OPERATIONS MANGEMENT (ME0308)

Operations
Productions Services
Management

Management Management

Operation Management is a systematic approach to addressing issues in the

transformation process that converts inputs into useful, revenue generating outputs.
RB/NIE/Mech 2019-20
 ME0308

RB/NIE/Mech 2019-20
RB/NIE/Mech

2019-20
Swiggy ME0308

If you're talented and think you can handle the pressure of an exponential growth rate, join
us on this journey. We'd love to have you on board!
"Swiggy is a food ordering and delivery company based out of Bangalore, India. Swiggy was
inspired by the thought of providing a complete food ordering and delivery solution from
the best neighbourhood restaurants to the urban foodie. A single window for ordering from
a wide range of restaurants, we have our own exclusive fleet of delivery personnel to
pickup orders from restaurants and deliver it to customers . Having our own fleet gives us
the flexibility to offer customers a no minimum order policy on any restaurant and accept
online payments for all partner restaurants that we work with. Our delivery personnel carry
one order at a time which ensures we get reliable and fast deliveries."
July 7 , 2015 Co founder:
On line food ordering at Rahul jaimini IIT KGP Tech
Bangalore-Koramangala Sriharsha Majety IIM CalCutta & BITs
Planning
Extended to Hyderabad, Mumbai, Nandan Reddy Msc ( Physics) BITs
Pune, Kolkata, Chennai.

1st online food service , 1995 World wide waiter, waiter .com at California, Close on 2001
Paper Boat ME0308

Paper Boat is a brand of traditional Indian beverages and foods produced and marketed by
Hector Beverages, which is headquartered in Bangalore, India.[1][2]
Paper Boat was launched by Hector Beverages in August 2013.[3] The product consists of a
range of traditional, indigenous Indian drinks such as Aam Panna, Jaljeera and Aam Ras.
The drinks were initially offered in single serving, flexible pouches; the company has since
then expanded to one liter Tetra Pak cartons as well.[3][4]
The company aims to preserve traditional recipes while using innovation to make the
ethnic Indian drinks accessible to an urban market.[5] Paper Boat does not use artificial
coloring or preservatives in its products.[6]
The company is funded by N.R. Narayana Murthy-led Catamaran Ventures, Footprint
Ventures and Sequoia Capital, among others other investors.[7]
Hector Beverages was founded in 2009 by
Neeraj Kakkar, Neeraj Biyani, Suhas Misra and
James Nuttall

The company's first product was a protein

drink called Frissia, following which the energy
drink brand, Tzinga was launched in 2011.[5]
Misra& Nuttall Co-Founder left in 2014-15
RB/NIE/Mech 2016 On wards it never looked back. 2019-20
 OLA cabs ME0308
ANI Technologies Pvt. Ltd., stylised as OLΛ, is an Indian origin online transportation
network company. It was founded as an online cab aggregator in Mumbai, but is now
based in Bangalore. As of April 2017

Ola Cabs was founded on 3 December 2010 by Bhavish Aggarwal, currently[when?] CEO,
and Ankit Bhati

In March 2015, OlaCabs acquired Bangalore based taxi service

RB/NIE/Mech 2019-20
Café Coffee Day ( CCD) ME0308
Coffee chain in 1993

The first CCD outlet was set up on July 11, 1996, at Brigade Road, Bangalore, Karnataka

The company is vertically integrated to cut costs: from owning the plantations[4] to growing
the coffee,[4] making the coffee machines[10] and making the furniture for the outlets

RB/NIE/Mech V G SIDDHARTHA 2019-20

 ME0308
Café Coffee Day Global Limited Company is a Chikkamagaluru-based business which grows
coffee in its own estates of 20,000 acres.[4] It is the largest producer of arabica beans in Asia,
exporting to various countries including the U.S., Europe, and Japan.[5]
V. G. Siddhartha started the café chain in 1993 when he incorporated Coffee Day Global,
which is the parent of the Coffee Day chain.[6] The first CCD outlet was set up on July 11,
1996, at Brigade Road, Bangalore, Karnataka. It rapidly expanded to other cities in India,
with more than 1000 cafés open across the nation by 2011.
In 2010, it was announced that a consortium led by Kohlberg Kravis Roberts would invest
₹10 billion (US$140 million) in Coffee Day Resorts, owned by the company.[7] The same year,
the logo was changed to the current logo, which the company stated was to showcase the
chain as a place to talk.[8] This was done with major changes in the layout of the stores,
including the addition of lounges and a total revamp of the interiors.[9]

The company is vertically integrated to cut costs: from owning the plantations[4] to
growing the coffee,[4] making the coffee machines[10] and making the furniture for the
outlets.[4]
On 29 July 2019, Siddhartha went missing, and his body was found in the Nethravathi
river backwaters two days later. A letter, assumed to be written by Siddhartha
addressing the board of directors and staff, was made public in which he takes
responsibility for not creating a profitable business model.[11]

RB/NIE/Mech 2019-20
 ME0308
Narayana Health's (NH) : A Journey that began wining the Heart of India
Indians are three times Prones to heart diseases than Europeans.

2013- 2.5 million heart surgeries per year in India. We are doing 90 000 only.

India Produce 80 Cardiologists a year compare to USA 800.

70% Urban where as India has 70% rural area.

First NH hospital in 2001,organized by Dr. Devi Shetty, Bangalore.

Now 14 Hospital

Cost cut down to Rs. 300000/ to 150000/- Now it is 75000/-

Beds, 300 beds, to 5700.

In 2020 expecting 5700+2500 beds.

Strength 12000 Employees to nearly 40000 Employees.

RB/NIE/Mech 2019-20
 Where are you?

RB/NIE/Mech 2019-20
 Galaxies 100 Billion

Stars 1000 Billion

Sun 200 billion

Planets

Earth Population 750.21 crores

India 131 Karnataka 7 Mysuru 10 NIE

??????
crores crores lakhs 5000

RB/NIE/Mech 2019-20
 ME0308

Apply
Knowledge

Input from Invent new

the earth things

Giving it
Use it/Recycle it
back to earth

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 ME0308

Choice is yours

RB/NIE/Mech 2019-20
 Aggregate Planning Strategies

i) Three pure planning strategy ( Internal to the organization)

When strategies aim to modify the capacity to meet the demand only with the help of
internal resources of the organization, they are as “ Pure planning strategies”

Strategy 1 : Vary the size of the work force ( Ex. Hiring or firing the workers,
Productivity per employee )
Strategy 2 : Vary the number of working hours ( Demand high, Over time,)
Strategy 3 : Vary the inventory levels ( During peak hours)
K.R.Phneesh

ii) Other pure strategy ( External to the organization)

