Chapter 1: Basic Principles of Management

Intended Learning Outcomes: After studying this chapter, you should be able to do the
following
a. Describe the nature and concept of Management
b. Understand the importance of Basic Management Functions
c. Distinguish the Basic Roles of Managers
d. Identify different Management Activities
e. Explain why Management is Necessary
f. Recognize Basic Management Actions
g. Discuss the Characteristics of a Good Manager
h. Deliberate Managing Change

What is Management?

Management in all business and organizational activities is the act of getting people
together to accomplish desired goals and objectives using available resources efficiently
and effectively.

Management comprises planning, organizing, staffing, leading or directing, and controlling

an organization or effort for the purpose of accomplishing a goal.

Why Management is Necessary?

Management is necessary to ensure that tasks are performed with communication,

cooperation, synchronization and understanding between teams.

Basic Management Functions

Management is a social process involving responsibility for economical and effective
planning & regulation of operation of an enterprise in the fulfillment of given purposes.

It is a dynamic process consisting of various elements and activities:

A. Planning - involves the establishment of business goals and objectives, and

determining the ways in which they will be achieved. It includes planning of vision,
mission, objectives, and goals
B. Staffing - the managerial function of acquiring, deploying, and retaining a workforce
of sufficient quantity and quality to create positive impact on the organization’s
effectiveness. It includes Recruiting, Selecting, Hiring, Training, and Retraining.
C. Organizing - It includes developing productive relationship amongst physical,
financial and human resources for achievement of organizational goals. It includes
division of labor, delegation of authority, departmentalization, span of control, and
coordination.
D. Directing - This managerial function deals with influencing, guiding, supervising,
motivating subordinates for the achievement of organizational goals. It includes
supervision, motivation, leadership, and communication.
E. Controlling - It implies measurement of accomplishment against the standards and
correction of deviation, if any, to ensure achievement of organizational goals. It
includes establishing standards based upon objectives; measuring and reporting
performance; comparing the two; and taking corrective/preventive action.
F. Co-ordination - is an integral element or ingredient of all the managerial functions.
Manager ensures that there should be co-ordination between actual performance
& standard performance to achieve organizational goals.
e.1. Co-ordination through Planning - Planning facilitates co-ordination by
integrating the various plans through mutual discussion, exchange of ideas
e.2. Co-ordination through Organizing - Manager groups and assigns various
activities to subordinates
e.3. Co-ordination through Staffing - A manager should bear in mind that the
right no. of personnel in various positions with right type of education and skills are
taken
e.4. Co-ordination through Directing - The purpose of giving orders, instructions
& guidance to the subordinates is served only when there is a harmony between
superiors & subordinates. e.5. Co-ordination through Controlling

Basic Roles of a Manager

There are 3 broad role categories:

1. Interpersonal Role - Roles managers assume to coordinate and interact with

employees and provide direction to the organization.
a. Figurehead role: Symbolizes the organization and what it is trying to achieve.
b. Leader role: Train, counsel, mentor and encourage high employee
performance.
c. Liaison role: Link and coordinate people inside and outside the organization to
help achieve goals.
2. Informational Role - This role involves handling, sharing, and analyzing information.
 a. Monitor role: Analyzes information from both the internal and external
environment.
b. Disseminator role: Manager transmits information to influence attitudes and
behavior of employees.
c. Spokesperson role: Use of information to positively influence the way people
in and out of the organization respond to it.
3. Decisional Role - This role requires decision making.
a. Entrepreneur role: Deciding upon new projects or programs to initiate and
invest.

b. Disturbance handler role: Assume responsibility for handling an unexpected

event or crisis.

c. Resource allocator role: Assign resources between functions and divisions, set
budgets of lower managers.
d. Negotiator role: Seeks to negotiate solutions between other managers, unions,
customers or shareholders.

Management Activities

Management activities include satisfying varying entities, dealing with emergencies,

purchasing, recruitment, accounting, training, planning, negotiating, sales, and dealing with
regulatory officials

Basic Management Actions

Basic Management Actions include Identifying what is needed or has to be done; Organizing
resources; Monitoring performance and task completion, Planning ahead for future
requirements; and Dealing with any problems that arise

