SVKM’s NMIMS SOHM (NAVI MUMBAI CAMPUS)

Principles of Operations Management

Students Handout / Notes

Session 2 – 28/07/23
Quantitative Techniques

Quantitative techniques play a crucial role in operations management as they involve the use
of mathematical and statistical methods to analyze and make data-driven decisions in various
aspects of the operations of a business. These techniques help organizations optimize their
processes, improve efficiency, and make informed decisions for effective resource allocation.
Here are some important quantitative techniques used in operations management:

1. Linear Programming (LP): LP is a mathematical optimization technique used to find

the best outcome in a model that is subject to linear constraints. It is widely used in
production planning, resource allocation, and inventory management to maximize
profits, minimize costs, or optimize resource utilization.

Here are some common applications of linear programming techniques in

operations management:
I. Production Planning and Scheduling: Linear programming is used to
determine the optimal production mix that maximizes output while
considering constraints such as limited labor, raw materials, and machine
capacity. It helps in creating production schedules that minimize costs and
maximize efficiency.
II. Inventory Management: LP can be applied to determine the optimal
inventory levels for different products, taking into account storage costs,
ordering costs, and customer demand. It helps find the right balance
between holding costs and stockouts.
III. Transportation and Logistics: Linear programming is used to optimize
transportation routes and distribution networks, minimizing
transportation costs while meeting demand requirements.
IV. Facility Location and Layout: LP techniques assist in selecting the optimal
location for new facilities and designing layouts that minimize
transportation costs and maximize efficiency.
V. Resource Allocation: In multi-project environments, linear programming
helps allocate limited resources (such as manpower, budget, or
equipment) to various projects in a way that maximizes overall productivity
and minimizes delays.
VI. Workforce Scheduling: Linear programming is used to create employee
work schedules that satisfy demand while adhering to labor regulations
and constraints on working hours.
VII. Portfolio Optimization: In financial operations management, linear
programming techniques are applied to optimize investment portfolios by
considering different financial instruments, risk levels, and return
objectives.
 VIII. Marketing and Advertising Budget Allocation: LP helps optimize
marketing and advertising budgets across different channels to achieve
maximum reach and impact within budget constraints.
IX. Blending and Mix Problems: In industries like chemicals or food
processing, linear programming is used to determine the optimal mix of
ingredients or components to achieve desired quality and cost targets.
X. Project Management: LP techniques can be applied to optimize project
schedules, considering the interdependencies between tasks and resource
constraints.

2. Inventory Control Models: Inventory control models are an essential aspect of

operations management that helps organizations optimize their inventory levels and
efficiently manage their stock. These models aim to strike a balance between holding
costs and ordering costs while ensuring that customer demand is met in a timely
manner. Here are some commonly used inventory control models in operations
management:
I. Economic Order Quantity (EOQ): The EOQ model is one of the most well-
known inventory control models. It calculates the optimal order quantity that
minimizes the total cost of inventory, considering both holding costs (costs
associated with carrying inventory) and ordering costs (costs incurred when
placing an order). The EOQ model assumes a constant demand rate and a fixed
order cost.
II. Reorder Point (ROP) Model: The ROP model determines the inventory level at
which a new order should be placed to replenish stock. It considers the lead
time (time taken for the order to arrive) and the average demand during that
lead time. The goal is to ensure that inventory is replenished before it runs out,
avoiding stockouts.
III. Periodic Review Model: In this model, inventory is reviewed and orders are
placed at regular intervals. The order quantity is adjusted based on the current
inventory level and the demand during the review period. The objective is to
maintain a constant inventory level while minimizing costs.
IV. ABC Analysis: ABC analysis classifies inventory items into three categories
based on their importance and value. A items are the most important and high-
value items, B items are of moderate importance and value, and C items are
low-value items. This classification helps in allocating resources and attention
to the most critical inventory items.
V. Just-In-Time (JIT): The JIT inventory control model aims to reduce or eliminate
the need for holding large inventories. Instead, materials and components are
ordered and delivered just in time for production. This approach minimizes
carrying costs and waste while improving production efficiency.
VI. Safety Stock Model: Safety stock is extra inventory maintained to handle
unexpected fluctuations in demand or lead time variability. The safety stock
model calculates the appropriate level of safety stock to maintain to avoid
stockouts during uncertain conditions.
VII. Single-Period Inventory Model: This model is used when inventory is only
ordered once for a specific selling season or period. The goal is to determine
the optimal order quantity to maximize the expected profit while considering
 the possibility of excess inventory.
VIII. Multi-Echelon Inventory Model: In supply chain settings with multiple levels
of inventory (e.g., distribution centers, retail stores), the multi-echelon
inventory model aims to optimize inventory levels at each echelon to minimize
overall costs and improve supply chain efficiency.
IX. By using these inventory control models, businesses can effectively manage
their inventory levels, reduce holding costs, avoid stockouts, and optimize
their supply chain operations, ultimately leading to improved efficiency and
customer satisfaction.