1) Back Order ( Wait, Customers , reduction in profit)
2) Sub-Contracting : ( widely used method of Modifying the supply.)
3) Product Promotion : ( Ex. Buy one take one)

RB/NIE/Mech
 Syllabus Flow Chart ME0308

• Operations Management concept

Unit 1

• Design and Capacity Planning

Unit 2

• Demand Forecasting
Unit 3

• Aggregate Planning and Master Scheduling

Unit 4

• Scheduling and controlling Production Activities

Unit 5

• Just in Time Manufacturing

Unit 6

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Unit 1 ME0308

Unit – 1:
Operations Management Concepts: Introduction, Historical Development,
Operations Management Definition, and Framework for managing operation, The
trending operation management Products v/s Services, Productivity, Factors affecting
Productivity, International Dimensions of Productivity, Scope of operations
management.
Operations Decision Making: Introduction, Characteristics of decisions, framework
for Decision Making, Decision methodology, Decision support system. Concept and
Numerical problems on economic model (BEA), Decision tree analysis.
SLE: statistical model

RB/NIE/Mech 2019-20
 Course outcomes:
ME0308
Course outcomes:
At the end of the course, the student will be able to:
1. Understand role of operation management, the factors affecting productivity and
develop decision support system.

2. Understand the different capacities, facility location and layouts.

3. Analyze different qualitative and quantitative forecasting models.

4. Evaluate different material and capacity requirement planning methods.

5. Understand and solve different job scheduling strategies.

6. Understand the Optimisation of time in material logistic process.

RB/NIE/Mech 2019-20
System aspect of production /operations function ME0308

RB/NIE/Mech 2019-20
System aspect of production /operations function ME0308

• Material
• Labor
Transfor Conversion • Goods
input • Equipment Process Out put
mation • Services
• Capital

Feedback
information

RB/NIE/Mech 2019-20
FUNCTIONAL SUBSYSTEM OF ORGANIZATIONS ME0308

Finance

Marketing Personnel

Production

When its Fails ?

Interwoven by many linkages. Ex. P M F Pe etc
RB/NIE/Mech 2019-20
Definitions ME0308

A set of interrelated management activities which are involved in

manufacturing certain products is called as production management.

If the same concepts is extended to services management then the

corresponding set of management activities is called as operating
managements,

So, in general , the concepts of manufacturing products /providing

services is called as operations management.

Ex: Production
Boilers with specific capacity, Construction flat, Automobiles

Ex: Services
Medical facilities and clinical tests, carrying food for the party, travel booking service,
Banking sector etc.
RB/NIE/Mech 2019-20
 ME0308

Systems: systems are the arrangement of components designed to

achieve objectives according to the plan

Subsystems : Personnel. Engineering, Finance, operations

Resources : Resources are the human, material and capital inputs to

the production process

RB/NIE/Mech 2019-20
Definitions Operations Managements ME0308

Operations Managements is a systematic approach to addressing

issue in the transformation process that converts inputs into useful,
revenue generating outputs.

Operations Managements is the process of effectively planning and

regulating the activities of that part of an enterprise which is
responsible for actual transformation of materials into finished
products by E.F.L.BRENCH

Production management deals with decision making related to

production processes so that the resulting goods or services are
produced according to specification, in the amount and by the
schedule demanded and at by minimum cost
RB/NIE/Mech by ELWOOD. S. BUFFA 2019-20
 ME0308

Operation management is the process where by resources flows with

in a defined system are combined and transformed in a controlled
manner to add value in accordance with Policies communicated
by management. By Joseph .G. Monks

Operation management is simply putting together inputs of men,

capital , materials Information and energy and transforming them into
products and services in the quantity, quality , time and location that
will best meet the organization objectives
By Lamone and kottas

RB/NIE/Mech 2019-20
 Important stages in the history of Operation Management
ME0308

Development Expansion Period

Handicraft Ear Colonial Expansion 1750-1800

Industrial Revolution Ear Industrial Expansion 1800-1850

Scientific Management Ear Financial Expansion 1900-1950

Operation Research and Automation Expansion 1950-2000

Computer Ear

? ? ?

RB/NIE/Mech 2019-20
Important stages in the history of Operation Management ME0308

RB/NIE/Mech 2019-20
 Manager skills
ME0308

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Historical Development
ME0308
Date Contributions Contributor

1778 Specialization of labour in manufacturing Adam Smith

1799 Interchangeable parts, cost accounting Eli Whitney and others

1832 Division of labour by skill; assignment of jobs by skill; Charles Babbage

basics of time study
1900 Scientific management time study and work study Frederick . W . Taylore
developed; dividing planning and doing of work
1900 Motion of study of jobs Frank B. Gilbreth

1901 Scheduling techniques for employees, machine jobs in Henry L. Gantt

manufacturing
1915 Economic lot sizes for inventory control F.W.Harris

1927 Human relations ; the Hawthorne studies Elton Mayo

1931 Statistical inference applied to product quality; quality W.A. Shewart

control charts
RB/NIE/Mech 2019-20
Date Contributions Contributor

1935 Statistical sampling applied to product control: H.F. Dodge and H.G.
inspection sampling plans Roming
1940 Operations research applications in world war II P.M.Blacker and other

1946 Digital Computer John Mauchlly and J.P.

Eckert
1947 Liner Programming G.B.Dantzing, Williams
and others
1950 Mathematical programming on-liner and stochastic A.Chames, W.W.Cooper
process and others
1951 Organizational digital computer: large-scale Sperry Univac
computations available
1960 Organizational behavior ; continued study of people at L. Cummings, L. Porter
work
1970 Integrating operations into overall strategy and policy W.Skinner J. Orlicky & G.
computer application to manufacturing, scheduling and Wright
control , material requirement planning (MRP)
1980 Quality and production applications from japan : W.E.Deming and J. Juran
robotics, CAD-CAM,TQM,JIT,KANBAN
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 ME0308

2000 Total integrated system, integration of USA. Europe,

several engineering disciplines. Production Japan etc
for global marketing and total customer
satisfaction. E-commerce, E-mail, Internet,
Global Village concepts

What is the Next ?????????????????