Characteristics of a Good Manager

A. Importance of Self Knowledge

Identity: Who are we and what do we aspire to become?
New information: What else do we need to know?
Relationships: Who else needs to be here to work with us?
B. Essential Professional Skills for Managers
Intellectual skills: Logical thinking and problem solving
Technical skills: Specialized knowledge required for work
Ethical skills: Discriminate right from wrong
Interactive skills: Communicate intelligently and create an atmosphere that
facilitates communication
Emotional skills: Ability to identify and handle one’s feelings
C. Management Style and Leadership – based on organization, situation, personal
values, personality, and chance.
D. Self-Development Methods – based on observation, reflection, guided readings,
visits / attachments, seeking feedback, seeking challenges, presentations, chairing
meetings, and prepared packages.
Managing Change

Below are some of popular Change concepts:

a. Survival and growth are dependent upon adaptation to changing environment.

b. Environment is influenced and shaped by the decisions and actions of the
organization.
c. Learning from experience is essential for adaptation and change.
d. Individuals and organizations change in both common and unique directions.

Change affects structures, chains of command, responsibility limits, incentive systems, and
company culture and values
 Chapter 2: Introduction to Management Science

Intended Learning Outcomes: After studying this chapter, you should be able to do the
following
a. Describe the nature and concept of management science
b. Identify the fields that management science involves in
c. Explain the characteristics of management science
d. Recognize the historical development of management science
e. Discuss various applications of management science
f. Deliberate the decision making process
g. Analyze the phase of decision making process
h. Explicate the process of quantitative analysis

MANAGEMENT SCIENCE (MS) is the broad interdisciplinary study of problem solving and
decision making in human organizations, with strong links to management, economics,
business, engineering, management consulting, and other fields.

Management Science (MS) can be defined as: “A problem-solving process used by an

interdisciplinary team to develop mathematical models that represent simple-to-complex
functional relationships and provide management with a basis for decision-making and a
means of uncovering new problems for quantitative analysis”.

It uses various scientific research-based principles, strategies, and analytical methods

including mathematical modeling, statistics and numerical algorithms to improve an
organization's ability to enact rational and accurate management decisions by arriving at
optimal or near optimal solutions to complex decision problems. Management science
helps businesses to achieve goals using various scientific methods.

Some of the fields that management science involves include: Data mining, Decision
analysis,
Engineering, Forecasting, Game theory, Industrial engineering, Logistics, Mathematical
modeling, Optimization, Probability and statistics, Project management, Psychology,
Simulation, Social network / Transportation forecasting models, Sociology, Supply chain
management, Management consulting, as well as many others.

Historical Development of Management Science:

The roots of management science extend to the work of F.W. Taylor, the father of Scientific
Management. Taylor is known for his systematic development of management techniques
which he started at the Midvale Steel Company in Philadelphia around 1880. Taylor
developed what he called his four principles of management: Research, Standardization,
Control and Cooperation.

When installed at the Link Belt Engineering Company in 1905, the system included cost
accounting, time study, inventory control, production control, planning, output scheduling,
functional operation, standardized procedures, a mnemonic system of classification, and
means for maintaining quality production.

Associated with Taylor were other important pioneers of scientific management – Carl
Barth, Gantt, Thompson, Hathaway and many others. Barth brought to the work of scientific
management the use of research mathematics, which he merged with his extensive
knowledge of machine tools. Gantt contributed the recognition of worker psychology, the
development of a bonus plan, and the charts used in production scheduling.

Out of this came the term Industrial Engineering which today is descriptive of the work of
functional staffs responsible for such activities as incentive standards, methods analysis,
quality control, production control, cost control and materials handling.

During the ten years just after World War II, a great deal of management science was
performed under the name of operations research. The influx of physical scientists many of
whom were unacquainted with modern management administration into war technology
and the pressures of total war with new and terrible weapons gave rise to a rediscovery of
a kind of pragmatic scientific management. This merged with an increasingly popular
acceptance of statistical quality control in America and the practical development of high-
speed electronic calculators to give impetus to the operations-research approach.

In brief, management science describes an integrated approach to operational control

based on the application of scientific research methods to business problems. A systematic
approach to problem solving received early impetus from Taylor’s scientific management
movement and is continued today by Industrial engineers and mathematical business
analysts. This approach is characterized by a methodology of sequential investigation steps.