3. Forecasting Techniques: Forecasting techniques are crucial in operations

management as they help organizations predict future demand, production needs,
resource requirements, and other key factors. Accurate forecasts enable businesses
to plan effectively, optimize operations, and make informed decisions. Here are some
commonly used forecasting techniques in operations management:
I. Time Series Analysis: Time series analysis involves analyzing historical data to
identify patterns, trends, and seasonality in a time-ordered sequence.
Techniques such as moving averages, exponential smoothing, and
autoregressive integrated moving average (ARIMA) models are commonly
used to make short-term and long-term forecasts based on historical data.
II. Causal Forecasting: Causal forecasting identifies cause-and-effect
relationships between variables to predict future outcomes. It involves
regression analysis to establish relationships between the dependent variable
(e.g., demand) and independent variables (e.g., price, marketing spending)
that influence it.
III. Trend Analysis: Trend analysis involves identifying and extrapolating long-
term patterns and trends in data. This technique is useful for making forecasts
when data shows consistent growth or decline over time.
IV. Seasonal Decomposition: Seasonal decomposition separates time series data
into its components, including trend, seasonality, and random variation. This
approach helps in understanding the underlying patterns and making seasonal
adjustments for more accurate forecasts.
V. Qualitative Forecasting: Qualitative forecasting techniques are used when
historical data is limited or unavailable. These methods rely on expert
judgment, market surveys, focus groups, and other qualitative inputs to make
forecasts.
VI. Delphi Method: The Delphi method is a structured approach to collect and
aggregate opinions from a panel of experts. It helps in generating consensus-
based forecasts by iteratively refining opinions and reaching a group decision.
 VII. Scenario Analysis: Scenario analysis involves creating multiple scenarios or
possible future situations based on different assumptions and factors. Each
scenario represents a different set of conditions, and managers can use them
to explore various outcomes and plan accordingly.
VIII. Machine Learning Models: Machine learning techniques, such as neural
networks, random forests, and support vector machines, can be applied to
large and complex datasets to make sophisticated forecasts. These models can
handle non-linear relationships and complex interactions in the data.
IX. Forecasting with Leading Indicators: Leading indicators are economic or
market variables that tend to change before the main variable of interest.
Incorporating leading indicators into forecasting models can provide early
signals for changes in demand or other relevant factors.
X. Simulations: Simulation techniques use computer models to simulate different
scenarios and analyze their outcomes. This approach is useful when there are
uncertainties and complex interactions among variables.
The choice of forecasting technique depends on the available data, the time horizon of
the forecast, the level of accuracy required, and the specific context of the business. Using
the appropriate forecasting technique empowers operations managers to make better-
informed decisions and respond proactively to changing market conditions.