RB/NIE/Mech 2019-20
 ME0308

RB/NIE/Mech 2019-20
Production System ME0308

• Men • Production
design
• Materials
• Process
• Machines Transformati • Product
Input Planning Output
• Information on process • Service
• Production
• finance control
• Maintenance

Control
• Inventory
•Cost
•Quality
Fig. Schematic production system

Systems: systems are the arrangement of components designed to

achieve objectives according to the plan

RB/NIE/Mech Subsystems : Personnel. Engineering, Finance, operations 2019-20

Operation System ME0308

• Land
• Late delivery
• Labor Serviced
• Labor turnover
• Building Transformati customer with
Input • Production Output
• Information on process desired
control merchandise
• capital
• Maintenance

feedback
• Inventory level
•Labor efficiency
•Sales volume

Fig. Operation system for department stores

Operation system is defined as one in which several activities are

performed to transform a set of inputs into a useful output using
a transformation process.
RB/NIE/Mech 2019-20
General model of operation functions ME0308

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 ME0308

Fig. Schematic model for operations/production system

RB/NIE/Mech 2019-20
Relative frequency of decision at different levels of
management ME0308

Strategic Defining goal, making policies,

EX. NIE, LIC , RBI, determination of organizational objectives
decisions
(Top level)
Acquisition of resource, plant location
Tactical decisions New products establishments,
(middle level) Monitoring of budget.

Effective and efficiency use

Operational decisions Of existing facilities and
Resources to carry out
( Bottom level) Activities with in the budget
Constraint.

RB/NIE/Mech 2019-20
Decision making pyramid ME0308

RB/NIE/Mech 2019-20
 Production Managing and tracking ME0308

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 ME0308

RB/NIE/Mech 2019-20
A Framework of Managing Operation ME0308

RB/NIE/Mech Fig. General model for managing operations 2019-20

Factors contribute to OM ME0308

Planning:

•Planning for operation

•Capacity planning
•Facility location planning
•Layout planning

Organizing:

•Organizing and staffing for operations

•Job design, Production/operation standards and work measurement

Controlling:

•Controlling operations
•Inventory Control
•Cost Control
•Maintenance
RB/NIE/Mech 2019-20
 ME0308

Behavior :

For smooth functioning of the concern, operations managers are really interested to
know how their efforts to plan, organize and control affect human behavior. This
may also include studying the behavior of their subordinates that may affect planning,
organizing and controlling actions of the management. In addition, the decision-making
behavior of manager is also worth analyzing.

Models:
•Verbal models : These involve words and descriptions
•Physical models: Built using a scale
•Schematic models: These involve diagrams and charts
•Mathematical models: Involving equations

RB/NIE/Mech 2019-20
 ME0308
Kerala 2018

Kodagu 2018

North Karnataka 2019

RB/NIE/Mech What is the solution , What kind of business ??? 2019-20

The Trend: information and Non Manufacturing systems
ME0308
Trends in operation management :

Trends in operation management gives some clues about the changes or shift in overall
economic activities.

Indian scenario

Agriculture Industrial Job

Manufacturing/Design Service industries

Will this trend continue ? If so, how long ? And at what rate?
Ex. Patanjali
RB/NIE/Mech 2019-20
The Trend: Information and Non Manufacturing systems
ME0308
The Trend : Global Scenario

Manufacturing/Design Service industries

Ex. Insurance , Banking, etc.

Information based
industries

Google,
Best Ex. Ordinary mail are replaced by electronic mail.
Information Apps,
Computers, mobile telephones, wireless
RB/NIE/Mech 2019-20
 ME0308

Education
Living style
Cloths
Technology
Culture
Luxury
Market
E commerce
Entertainment
Sports
Apps
Investment
Etc.

RB/NIE/Mech 2019-20
Trend Example: ME0308

Products V/s SServices

RB/NIE/Mech Ex. Silicon wafer 2019-20

Products V/s Services ME0308
Operation Management encompasses both manufacturing and services sector, there are some fundamental
differences between them are listed below.

(Touch)

( good ,Bad,)

Service : the action of helping or doing work for someone

Service: a system supplying a public need

RB/NIE/Mech 2019-20
Productivity ME0308

Productivity may be defined as tool used to measure the

Effectiveness of resource utilization to produce goods or service

According Peter Drucker, “ Productivity means a balance between

all factors of production that will give the maximum output
with the smallest effort.

RB/NIE/Mech 2019-20
Transformation and value adding activities ME0308
The objective of combining resource under controlled conditions is to transform them
Into goods and services having a higher value than the original inputs.

The productivity refers to the ratio between values of outputs per work hour to the cost
Of inputs. The overall must be greater than 1, then we can say value is added to the
Product.

Fig. Schematic model for operations/production system

Ex. Sony TV, hotels, colleges, vehicles etc
RB/NIE/Mech 2019-20
Factors affecting Productivity. ME0308

RB/NIE/Mech 2019-20
Productivity and performance ME0308

RB/NIE/Mech 2019-20
Influence of Productivity ME0308

GDP: Gross domestic product:

Internal influence: India:
1) Human capital investment 6.81 %( up to date 2019-20)
2) Capital investment 7.3% (2018-19) Expecting 7.6%
3) R & D investment 7.2% (2017-18)
4) Learning by doing 7.2% (2016-17)
5) Workspace culture 7.9 % (2015-16)
6) Business models and process 7.3 % (2014-15)

Dr. APJ GDP Should be 10% to compete

External influence:
Rich and Poor Based on GDP
1) Knowledge Spillovers ( ex. HMT)
2) Economic geography
GDP is used to measures Economic
3) Competitions
output.
4) International linkages
Gross Domestic Product of a nation is the sum
5) Regulations
of values of goods and service produced in that
6) Quality institution
nation in a year.
7) Infrastructure GDP, PGDP, GWP
RB/NIE/Mech Global warming potential 2019-20
 ME0308
Factors affecting Productivity.
The various factors influencing productivity can be broadly classified into two categories
Controllable Factors or Internal Factors Uncontrollable Factors or External Factors

Product ( usefulness) Change in Economic situation (Doller)

Plant and equipment (breakdown) Social changes and attitudes (participation)

Technology (Automation) Natural Resources

Materials (reduce cost ) Government policy

Work Methods and Processes (Engg Tech) Infrastructure

Energy resources and power supply

Human factors (skill)

Management style (influence working class)

RB/NIE/Mech 2019-20
Techniques to improve Productivity ME0308

The industry is always in search of ways and techniques to improve productivity some
Of the basic techniques are listed below

1) Technology Based ( CAD,CAM,CIM, Robots, Laser, FMS)

2) Employee Based ( Incentives, job rotation, encouragement, TQM, QC, )

3) Material Based ( MRP= material requirement planning, purchase, storage, waste) )

4) Process Based (method study)

5) Product Based (value analysis and value engg. Std, )

6) Management Based ( Communication, motivation, promoting group activity)

RB/NIE/Mech 2019-20
Techniques to improve Productivity ME0308
There are several strategies for improving productivity

1. Increased output for the same input Ex. Steel plant (Altering billet making section)

2. Decreased input for the same output ( Cheaper raw material)

3. Proportionate increase in the output is more than the proportionate

increase in the input( Ex increasing new product along with old )

4. Proportionate decrease in the input is more than the proportionate.

decrease in the output
5. Simultaneous increase in the output with decrease in the input.( Ex. Advance
automated technologies )

RB/NIE/Mech 2019-20
 ME0308
Table 4. Revenue and Capital Expenditure of Defence Services, 2018-19
Note: *: Includes Rs 9.96 crore allocated for capital expenditure for the inspection organisation

Army Navy Air Force OFs DRDO

Revenue
Expenditure
(Rs in Crore) 128077 19571 28821 727 8127
Capital
Expenditure
(Rs in Crore) 26826* 20848 35770 804 9734
Revenue
Expenditure
as % of Total 83 48 45 48 45
Capital
Expenditure
as % of Total 17 52 55 52 55

RB/NIE/Mech 2019-20
International Dimensions of Productivity ME0308
Industrialization nations are developed two strategies to remain competitive in the
Business.