Characteristics of Management Science

The four major characteristics of management science are as follow:

1. Examine Functional Relationships from a Systems Overview - The activity of any one
function of a company will have some effect on the activity of each of the other
functions. Therefore, it is necessary to identify all important interactions and determine
their impact on the company as a whole. Initially, the functional relationships in a
management science project are expanded deliberately so that all the significantly
interacting parts and their related components are contained in a statement of the
problem. A systems overview examines the entire area under the manager’s control.
This approach provides a basis for initiating inquiries into problems that seem to be
affecting performance at all levels.
2. Use the Interdisciplinary Approach - Management science makes good use of a simple
principle, it looks at the problem from different angles and approaches. For example, a
mathematician might look at the inventory problem and formulate some type of
mathematical relationships between the manufacturing departments and customer
demand. A chemical engineer might look at the same problem and formulate it in terms
of flow theory. A cost accountant might conceive the inventory problem in terms of
component costs (e.g., direct material cost, direct labor cost, overheads etc.) and how
such costs can be controlled and reduced, etc. Therefore, management science
emphasizes over the interdisciplinary approach because each of the individual aspects
of a problem can be best understood and solved by those, experts in different fields
such as accounting, biological, economic, engineering, mathematics, physical,
psychological, sociological, statistical etc.
3. Uncover New Problems for Study - The third characteristic of management science,
which is often overlooked, is that the solution of an MS problem brings new problems
to light. All interrelated problems uncovered by the MS approach do not have to be
solved at the same time. However, each must be solved with consideration for other
problems if maximum benefits are to be obtained.
4. Use a Modeling-Process Approach to Problem Solving - Management science takes a
systematic approach to problem solving. It may use a modeling process approach taking
the help of mathematical models.

Other Characteristics of Management Science are:

5. A primary focus on managerial decision-making.

6. The application of science to decision-making.
7. A dependence on electronic computers.
8. An appraisal resting on criteria of economic effectiveness. Effectiveness may be defined
as the extent to which goals are achieved. Effectiveness is evaluated by measures of
effectiveness (also known as measures of performance).

Applications of management science are abundant in industries such as airlines,

manufacturing companies, service organizations, military branches, and in government. The
following list presents typical managerial problems where management science techniques
could be applied: Inventory control, Facility design, Product-mix determination, Portfolio
analysis, Scheduling and sequencing, Merger-growth analysis, Transportation planning,
Design of information systems, Allocation of scarce resources, Investment decisions (new
plants, etc.), Project management – planning and control, New product decisions Sales force
decisions, Market research decisions etc. For solving these and many other problems the
following techniques can be used:

a. Decision Analysis - These techniques can be used to select optimal strategies out of
several decision alternatives. Managerial problems and appropriate tools are divided,
according to the kind of manager’s information, into three classes: decisions under
certainty (deterministic), decision under risk (probabilistic) and decisions under
uncertainty.
b. Forecasting - Forecasting methods support the manager’s prediction of future aspects
of a business operation. Statistics and econometrics offer many techniques based on
time-series and regression analysis. The main managerial goal is to project future trends
following the previous behavior of the system. The well-known are the methods of
Moving Averages, Least Squares, and Exponential Smoothing.
c. Project Management - In many situations the managers are responsible for planning,
scheduling and controlling projects that consist of many separate jobs or tasks
performed by a variety of departments or individuals. An execution of each job takes
specific time. There are two basic methods for solving those problems: CPM (Critical
Path Method) and PERT (Program Evaluation Review Technique). Both methods require
the network representation of the problem.
d. Linear Programming - It is one of the best-known tools of management science. This
approach mostly defines the problem as the maximizing (minimizing) a linear function,
respecting the set of linear constraints.
e. Inventory Models - Inventory control is one of the most popular techniques, which
helps managers to determine when and how much to order. The main goal is usually to
find a proper balance between the inventory holding cost and the cost of executing an
order.
f. Distribution Models - A distribution problem is a special type of linear programming
problem. There are two main types of distribution problems: The Transportation
Problem and the Assignment
Problem. The transportation problem deals with shipments from a number of sources to a
number of destinations, whereas the assignment problem deals with finding the best one-
to-one match for each of a given number of possible “candidates” to a number of
proposed “positions”.
g. Network Models - Some problems can be described graphically as a network (the set of
nodes and arcs). Typical situation is a transportation network: cities (nodes) are
connected to each other by roads (arcs). If we evaluate the network (in this case we are
interested e.g. in distances between all the cities), the task is often to find the minimal
distance from one city to all other cities.
h. Markov Analysis - This technique can be used to describe the behavior of a system in a
dynamic situation (evolution of the system throughout the time). If - at a given time
point - the system is in one of possible states, at following time point the system can
remain in current state or can move into any other state. Remaining in current state or
movement to another state are set by transition probabilities. The manager can be
interested in the probability with which the system will be in the specific state at the
specific time. Markov analysis is a very powerful tool of management science with many
real applications.
i. Theory of Games - This area is an extension of decision analysis to the situations with
two or more decision makers. Simultaneous decisions (selected strategies) of all
managers initiate an action that affects all decision makers (players), i.e. their profit,
cost, etc. In some conflicts, there is a possibility for two or more decision makers to
cooperate, while competing with the others. In economic theory we can find a typical
case of strategic game - oligopoly model.
j. Goal Programming - When several competing objectives have to be considered
simultaneously, more powerful tool is needed. Goal programming is a special technique
for dealing with such cases, usually within the framework of linear programming.

