6 = 0
■ Total Slack = 2
– This is the total slack available to both the activities, also known a shared slack
– If the first activity uses all the slack, there will be zero slack available to the subsequent activities in that path
 Time-Cost Trade-Offs: CRASHING
■ In many situations, it is possible to reduce the length of a project by injecting additional
resources.

■ Managers may shorten, or crash, certain activities by increasing direct expenses to speed
up the project.

■ To shorten or crash any activity, managers need following information:

– Regular time and crash time estimates for each activity
– Regular or Normal cost and crash cost estimates for each activity
– A list of activities that are on the critical path
 Time-Cost Trade-Offs: CRASHING

■ Activities on the critical path are potential candidates for crashing.

■ Activities should be crashed according to crashing costs, i.e., Crash those with the lowest
crash costs first.

■ Crashing should continue as long as the cost to crash is less than the benefits derived from
crashing.
Example

Crash Candidates

Crash Slope Crash Limit

Begin shortening the project one day at a time in the

order of lowest crash cost per day
 ■ Crash activity c by one day
Example – Crash cost = $300
– New Project duration =19 days
(c can’t be crashed any more)
■ New crash candidate ?
■ Crash activity e by one day
– Crash cost = $600
– New Project duration =18 days
(both the paths will become critical now)
■ New crash candidate ?

(0)
(2)
(1) Possible
(0) candidates
(3)
(1)
(1)
 ■ Crash activity f by one day

Example – Crash cost = $800

– New Project duration =17 days
(f can’t be crashed any more)
■ New crash candidate ?

(0)
(2) Possible
(0) candidates:
(0)
b&e
(3)
(1)
(0)

■ Crash cost of b & e = $500+$600 = $1100

■ But Indirect project cost per day is $1000
■ No additional improvement is feasible.
– Total crash cost = $300+$600+$800 = $1700
– Crash time = 3 days
PROBABILISTIC TIME ESTIMATES

■ The probabilistic approach involves three time estimates for each activity:
– Optimistic-time (to) : Length of time required under optimal conditions
– Pessimistic-time (tp): Length of time required under the worst con
– Most Likely time (tm): The most probable length of time for an activity

The fundamental question: What is the probability of the project completion within a given time ‘T’ ?
Time Estimates (beta-distribution)

Activity Level
Path Level
Path Mean = The expected duration of a path
= Sum of expected times of all the activities on the path
 Example

What is the probability that the project will be

completed in 17 weeks?

• One can have the probabilistic estimate of project completion time by knowing expected path times.

• The path probabilities are assumed to have normal distribution.

Example

What is the probability that the project will be

completed in 17 weeks?
Critical Path
Path Probability
■ The probability that a given path will be completed in a specified length of time:

(te) (ts)

te ts

■ Z-scores of each path will provide the path probability values (for a specified completion time)
■ The more positive the value of z, the better.
– Rule of thumb: If the value of z is +3.00 or more, the path probability is close to 100 percent
(for z = +3.00, the probability is .9987)
– A negative value of z indicates that the specified time is earlier than the expected path
duration; i.e., a certain delay in completion
 Same Example

Critical Path

What is the probability that the project will

be completed in 17 weeks?
Same Example Path Mean

Critical Path

• Za-b-c = (17 – 10)/0.97 = +7.22

• Zd-e-f = (17 – 16)/1.00 = +1

• Zg-h-i = (17– 13.5)/1.07 = +3.27

Note: If the value of z exceeds + 3.00, treat the
probability of completion as being equal to 1.0.