1. Moving to a new and more advanced products, and

2. Employing better and more flexible system

The word is fast, becoming a global village. Economic liberalization, privatization and
Globalization in many countries all over world have erased several frontiers, both in
Manufacturing as well as service operations. Market have opened up, competitions
are very hot, quality is going up, inefficient companies are breaking up, productivity
And professionalism are shooting up, outs sourcing is buzzing up and so on, in the present
International market scenario.
USA –is 50% depend From china , korea, India, Brazil, Malaysia etc.
USA, UK,GERMANY, FRANCE, RUSSIA, --------- Research, Aviation, micro electrons,
nano-technology, fiber optics, laser-technology etc.

RB/NIE/Mech 2019-20
Operational Excellence
1. Quality Measures
ME0308
•% of products which do not need rework
•Costs incurred to improve quality
•Number of defective pieces (parts per million)
•Avg no. of employee suggestion per month.

2. Delivery Schedule Measures •Lead time required to Procure raw material

•Manufacturing lead time and cycle time required
•Number of times delivery schedules no met
3. Cost Measures •Avg time spent by inventory before usage
•Cost of ordering and Procuring raw materials
•Cost reduction due to import substitution
4. Flexibility Measure •Cost of manufacturing as a % of selling price
• Range of products offered w.r.t ,size,colour. Capacity etc.
•Time taken from design stage to customer delivery stage
•Process and manufacturing flexibility
5. Other Measures •Direct labour to indirect labour ratio
•Avg training time per employee
•Process rate to sales rate ratio
RB/NIE/Mech 2019-20
World Class Manufacturing Practices ME0308

World class manufacturing concept is of a recent origin. The following attributes of the
world class manufacturing are aimed to fulfill the customer demands.

1. Product with high quality.

2. Products at competitive price
3. Products with several enhanced features
4. Products in a wide variety
5. Products delivered with shorter lead times
6. Products delivered on time
7. Flexibility in fulfilling products demand.

All these performance measures are external to the manufacturing system but highly
essential for the success of the company.

Ex. Mobile.

RB/NIE/Mech 2019-20
World Class Manufacturing Practices ME0308

1. Just-in-time Manufacturing : (Japanese, Inventory )

2. TQM (Total Quality Manufacturing) : Small improvement group

3. TPM ( Total Production Maintenance): Removal maintenance dept and tr. to Prod dept.

4. Employee Involvement: Multiple responsibilities

5. Simplicity : i) Kanaban System : information written on the cards

a) Withdrawal Kanban (WK)
b) Production order kanaban (POK)

ii) Poka Yoke : Japanese term means mistake proofing or error proofing
iii) Kaizen : means Change to good, it works on elimination of waste

RB/NIE/Mech 2019-20
Japanese managerial techniques ME0308

1. Corporate objects : Customer are given the highest priority. Employees are
given the next priority. Owners and shareholder get the last priority.

2. Time horizon : long term

3. Employment schedules : Life long career
4. Materials : Resources are limited, space is used efficiently while inventory.
5. Financing : more use is made of debt capital and less of equity capital.
6. Training : High
7. Worker participation: Workers participate in management via suggestions, feedback,
quality circles, etc.

RB/NIE/Mech 2019-20
Scope of Operations Management ME0308

Location
Maintenance of Plant layout &
management facilities Material han

Material Production Product

management OM design

Quality
Process
control Production design
planning and
control
RB/NIE/Mech 2019-20
 ME0308
Kerala 2018

Kodagu 2018

North Karnataka 2019

RB/NIE/Mech What is the solution , What kind of business ??? 2019-20

 Any questions?
It is your time to discuss

? Any Suggestion ?

May I help you?

RB/NIE/Mech
 OPERATION DECISION MAKING ME0308

RB/NIE/Mech 2019-20
 OPERATION DECISION MAKING ME0308
Dept. : Marketing, R & D , Maintenance, Transportation, Finance, Human resources

Routine situation of decision making in operation manufacturing organization :

Material, Demand, machine, labourers, high or low volume price products etc.

CHARACTERISTICS OF DECISIONS:

a) Personal judgments : Based on Knowledge , Experience,

and common sense

b) Quantitative analysis : Based on the mathematical models

RB/NIE/Mech 2019-20
 ME0308

RB/NIE/Mech 2019-20
 ME0308

⚫ Decision = choice made from available

alternatives

⚫ Decision Making = process of identifying

problems and opportunities and resolving them

RB/NIE/Mech 2019-20
Characteristics of Decisions ME0308

Based on personal judgment and quantitative analysis

1. Significant or long-lasting decisions : Ex. Plant location, infrastructure development, R & D

2. Time availability : study new proposals

3. Cost of analysis : The cost of analysis gets added up to the cost of the project which
many bring down profitability

4. Decision complexity : sometimes decision become very complex and cumbersome because

i) Too many variables involved

ii) Variables being highly interdependent or sequentially related
iii) Data describing the variable are either incomplete or uncertain

RB/NIE/Mech 2019-20
 Information Continuum ME0308

Complete Extreme
certainty uncertainty
All data

Objective
No data
information

Large Small Subjective

samples samples information

Fig. Information Continuum

RB/NIE/Mech 2019-20
FRAMEWORK FOR DECISION MAKING ME0308
Decision making using scientific and analytical methods involve a systematic step by step
Procedure as follows:

1. To define the problem and parameter influencing it. (both controllable & non-controllable)

2. To establish the criteria for decision making : (Grading)

3. To formulate a model considering all decision variable

(i) Physical model : eg. An architects idea of a building
(ii) Computer model : virtual walk through, a CAD model
(iii) Mathematical models : Forecasting model, simplex model, transportation etc.
(iv) Verbal models : Words and description
4. To generate alternatives solution by varying parameters.: (Mathematical , statistical)

5. Evaluate all alternative and select the best.: ( Experience, good judgment majority choice, etc)

6. Implement the decision and monitor the results. : this not a part of Decision Making
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 ME0308