Decision Making Process

Decision making is the process of making choices by identifying a decision, gathering

information, and assessing alternative resolutions. Using a step-by-step decision-making
process can help you make more deliberate, thoughtful decisions by organizing relevant
information and defining alternatives. This approach increases the chances that you will
choose the most satisfying alternative possible.

1. Identify the decision You realize that you need to make a decision. Try to clearly
define the nature of the decision you must make. This first step is very important.
2. Gather relevant information Collect some pertinent information before you make
your decision: what information is needed, the best sources of information, and
how to get it. This step involves both internal and external “work.” Some
information is internal: you’ll seek it through a process of self-assessment. Other
information is external: you’ll find it online, in books, from other people, and from
other sources.
3. Identify the alternatives As you collect information, you will probably identify
several possible paths of action, or alternatives. You can also use your imagination
and additional information to construct new alternatives. In this step, you will list
all possible and desirable alternatives.
4. Weigh the evidence Draw on your information and emotions to imagine what it
would be like if you carried out each of the alternatives to the end. Evaluate
 whether the need identified in Step 1 would be met or resolved through the use of
each alternative. As you go through this difficult internal process, you’ll begin to
favor certain alternatives: those that seem to have a higher potential for reaching
your goal. Finally, place the alternatives in a priority order, based upon your own
value system.

5. Choose among alternatives Once you have weighed all the evidence, you are ready
to select the alternative that seems to be the best one for you. You may even
choose a combination of alternatives. Your choice in Step 5 may very likely be the
same or similar to the alternative you placed at the top of your list at the end of
Step 4.
6. Take action You’re now ready to take some positive action by beginning to
implement the alternative you chose in Step 5.
7. Review your decision & its consequences In this final step, consider the results of
your decision and evaluate whether or not it has resolved the need you identified
in Step 1. If the decision has not met the identified need, you may want to repeat
certain steps of the process to make a new decision. For example, you might want
to gather more detailed or somewhat different information or explore additional
alternatives.

Analysis Phase of Decision Making Process

A. Qualitative Analysis – based largely on the manager’s judgment and experience;

includes the manager’s intuitive feel for the problem; and is more of an art than a
science.
B. Quantitative Analysis – analyst will concentrate on the quantitative facts or data
associated with the problem, will develop mathematical expressions that describe
the objective, constraints, and other relationship that exists in the problem, and
will use one or more quantitative methods to make a recommendation.
Potential reasons for a Quantitative analysis approach to decision making
b.1. The problem is complex b.2. The problem is very important
b.3. The problem is new b.4. The problem is repetitive

Process of Quantitative Analysis

 Chapter 3: Decision Analysis

Intended Learning Outcomes: After studying this chapter, you should be able to do the following
a. Describe the nature and concept of decision analysis
b. Understand the process of problem formulation
c. Distinguish the difference between optimistic approach and conservative approach
d. Identify the approaches in decision making with and without probabilities
e. Deliberate the minimax regret approach process
f. Learn how to make decision trees
g. Solve a decision analysis problem

DECISION ANALYSIS - Refers to a systematic, quantitative and interactive approach to

addressing and evaluating important choices confronted by organizations in the private and
public sector.

Decision Analysis can be used to develop an optimal strategy when a decision maker is faced
with several decision alternatives and an uncertain or risk-filled pattern of future events

Problem Formulation – is the first step in the decision analysis process. We begin with a
verbal statement of the problem.

a. Decision Alternatives – are the different possible strategies the decision maker can employ.
b. States of Nature (Chance Events) – refer to the uncertain future events.
c. Resulting Payoffs – the consequence resulting from a specific combination of a decision
alternative and a state of nature or chance event outcome.

EXAMPLE PROBLEM 1: Pittsburgh Development Corporation (PDC) purchased land that will
be the site of a new luxury condominium complex. PDC commissioned preliminary
architectural drawings for three different projects: one with 30, one with 60, and one with
90 condominiums.