4. Queuing Theory: Queuing theory helps in analyzing waiting lines and designing
systems to optimize service levels and minimize customer waiting time. Queuing
techniques, also known as queuing theory, are an essential aspect of operations
management that deals with the analysis and optimization of waiting lines or queues.
Queues are common in various operations, such as customer service centers,
manufacturing processes, transportation systems, and healthcare facilities. Queuing
techniques help in understanding and managing the behavior of queues, leading to
improved efficiency, reduced waiting times, and better resource allocation. Here are
some key queuing techniques used in operations management:
I. Arrival and Service Patterns: Queuing theory considers the arrival pattern of
customers or entities into the system and the service pattern provided by the
servers. It takes into account whether arrivals follow a random or deterministic
pattern and whether service times are constant or variable.
II. Queue Length and Waiting Time Analysis: Queuing models help in analyzing
the average queue length and waiting time for customers. This information is
crucial for managing customer expectations and improving service levels.
III. Utilization and Service Rate: Queuing theory calculates the utilization of
servers, which is the proportion of time that servers are busy serving
customers. It also considers the service rate, which is the number of customers
served per unit of time.
IV. Little's Law: Little's Law is a fundamental queuing theorem that relates the
average number of customers in the system, the average time spent in the
system, and the average arrival rate. It helps in understanding the relationship
between system performance metrics.
V. Queuing Network Models: Queuing networks are used to analyze more
complex systems where multiple queues and servers are interconnected. It
 helps in understanding the overall system behavior and performance.
VI. Priority Queues: In some queuing systems, priority rules are applied to serve
certain customers ahead of others. Queuing theory helps in analyzing the
impact of different priority rules on system performance.
VII. Service Disciplines: Queuing models can be used to evaluate different service
disciplines, such as First-Come-First-Serve (FCFS), Last-Come-First-Serve
(LCFS), and Priority Scheduling, to determine which one best suits the specific
operational requirements.
VIII. Queuing Simulation: Simulation techniques can be employed to model and
analyze complex queuing systems with multiple variables and factors that may
not be easily amenable to analytical solutions.
By applying queuing techniques, operations managers can identify potential
bottlenecks, optimize resource allocation, minimize waiting times, and enhance
overall system efficiency, leading to better customer satisfaction and operational
performance

5. Simulation: Simulation involves creating a computer model of a real system to analyze

its behavior under various scenarios. It is used to study complex systems where
analytical solutions are not feasible, like supply chain networks or production
processes.
6. Decision Trees: Decision trees are used in decision analysis to evaluate different
alternatives and make decisions based on their probabilities and outcomes. They are
valuable for making choices in uncertain situations.
7. Six Sigma: Six Sigma is a data-driven methodology used to improve process quality by
identifying and eliminating defects. It involves the use of statistical tools and
techniques to achieve process improvement and reduce process variation.
8. Quality Control Charts: Quality control charts, such as control charts and Pareto
charts, are used to monitor and control the quality of products or processes, enabling
early detection of defects and deviations from the norm.
9. Project Management Techniques: Techniques like Critical Path Method (CPM) and
Program Evaluation and Review Technique (PERT) are used to plan, schedule, and
manage complex projects, ensuring efficient use of resources and timely completion.
10. Linear Regression and Forecasting Models: These techniques are used to analyze
historical data and establish relationships between variables, aiding in decision-
making and prediction of future trends.

Linear regression is a statistical method used to model the relationship between a

dependent variable (also known as the response variable) and one or more
independent variables (also known as predictor variables or features). The objective
of linear regression is to find the best-fitting straight line (or hyperplane in higher
dimensions) that represents the linear relationship between the variables.

The linear regression model assumes that the relationship between the dependent
variable and the independent variables can be expressed by a linear equation of the
form:
y = b0 + b1 * x1 + b2 * x2 + ... + bn * xn
where:
• y is the dependent variable (the variable we want to predict or explain),
• x1, x2, ..., xn are the independent variables (predictor variables),
• b0 is the intercept (the value of y when all independent variables are zero),
• b1, b2, ..., bn are the coefficients (slope values) representing the impact of
each independent variable on the dependent variable.
The goal of linear regression is to estimate the values of the coefficients (b0, b1, b2,
..., bn) that minimize the difference between the observed values of the dependent
variable and the values predicted by the linear equation. This process is often
accomplished using the method of least squares, which aims to minimize the sum of
the squared differences between the observed and predicted values.
Linear regression is widely used for various purposes, including:
I.Predictive Modeling: To predict the value of the dependent variable for new
observations based on the values of the independent variables.
II.Trend Analysis: To identify trends and patterns in data and make predictions
for future observations.
III.Relationship Analysis: To determine the strength and direction of the
relationship between variables.
IV.Causality Inference: To assess whether changes in independent variables cause
changes in the dependent variable.

It's important to note that linear

regression assumes a linear
relationship between the variables,
and its effectiveness depends on the
data's characteristics and the
underlying relationships. In some
cases, when the relationship is not
linear, other regression techniques
such as polynomial regression,
exponential regression, or non-linear
regression may be more appropriate.

Quantitative techniques in operations management provide valuable insights and

support data-driven decision-making across various functional areas, contributing to
the overall efficiency and success of an organization. By using these tools, businesses
can optimize their processes, reduce costs, improve customer satisfaction, and
maintain a competitive advantage in the market.