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 ME0308

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Decision Methodology ME0308
Engineers and Managers are expected to use a number of quantitative techniques to serve
as a basis for decision making. But type of quantitative technique used depends on the
nature of variables influencing the problems.
Condition: All information variables known, or in certain cases no information available.
Few quantitative techniques:
A. Variable with complete certainty B. Variable with Risk and Partial certainty
1. Break-even-analysis 1. Forecasting
2. Cost benefit analysis 2. Decision tree
3. Inventory control 3. PERT & CPM
4. Linear programming. 4. Aggregate planning
5. Non-linear programming 5. Simulation
6. Dynamic programming 6. Queueing theory
7. Integer programming 7. Regression and correlation
8. Scheduling 8. Heuristic methods
C. Variables with extreme uncertainty
1. Game Theory 2019-20
2. Flip of the coin OR is the solution
RB/NIE/Mech 3. Astrology
Decision support systems (DSS) ME0308
Decision support systems (DSS) are computer based systems designed to help decision
maker at various stages of the decision making process especially in the development of
alternatives and evaluation of possible courses of action. A large number of computer
based analytical tools or software's are available to help modern day managers to take
decisions on various aspects of business. Computers have enabled decision makers to
save time and costs, crunch data, visualization solution better and provide more alternatives.

CRAFT ( Computer Relatives Allocation of Facilities Technique : used for plant layout
CAN-Q ( Computer analysis of Network of Queues. : Queueing problems
ALDEP ( Automated layout design program) : used for layout design
COMSOLE ( Computer Method for Sequencing of Assembly Lines)
ADAMS ( Simulation of Kinematics Mechanisms)
IMPAS ( Computer aided process planning software)
ESPIRT ( Computer aided part programming)
PREDATOR ( Checking the manual part program)
NASTRAN/ANSYS /ABACUS/DEFORM/FLUENT: used for finite element analysis

RB/NIE/Mech 2019-20
Economic Model ME0308

Mathematical and analytical models which address issues of costs, revenues, profits
and losses are economical models. Decisions on these are fundamental to the survival
and continuation of any business. Break Even Analysis and contribution analysis are
important economic models widely used in several business areas.

Break Even Analysis:

The fundamental objective of any business is to maximize profit and minimize
losses. Profit mainly depends upon production costs, sales revenues and volume of
output. Break Even Analysis is a graphical and algebraic representation of the
relationships among these three variables.
It is extensively used model for decision –making by many organizations.

Break Even analysis is also known as cost-volume-profit model.

Total production costs are generally divided into two categories- Fixed costs and
Variable costs. Sales revenue depends upon the volume of output and price per
unit of output whereas volume of output depends upon the sales demand.
RB/NIE/Mech 2019-20
Break Even Analysis: ME0308

1. Fixed costs (FC): These costs remain fixed or constant irrespective of the volume of
production. They remain the same whether the production is small. Large or NIL.

Ex. Costs on land and building, Salaries to top management, insurance, depreciation,
taxes on property, equipment etc.

2. Variable Costs (VC): These costs vary with the volume of production. Higher the
production, higher will be the variable costs. In other words, variables costs are the
function of volume of output. Variable costs become zero when production is
stopped. Variable costs are also known as prime costs.

Ex. Cost of raw materials, labor, transportation of finished goods. Packing costs etc.

3. Total cost (TC) : It is the final cost involved in the manufacture of a product. It is
nothing but the sum of fixed costs and variable costs.
4. Sales Revenue (SR) : It is the income which comes into the organization through the
sales of the products.
Turnover is the net sales generated
by a business, which profits is the
Sales Revenue = Total cost + Profit
residual earning of a business after
all expenses have been charged
RB/NIE/Mech against net sales. 2019-20
 ME0308

Fixed cost Total cost

Variable cost
cost
cost + = FC

Volume of output Volume of output Volume of output

RB/NIE/Mech 2019-20
 ME0308

Sales Revenue

Total cost
Price per unit
Revenue
of O/P
Cost FC

Volume of output
Volume of output

RB/NIE/Mech 2019-20
Break Even Chart ME0308

Sales Revenue line

Profit

Contribution Profit Region

Break Even Break Even
Cost Point
Total VC
Total cost line
Cost

Loss Region
Total FC
Margin of safety
FC
Break Even output

Volume of output
RB/NIE/Mech 2019-20
 Any questions?
It is your time to discuss

? Any Suggestion ?

May I help you?

RB/NIE/Mech 2019-20
Break Even Point ME0308

Break Even Point:

The point at which the sales Revenue line and total cost line intersect is known as
Break-even point. In other words, the Break-even point is that junction where income
and costs are exactly in balance. Thus there is neither profit nor loss for the
corresponding volume of output known as Break-even production. The BEP divides the
profit and loss regions.

Assumption in Break even analysis:

1. Selling price per unit of output will remain constant throughout the volume of output.
2. There is a liner relationship between sales volume and costs i.e., there are no whole
sale rates.
3. Costs can be divided into two categories – Fixed costs and Variable costs.
4. Production and sales quantities are equal i.e., there is no inventory.
5. No other factor will influence the cost expect the quantity of output.

RB/NIE/Mech 2019-20
Break Even Point ME0308

Uses of Break-Even Analysis:

1. BEC helps the management to know at a glance the profits at different levels of
output.
2. BEA is useful in determining the minimum output necessary to BE and go after profit.
3. The effects of altering selling price or the effects of controlling costs on the profits
earned can be quickly understood by looking at the chart.
4. It helps comparing the profitability of two or more proposals.
5. It helps in fixing the selling price in order to attain expected profit.
6. It helps in computing the output required to maintain a particular level of profit.
7. It helps in taking decision regarding production , plant locations, make or buy
components etc.

Limitations of BEA:
1. The whole of the production output is sold, which may not be so in reality.
2. Certain costs are partly FC and Partly VC. BEA holds good only for short run
requirement.
3. Profits depend only on selling price and sales volume ignoring the fact that they are
affected by technological changes, price, volume discounts, improved management,
improvement in quantity, versatility etc.

RB/NIE/Mech 2019-20
 ME0308

1) Contribution: It is difference between sales revenue and variable costs for any given
volume of output., At any given volume of output, If contribution is greater than the
fixed costs, Profit will result. contribution always equals Fixed cost at BEP
Contribution = Sales Revenue – Variable costs.
2. Margin of safety : Margin of safety is the horizontal distance between the BEP and the
actual output being produced.

Margin of safety = [ ( Actual sales - Break even sales) / Actual sales ] X 100

3. Angle of incidence ( ) : The angle between the sales revenue line and the total cost
line is called as angle of incidence. A large of incidence indicates large profit and
extremely favorable business positions.