The financial success of the project depends upon the size of the condominium complex
and the chance event concerning the demand for the condominiums. The statement of the
PDC decision problem is to select the size of the new luxury condominium project that will
lead to the largest profit given the uncertainty concerning the demand for the
condominium.

a. Decision Alternative – Small complex, Medium Complex and Large complex

b. States of Nature / Chance Event – Strong Demand and Weak Demand
c. Resulting Payoff – combination of decision alternative and state of nature.

PAYOFF TABLE States of Nature

Decision Alternative S1 – Strong Demand S2 – Weak Demand
D1 – Small Complex 8 7
D2 – Medium Complex 14 5
D3 – Large Complex 20 -9

APPROACHES IN DECISION MAKING WITHOUT PROBABILITIES

1. Optimistic Approach - would be used by an optimistic decision maker. The decision with the
largest possible payoff is chosen. The decision alternative that is recommended is the one
 that provides the best possible payoff. This approach is also called Maximax, or Maximum of
all Maximum.

Solution: In Decision Alternative 1, the largest possible payoff is 8 (million) (8 is larger than
7). In Decision Alternative 2, the largest possible payoff is 14 (14 is larger than 5). In Decision
Alternative 3, the largest possible payoff is 20 (20 is larger than -9). The decision alternative
recommended is Decision Alternative 3 because it provides the best possible payoff (20
Million is higher than 8 and 14 million. Therefore, PDC should build a Large Complex (D3) in
Optimistic Approach.

2. Conservative Approach – would be used by a conservative decision maker. For each decision
the minimum payoff is listed and then the decision corresponding to the maximum of these
minimum payoff is selected. Hence, the minimum possible payoff is maximized. The decision
alternative recommended is the one that provides the best of the worst possible payoff. This
approach is also called Maximin, or Maximum of all Minimum.

Solution: In Decision Alternative 1, the smallest possible payoff is 7 (million) (7 is smaller

than 8). In Decision Alternative 2, the smallest possible payoff is 5 (5 is smaller than 14). In
Decision Alternative 3, the smallest possible payoff is -9 (-9 is smaller than 20). The decision
alternative recommended is Decision Alternative 1 because it provides the best possible
payoff (7 Million is higher than 5 and -9 million. Therefore, PDC should build a Small
Complex (D1) in Conservative Approach.

Note: Although we are getting the smallest possible payoff for each decision alternative,
we are still choosing the best possible payoff out of the decision alternatives.

3. Laplace – Choose the alternative with the best weighted payoff. The Laplace approach treats
the states of nature as equal/ equal probability to each event. Given two events to our
problem, the probability of each event is 0.5 (50%). The best weighted payoff will be chosen.
D1 (small) – 8 (0.5) + 7 (0.5) = 4+3.5 = 7.5
D2 (medium) – 14 (0.5) + 5 (0.5) = 7+2.5 = 9.5
D3 (large) - 20 (0.5) + -9 (0.5) = 10 + -4.5 = 5.5
Decision: Since 9.5 is the best weighted payoff, the realist would build a medium
complex

Note: Since the Laplace approach is treating the states of nature as equal, the probability
percentage for 3 states of nature is 33.33% (100/3), 25% for 4 states of nature, and 20% for
5 states of nature, and so on.

4. Minimax Regret Approach – requires the construction of a regret table or an opportunity loss
table. This is done by calculating for each state of nature the difference between each payoff
and the largest payoff for that state of nature. Then, using this regret table, the maximum
regret for each possible decision is listed. The decision chosen is the one corresponding to
the minimum of the maximum regrets. This decision alternative minimizes the maximum
state of regret that could occur over all possible states of nature. This approach is called
Minimax, or Minimum of all Maximum Regret.

Solution: First, get the largest possible for each state of nature. In state of nature 1 (strong
demand), the largest possible payoff is 20 (20 is larger than 8 and 14). Put 20 under
Maximum payoff of s1. In state of nature 2 (weak demand), the largest possible payoff is 7
(7 is larger than 5 and -9).
 States of Nature Maximum Payoff
s1 s2 s1 s2
D1 8 7 20 7
D2 14 5 20 7
D3 20 -9 20 7

Second, subtract each state of nature from the maximum payoff. For example, in decision
alternative 1 under s1, the maximum payoff is 20, while the payoff of s1 is 8, just subtract
8 from 20 (20 – 8), the opportunity loss or regret is 12. Do this for each state of nature in
every decision alternative.

Third, using the regret table, get the maximum regret for each possible decision. For
example, in Decision alternative 1, the maximum regret is 12 (12 is larger than 0). In
Decision alternative 2, the maximum regret is 6 (6 is larger than 2). In Decision alternative
3, the maximum regret is 26 (26 is larger than 0).

States of Maximum Regret Table Maximum

Nature Payoff Regret
s1 s2 s1 s2 s1 s2
D1 8 7 20 7 20 – 8 = 12 7–7=0 12
D2 14 5 20 7 20 – 14 = 6 7–5=2 6
D3 20 -9 20 7 20 – 20 = 0 7 – (-9) = 16 26

Lastly, choose the decision alternative corresponding to the minimum of the maximum
regrets. The maximum regret for d1 is 12, d2 is 6, and d3 is 26. The smallest (minimum) of
all maximum regret is 6 under decision alternative 2 (d2). Therefore, PDC should build a
Medium Complex (D2) under Minimax Regret Approach.

DECISION MAKING WITH PROBABILITIES

If probabilistic information regarding the states of nature is available, one may use the
expected value (EV) approach. Here the expected return for each decision is calculated by
summing the products of the payoff under each state of nature and the probability of the
respective state of nature occurring. The decision yielding the best expected return is
chosen.

DECISION TREE - Is a chronological representation of the decision problem.

In problem number 1, the Probability Estimates for the State of Nature is 80% for Strong
Demand and 20% for Weak Demand meaning there is 80% possibility of strong demand and
20% possibility of weak demand. Let’s go back to the problem.

PAYOFF TABLE States of Nature

Decision Alternative S1 – Strong Demand S2 – Weak Demand
Probability Estimate 80% 20%
D1 – Small Complex 8 7
D2 – Medium Complex 14 5
D3 – Large Complex 20 -9
Solution: The payoff of each decision alternative is multiplied to the probability estimates.
For example, in Decision alternative 1, the payoff for s1 or strong demand is 8, multiply 8
to the probability estimate which is 80% (8 x 80% = 6.4). The payoff for s2 or weak demand
in decision alternative 1 is 7, multiple 7 to the probability estimate which is 20% (7 x 20% =
1.4). Calculate by summing the products of the payoff under each state of nature of every
decision alternative. For example, in decision alternative 1, add 6.4 and 1.4 to get 7.8. Look
at the table below.

D1 s1 8 x 80% = 6.4 6.4 + 1.4 = 7.8

s2 7 x 20% = 1.4
D2 s1 14 x 80% = 11.2 11.2 + 1 = 12.2
1 s2 5 x 20% = 1
D3 s1 20 x 80% = 16 16 + (-1.8) = 14.2
s2 -9 x 20% = -1.8

The decision yielding the best expected return is chosen. Decision alternative 1 or small
complex has a return of 7.8 (million). Decision alternative 2 or medium complex has a return
of 12.2. Decision alternative 3 or large complex has a return of 14.2. The decision yielding
the best expected return is chosen. 14.2 Million is larger than 7.8 and 12.2. Therefore, PDC
should build a Large Complex (D3) under Decision Making with Probabilities.

Example Problem 2: Use the following information below. Make decisions for ABC
Corporation using the following approaches:

a. Optimistic Approach
b. Conservative Approach
c. Minimax Regret Approach
d. Decision Making with Probabilities - Probability Estimates for the State of Nature = .3 / 30%
for Strong Demand, .5 / 50% for Moderate Demand and .2 / 20% for Weak Demand

PAYOFF TABLE States of Nature

Decision Alternative S1 – Strong S2 – Moderate S2 – Weak
Demand Demand Demand
d1 – Small Complex 15 12 9
d2 – Medium Complex 18 16 13
d3 – Large Complex 25 14 11
Note: Try to solve the problem first before looking at the solutions on the next page.
Example Problem 2 Solution:

a. Optimistic Approach: d1 = 15, d2 = 18, d3 = 25

Decision – D3, Build a large complex for a payoff of 25 million.
b. Conservative Approach: d1 = 9, d2 = 13, d3 = 11
Decision – D2, Build a medium complex for a payoff of 13 million.
c. Minimax Regret Approach

States of Maximum Regret Table Maximum

Nature Payoff Regret
s1 s2 s3 s1 s2 s3 s1 s2 S3
D1 15 12 9 25 16 13 25 – 15 = 10 16 – 12 = 4 13 – 9 = 4 10
D2 18 16 13 25 16 13 25 – 18 = 7 16 – 16 = 0 13 – 13 =0 7
D3 25 14 11 25 16 13 25 – 25 =0 16 – 14 =2 13 – 11 = 2 2
Decision – D3, Build a Large Complex.