4. Profit volume ratio: It is a measure to compare profitability of different products.

Higher the P/V ratio, more profitable will be the product.
P/V Ratio = [ Contribution / Total sales revenue] X 100
= [ ( Total sales revenue-Total variable costs) / Total sales revenue ] X 100
RB/NIE/Mech 2019-20
Calculation of Break-even point ( analytically) ME0308
Total costs = F + [v x Q ]
At BEP,
Total costs = Total Sales revenue Q = Break –even output
FC + (v x Q) = s x Q s –v = Contribution per unit.

Q ( BEP) = FC / ( s – v)

BEP = {Fixed costs/ [Contribution / unit of o/p]}

Where as,
FC= Fixed costs
Q= Quantity of output produced and sold
s = Selling price per unit of output.
v = Variable price per unit of output
sQ = S = Sales revenue ( income) for quantity Q
vQ = V = Variable costs for quantity Q.
RB/NIE/Mech 2019-20
Problems on BEP: ME0308

1) If fixed cost for manufacturing a certain products are Rs. 3,00,000 and variable costs
are estimated at 40% of the unit selling price of Rs 100. What is the quantity of
sales at which there is Break-even ?

Ans. Q = 5000 units

2) Process X has fixed costs of Rs 80,000 per year and variable costs of Rs 18 per unit.
Where process Y has fixed costs of Rs 32,000 per year and variable costs of Rs 48
per unit. At what production volume Q are the total costs of projects X and Y equal
?
Ans : Q = 1600 units.

3)

RB/NIE/Mech 2019-20
 ME0308

3) Festo India company has its existing product base ( Pneumatic cylinder) decides to
launch a new product priced at Rs 6500 per unit. If the fixed cost is Rs 8,20,000 and
variable cost per unit is Rs 2400 determine.
a) The BEP
b) The contribution
c) The volume needed to generate a profit of Rs 10,25,000?

Ans : a) BEP = Q = 200 units.

b) The contribution:
Total Contribution = Sales revenue – variable cost = 6500 x 200 – 2400 x 200
= 1300000 – 480000 = Rs 820000.
c) Sales revenue = Total cost + Profit
Profit = Sales revenue – Total cost
10,25,000 = sQ – ( F+vQ)
Q = 450 units.
Thus the additional volume company has to sell is = 450 – 200 = 250 units.

RB/NIE/Mech 2019-20
 4) A publisher sells a text book priced at Rs 200 each . The production costs for a volume
10000 books are as follows.
a) Labor = Rs 2,40,000
b) Materials = Rs 4,80,000 VC= a+b ME0308
c) Total over heads = Rs 3,60,000 FC= c+d+e
d) Selling and admiration = Rs 2,00,000
e) Interest on capital = Rs 3,20,000
Use the data to draw a break even chart and determine the BEP.

Ans : From the chart Break even volume  6900 units.

5) Locations A would result in annual fixed costs of Rs 3,00,000, variable cost of Rs

63/unit, and revenues of Rs 68/ unit. Annual fixed costs for location B are Rs. 8,00,000,
variable costs are Rs. 32/unit and revenues are Rs 68/unit. Sales volume is estimated to
be 25000 units / year. Which location is more attractive.

Ans : Break even volume of A = 60000 units

Break even volume of B = 22222 units.

Need to find out Profit of A and B

RB/NIE/Mech 2019-20
 5) A firm has rated capacity of manufacturing 30,000 casting / year. But due to poor
sales it is working at 25% of its related capacity. The expense are as below.

a) Fixed production expense = Rs. 2,70,000

b) Direct production expense = Rs. 62000
c) Variable production expense = Rs 80000
d) Direct labour cost = Rs 52200
e) Fixed sales expense = Rs 30000
f) Variable sales expense = Rs 15000

i) Determine BEP when each unit is sold at the rate of Rs 55

ii) If it is possible to increase the sales to 24000 units / year and selling price reduced to
Rs 40 per unit. What would be the present profit or loss ?
Compare this with the profit or loss in the above case.

iii) What is the new BEP

iv) Obtain the BEP graphically for both cases.

RB/NIE/Mech 2019-20
 Solution:
Rated capacity = 30000 casting /year
Actual Production = 25 % of 30000 = 7500 casting / year.
ME0308
Q1 = 7500 c/y
Q2 = 24000 c/y

Total fixed cost = F = Fixed production cost + Fixed sales expenses

= 270000 +30000 = Rs 3,00,000
Total variable cost = V = b+c+d+f = 62000+80000+52200+15000 = Rs. 209200

For Q1 Variable cost per casting = V/Q1 = 209200/ 7500 = Rs 27.89 33 per unit.
Total cost1 [( at Q1= 7500)] = F+V = 3,00,000 + 2,09,200 = Rs 5,09,200
Total cost 2 [( at Q2 =24000)] = F + v Q2 = 3,00,000 + (27.8933 x 24000) = Rs 969439.2

Sales revenue1 ( at Q1) = S1 = 55 x 7500 = Rs. 4,12,500

Sales revenue2 (at Q2) = S2 = 40 x 24000 = Rs 9,60,000

I ) BEP from Graph For Q1 profit or loss

For Q1 BEV = 11100 casting /y = SR1 –TC1 = 4,12,500 – 5,09,200
= -96700
ii) For Q2 BEV = 24,900 casting /y For Q2 Profit or loss
= SR2 – TC2 = 9,60,000 – 9,69,439
RB/NIE/Mech = - 9439
 ME0308

For Q1 profit or loss

= SR1 –TC1 = 4,12,500 – 5,09,200
=Rs -97200
For Q2 Profit or loss
= SR2 – TC2 = 9,60,000 – 9,69,439
=Rs - 9439

******* Construct BEC

Conclusion:
Looking at the value . It is concluded that it is loss making both at Q1 and Q2.
But the loss is considerably reduced from Rs -97200 to Rs – 9439 when sales
went up from 7500 to 24000 because of reduction in selling price fro Rs 55 to Rs
40.
RB/NIE/Mech 2019-20
 6) A travel agency has a vacation package that sells for Rs 12,500. Fixed costs are Rs 80
lakhs and the present volume of 1000 customers. Variable costs are Rs 25 lakhs and
profits are Rs 20 lakhs.

a) What is the Break-even point volume

b) Assuming that fixed costs remain constant, how many additional customers will be
required for the agency to increase profits by Rs 10 lakhs.

Ans.

a) Q = F/ (s-v) = 800 customers.

b) SR = Profit + Total cost

12500 x Q2 = (20 lakh s + 10 lakhs ) + ( 80 lakhs + (2500 x Q2)

Q2 = 1100 customers.

 Q2- Q1 = 1100 -1000 = 100 customers.