d. Decision Making with Probabilities

D1 s1 15 x .3 = 4.5 4.5 + 6 + 1.8 = 12.3

s2 12 x .5 = 6
s3 9 x .2 = 1.8
D2 s1 18 x .3 = 5.4 5.4 + 8 + 2.6 = 16
1 s2 16 x .5 = 8
s3 13 x .2 = 2.6
D3 s1 25 x .3 = 7.5 7.5 + 7 + 2.2 = 16.7
s2 14 x .5 = 7
s3 11 x .2 = 2.2
Decision – D3, Build a Large Complex with a payoff of 16.7 million.
 Chapter 4: Forecasting

Intended Learning Outcomes: After studying this chapter, you should be able to do the following
a. Describe the nature and concept of forecasting
b. Understand the importance of a time series forecast
c. Identify the different types of smoothing methods in forecasting
d. Learn how to use moving averages, weighted moving averages, and exponential smoothing
methods of forecasting
e. Solve time series analysis and forecasting problems using moving averages, weighted
moving averages, and exponential smoothing methods

A forecast is a prediction of what will happen in the future.

A time series is a set of observations measured at successive points in, or over successive
periods of, time. The objective of time series methods is to discover a pattern in the
historical data and then extrapolate this pattern into the future. The forecast is based solely
on past values of the variable that we are trying to forecast. I

In cases in which the time series is fairly stable and has no significant trend, seasonal, or
cyclical effects, one can use smoothing methods to average out the irregular components
of the time series. Three common smoothing methods are:

A. Moving averages - The moving average method consists of computing an average of the most
recent n data values in the series and using this average for forecasting the value of the time
series for the next period.
Example Problem 1: The data below show the number of gallons of gasoline (in 1000s) sold
by a gasoline distributor in Iba, Zambales over the past 12 weeks. The time series appears to
be stable over time, so smoothing methods are applicable.

Week Sales Week Sales

1 17 7 20
2 21 8 18
3 19 9 22
4 23 10 20
5 18 11 15
6 16 12 22

1. Moving Averages – forecast gasoline sales for weeks 13, 14, and 15 using a 3 week moving
average.

Solution: Using a 3 week moving average to forecast gasoline sales for week 13, we need
to get the 3 most recent data points. The 3 most recent weeks are Weeks 10, 11, and 12.
We need to get the sum of the data points of weeks 10, 11, and 12 (20 for week 10, 15 for
week 11, and 22 for week 12). The summation of the three most recent data points is 57,
divided by n or the number of weeks which is 3 (week 10, 11, and 12). 57 divided by 3 is 19.
The forecasted gasoline sales for week 13 is 19 (million).

Moving Average (week 13) = ∑ (most recent n data points) = (20 + 15 + 22) =57 =19
n 3 3
Solution: Using a 3 week moving average to forecast gasoline sales for week 14, we need
to get the 3 most recent data points. The 3 most recent weeks are Weeks 11, 12, and 13.
We need to get the sum of the data points of weeks 11, 12, and 13 (15 for week 11, 22 for
week 12, and using the result of our previous solution, 19 for week 13). The summation of
the three most recent data points is 56, divided by n or the number of weeks which is 3
(week 11, 12, and 13). 56 divided by 3 is 18.67. The forecasted gasoline sales for week 14 is
18.67 (million).

Moving Average (week 14) = ∑ (most recent n data points) = (15 + 22 + 19) =56
=18.67
n 3 3

Solution: Using a 3 week moving average to forecast gasoline sales for week 15, we need
to get the 3 most recent data points. The 3 most recent weeks are Weeks 12, 13, and 14.
We need to get the sum of the data points of weeks 12, 13, and 14 (22 for week 12, and
using the result of our previous solution, 19 for week 13, and 18.67 for week 14). The
summation of the three most recent data points is 59.67, divided by n or the number of
weeks which is 3 (week 12, 13, and 14). 59.67 divided by 3 is 19.89. The forecasted gasoline
sales for week 15 is 19.89 (million).

Moving Average (week 15) = ∑ (most recent n data points) = (22 + 19 + 18.67) =59.67
=19.89
n 3 3
What if it’s a four-week moving average.
22 + 20 + 15 + 22 / 4 = 19.75 sale for week 13

B. Weighted moving averages –In the weighted moving average method for computing the
average of the most recent n periods, the more recent observations are typically given more
weight than older observations. For convenience, the weights usually sum to 1 (or 100%)

2. Weighted moving averages - forecast gasoline sales for weeks 13, 14, and 15 using a 3 week
weighted moving average, using the weights 0.1, 0.3, and 0.6.