 We need 100 more customers to increase profit by Rs 10 lakhs.

RB/NIE/Mech 2019-20
 7) Pizza hut has the following data on costs at two volumes of production for a pizza that
sells at Rs 50.

a) Construct a Break even chart

b) Compute the variable cost, the contribution and the BEP
c) Using the contribution for b) estimate the profit at a volume of 8000 units.

Labour Materials Overheads Other fixed Total

Rs Rs Rs Rs Rs

6000 units 60000 36000 54000 80000 230000

10000 100000 60000 60000 80000 300000

units

Ans :

RB/NIE/Mech 2019-20
 ME0308

Problem: A manufacturer of motor cycles buys side box at Rs. 240 each. In case he makes
it himself, the fixed and variable costs would be Rs.300,000 and Rs. 90 pre side box,
respectively. Should the manufacturer make or buy the side box if there is a demand for
2500 side boxes?
Q ( BEP) = FC / ( s – v)

BEP = 300000/(240-90)
= 2000 units.

Since the demand (2500 units) is more than the break even points, the company
can manufacture the side boxes.

RB/NIE/Mech 2019-20
 ME0308

Problem: There are three alternative available to meet the demand of a particular product.
They are as follows :
1. Making the product using process A.
2. Making the product using process B.
3. Buying the product.
The details as follows
Cost Elements Making using Making using Buy
Process A process B
FC/year 100,000 300,000 -
VC/unit 75 70 -
Purchase price /unit - - 80

The annual demand for the product is 10000 units

(a) Should the company make the product using process A or Process B or buy it?
(b) At what annual volume should the company switch from buying to making using
process A?
(c) At what annual volume should the company switch from process A to B ?

Ans: a) buy it b) Q ≥ 20 000 units, c) Q ≥ 40 000 units,

RB/NIE/Mech 2019-20
 ME0308

Problem: Old Fashioned Berry pies –Ltd , currently operates a single bakery, but is not
considering a second location in a new shopping mall. The owner estimates that fixed costs
would be dollar 3,000 per week, and that labor and materials to produce pies at that
location will be 60 cents per pie. Pie be sold for dollar 1.60 each.
1) What number of pies must be sold to break even?
2) What profit ( or loss) would there be on sales of 20,000 pies in one week?
3) What volume would be required in order to realize a profit of dollar 12000?

Ans: 1 Q = 3000 pies

2)Profit upon selling 20000 pies in a week =dollar 17000
3) Volume to sell to realize profit dollar 12000
Q = 15000

RB/NIE/Mech 2019-20
 ME0308

Problem : A manufacturer of farm equipment is considering three location A, B, and C for a

new plant. Cost studies show that fixed costs per year at the sites are Rs. 2,40,000, Rs.
2,70,000, and Rs. 2,52,000 respectively. Whereas variable costs are Rs. 100/-unit, Rs.
90/unit- and Rs. 95/- unit respectively. If the plant is designated to have as effective system
capacity of 2500 units per year and is expected to operate at 80 % efficiency, what is the
most economical location, on the basis of actual output?

Hint : Actual out put or capacity : System efficiency X System capacity

i.e 0.80 X 25000 = 2000 units.

RB/NIE/Mech 2019-20
 Decision Tree Analysis ME0308

Decision Tree Analysis is a technique used for taking long-term capacity planning
decision. A decision tree is basically a diagram used to structure and analysis a
decision problem. It is a systematic and sequential laying out of decision points,
Alternatives, and chance events. A decision point is a juncture when one decision
has to be taken among a few alternatives. A chance event is one which
potentially leads to several different outcomes, only one of which will definitely
occur. In other words when a chance event occurs, the decision maker has no control
over which outcome will occur.

Decision tree analysis is a comparative study of different possibilities occurring due

to decisions take, and arriving at the best possible alternative purely depending on
the probability of occurrence of each outcome and the probable profit or loss of
such a outcome.

RB/NIE/Mech 2019-20
 Step in Decision Tree Analysis ME0308

1) Tree Diagramming
a) Identify all decision points and the order in which they occur.
b) Identify alternate decisions for each decision point.
c) Identify the chance events that may occur after each decision.
d) Draw a tree diagram showing the sequence of decisions and chance events.

2) Estimation
a) Estimation the probability of each possible outcome of each chance event.
b) Estimate the economical consequence of each possible outcome and decision
alternative.

3) Evaluation and Selection

a) Calculate the expected value of each decision alternative.
b) Select that alternative which offers the most attractive expected value.

RB/NIE/Mech 2019-20
Decision tree Diagram Example: ME0308

RB/NIE/Mech 2019-20
 Decision Tree-Problems: ME0308

1) An entrepreneur wants to introduce a new quartz crucible into Indian Market. This
product has an excellent market for the next 5 years. He has three options.
i) Making the crucible by building a large unit.
ii) Making the crucible by building a small unit.
iii) Becoming a trader. Just buy and sell.
The following data are furnished.
Alternative Possibility of Sales Probabi
a) Investment Analysis: demand Revenue/Year lity
( Rs. In lakh)
Alternative Investment
Make in large unit Rs. 60 Lakhs Large Unit High 19 0.7
Make in small unit Rs. 40 Lakhs Medium 10 0.1
Low 3 0.2
Buy and sell NIL Small Unit High 16 0.7
Medium 12 0.1
Low 4 0.2
Buy and High 10 0.7
Sell Medium 4 0.1
Low 1 0.2

RB/NIE/Mech 2019-20
 ME0308
Rs 19 Lakh : P = 0.7 : 5 years
60 L High
Large Medium Rs 10 Lakh : P = 0.1 : 5 years
Rs 3 Lakh : P = 0.2 : 5 years
Low
a
Rs 16 Lakh : P = 0.7 : 5 years
40 L High
Rs 12 Lakh : P = 0.1 : 5 years
2 Medium
Small Rs4Lakh : P = 0.2 : 5 years
b Low
Rs 10 Lakh : P = 0.7 : 5 years
1 NIL High
Rs 4 Lakh : P = 0.1 : 5 years
Medium
Rs 1 Lakh : P = 0.2 : 5 years
c Low

Decision
event
Chance event

RB/NIE/Mech 2019-20
 ME0308
i) Probable Revenue for :
Chance Event a = { ( 19 x 0.7) + ( 10 x 0.1) + ( 3 x 0.2)} x 5 = (13.3+ 1+ 0.6) x 5
= 74.5
But the revenue above is including the initial investment of Rs 60 lakhs.
 Income for event a = 74.5 – 60 = 14.5 lakhs.

Similarly for b :
Chance Event b = 66 lakhs
Income for Event b = 66 – 40 = 26 Lakhs

Similarly for c:
Chance of event c = 38Lakh.
Income for Event c = 38 Lakhs
Since there is no initial investment for buy and sell option. The income is 38Lakhs

Between a and b , b is more profitable,

Between b and c , c is more profitable.

There fore the enterpriser decides to become a trader.

RB/NIE/Mech 2019-20
 ME0308
Prob: Madura garment is evaluating a project developing a new anti- stain shirt either
through R&D or through a collaboration with Marks & Spencers of England. The
management of the company estimates its 10 years present value profits(in lakhs) and the
probabilities for various success possibilities, as shown in the table.

(a) Highly successful (b) Moderately © Failure

Probability, P1=0.2 successful Probability, P3=0.4
Probability, P2=0.4

Rs. In lakhs Rs. In lakhs Rs. In lakhs

i) Developing on 800 600 -120

own through R&D
ii) Joint venture 600 400 -40
with Marks &
Spencer

Suggestion the management which alternative should be selected based upon the criteria
of,
i) Maximax ii) Maximin iii) Laplace iv) Maximum probability and v) Expected
monetary value.
Also draw a decision tree for the given problem.
RB/NIE/Mech 2019-20
 ME0308

i) Maximax: This is nothing but the absolute maximum of all possibilities. In other
words, maximum implies selection of alternative with highest profit even if it is
with the lowest probability.

Therefore, maximax = choose (i) a with Rs 800 lakhs profit and of probability 0.2

ii) Maximin: This is nothing but the best of the worst values. In other words, maximin
implies selection of the alternative which minimizes losses.
Therefore , maximin = Choose (ii) c with Rs 40 lakh loss and of probability 0.4.
Laplace: This is nothing but the selection of the best option after calculation the average
pay off for each alternative.

1) Develop through R&D = ( 800X0.2 + 600X0.4 + (-120X0.4)) / 3 = 149.33

2) Joint venture = ( 600 X0.2 + 400X0.4 +( -40X0.4)) / 3 = 98.66

Therefore R&D option is selected based on Laplace criterion because of higher average
pay off.

RB/NIE/Mech 2019-20
 ME0308

iv) Maximum probability : In this , that criterion is selected which has the highest
probability in deciding the profit or loss of any of the alternatives.

In this problem, both moderately successful and not successful have equal probability
of occurrences of 0.4. So either of the criterion can be chosen. If moderately successful
criterion is selected then the alternative to be pursued should be R&D ( because of
higher profit) and if Not successful criterion is selected, then the alternative to be
pursued should be joint venture ( because of lower losses)

V) Expected monetary value: This is similar to laplace criterion but the difference is
that here instead of the average the total is considered. In other words, the
expected total loss or profit of each alternative becomes the basis for decision..

Therefore, EMV of R&D =( 800 x 0.2 + 600 x 0.4 -120 x 0.4) = 448 lakhs.
EMV for joint venture = ( 600 x 0.2 + 400 x 0.4 – 40 x 0.4 )= 296 lakhs.

Comparing the two, R & D option is selected based on Expected monetary value
criterion.

RB/NIE/Mech 2019-20
 ME0308
Decision Tree Diagram
Highly Successful (P1 = 0.2)
Rs. 800 lakhs

Moderately Successful (P2= 0.4) Rs. 600 lakhs

Failure ( P3 = 0.4) Rs. -120 lakhs

Highly Successful (P1 = 0.2)

Rs. 600 lakhs

Moderately Successful (P2= 0.4)

Rs. 400 lakhs
Failure ( P3 = 0.4)
Rs. -040 lakhs

NIE/Mech 2019-20
 ME0308

Prob: A complex airborne navigating system incorporates a sub-assembly which

unrolls a map of the flight plan synchronously with the movement of the aeroplane.
The sub-assembly is brought on very good terms from the sub-contractor, but is not
always in perfect adjustment on delivery. The sub-assemblies can be readjusted on to
guarantee accuracy at the cost of Rs. 50 per sub-assembly. It is not, however , possible
to distinguish visually those sub-assembles need adjustment.

Alternatively, the sub-assemblies can each be tested electronically at a cost of Rs. 10 per
sub-assembly tested. Past experience shows that about 30% of those supplied are
defective , the probability of the test indicating a bad adjustment when the sub-
assembly is faulty is 0.8 , while the probability that the test indicates a good adjustment
when the sub-assembly is properly adjusted is 0.7 . If the adjustment is not made and
the sub-assembly is found to be faulty when the system has its final check, the cost of
subsequent rectification will be Rs. 140 . Draw up an appropriate decision tree to show
the alternatives open to the purchaser and use it to determine his appropriate course of
action.

RB/NIE/Mech 2019-20
 ME0308
Rs.0

Rs.50
A

1 Rs.140

EMV of node B = 0.7x 0 +0.3 x50 = Rs. 15

EMV of node C = 0.2x 140+0.8x5 = Rs. 68
EMV of node A = 0.7x15 + 0.3 x 68 = Rs. 30.90
EMV of node 1 via the branch testing = 10+30.90 = 40.90
EMV 0f node 1 via the branch “no test” = Rs.50>Rs.40.90
Rs.50
Optimal EMV of node 1 is Rs 40.90 corresponding to the
RB/NIE/Mechdecision of testing the sub-assemblis. 2019-20
 ME0308

Problem: HCL software development corp. has determined that it need to expand
its current capacity. The decision has come down to whether to expand now with a
large facility, incurring additional costs and taking the risk that the demand will not
materialize, or to undertake a small expansion, knowing that the decision will have
to be reconsidered in five years. Management has estimated the following chances
for demand.
• The likelihood of demand being high is 0.60
• The likelihood of demand being low is 0.40. The profits for each alternative
have been estimated.
• Large expansion has an estimated profitability of either Rs. 100 lakhs or 60
Lakhs. Depending on whether demand turns out be high or low.
• Small expansion has a profitability of 50 Lakhs, assuming that demand is low.
• Small expansion with an occurrence of high demand would require
consideration is expected to be 70 lakhs, Else it would result in profit of 60
lakhs
1) Construct a decision tree, and
2) Find the best alternative,

RB/NIE/Mech 2019-20
 ME0308
High demand P= 0.6, Profit =100lakhs

Large
a
expansion
Low demand P= 0.4, Profit =60 lakhs
Profit = 70 Lakhs
1 c
High demand, P = 0.6 2 Profit = 50 Lakhs
b d
Small expansion
High demand, P = 0.6
Profit = 50 Lakhs

• Probable revenue ( large expansion) = 0.6 X 100 + 0.4 x 60 = 84 lakhs

• Probable revenue ( Small expansion) = 0.6 X 70 + 0.4 X 50 = 62 lakhs

RB/NIE/Mech 2019-20
RB/NIE/Mech
 Choice is yours

RB/NIE/Mech