Solution: Using a 3 week weighted moving average to forecast gasoline sales for week 13,
we need to get the 3 most recent data points. The 3 most recent weeks are Weeks 10, 11,
and 12. We need to multiply the given weights to the data points of weeks 10, 11, and 12
(20 for week 10, 15 for week 11, and 22 for week 12). Take note that the highest weight
shall be assigned to the most recent week. Therefore, the 0.6 weight should be given to
week 12, the 0.3 weight should be given to week 11, and the weight 0.1 should be given to
week 10. Multiply the weights assigned to the respective data points: (Week 10 = 20 x 0.1
= 2, Week 11 = 15 x 0.3 = 4.5, Week 12 = 22 x 0.6 = 13.2). Next, we need to add the result
of the three data (2 + 4.5 + 13.2). The forecasted gasoline sales for week 13 is 19.7.

Weighted Moving Average (week 13) = Week 10 (0.1) + Week 11 (0.3) + Week 12 (0.6)

= (20 (0.1)) + (15 (0.3) + (22 (0.6)

=2 + 4.5 + 13.2

=19.7
Solution: Using a 3 week weighted moving average to forecast gasoline sales for week 14,
we need to get the 3 most recent data points. The 3 most recent weeks are Weeks 11, 12,
and 13. We need to multiply the given weights to the data points of weeks 11, 12, and 13
(15 for week 11, 22 for week 12, and using our previous computation, 19.7 for week 13).
Take note that the highest weight shall be assigned to the most recent week. Therefore,
the 0.6 weight should be given to week 13, the 0.3 weight should be given to week 12, and
the weight 0.1 should be given to week 11. Multiply the weights assigned to the respective
data points: (Week 11 = 15 x 0.1 = 1.5, Week 12 = 22 x 0.3 = 6.6, Week 13 = 19.7 x 0.6 =
11.82). Next, we need to add the result of the three data (1.5 + 6.6 + 11.82). The forecasted
gasoline sales for week 14 is 19.92.

Weighted Moving Average (week 14) = Week 11 (0.1) + Week 12 (0.3) + Week 13 (0.6)

= (15 (0.1) + (22 (0.3) + (19.7 (0.6)

=1.5 + 6.6 + 11.82

=19.92

Solution: Using a 3 week weighted moving average to forecast gasoline sales for week 15,
we need to get the 3 most recent data points. The 3 most recent weeks are Weeks 12, 13,
and 14. We need to multiply the given weights to the data points of weeks 12, 13, and 14
(22 for week 12, and using our previous computation, 19.7 for week 13, and 19.92 for week
14). Take note that the highest weight shall be assigned to the most recent week. Therefore,
the 0.6 weight should be given to week 14, the 0.3 weight should be given to week 13, and
the weight 0.1 should be given to week 12. Multiply the weights assigned to the respective
data points: (Week 12 = 22 x 0.1 = 2.2, Week 13 = 19.7 x 0.3 = 5.91, Week 14 = 19.92 x 0.6
= 11.95). Next, we need to add the result of the three data (2.2 + 5.91 + 11.95). The
forecasted gasoline sales for week 15 is 20.06.

Weighted Moving Average (week 15) = Week 12 (0.1) + Week 13 (0.3) + Week 14 (0.6)

= (22 (0.1) + (19.7 (0.3) + (19.92 (0.6)

=2.2 + 5.91 + 11.95

=20.06

3. Exponential smoothing – it is one of the most widely used techniques in forecasting. Each
new forecast is based on the previous forecast plus percentage of the difference between that
forecast and the actual value of the series at that point. The forecast for the next period is
equal to the forecast for the current period plus a proportion ‘a’ of the forecast error in the
current period.

Note: you can also use the Formula F1=Ft+1 + a (At-1 – Ft-1)

Ft+1 = a[the actual value for the current period] + (1- a)[the forecasted value for the current
period]

Where Ft+1= forecast of the time series for period t+1

Yt= actual value of the time series in period t

Ft= forecast of the time series for period t

 a= smoothing constant

Smoothing constant – determines how the historical time series values are weighted. The
higher the smoothing constant, the greater weight assigned to the values from the latest
period.

Note: To start the calculations, we let F1 equal the actual value of the time series in period
1.

Exponential smoothing – calculate exponential smoothing forecasts using a=0.5 (f1=17)

Ft+1 = a[the actual value for the current period] + (1- a)[the forecasted value for the current
period]

Where Ft+1= forecast of the time series for period t+1

Yt= actual value of the time series in period t

Ft= forecast of the time series for period t

a= smoothing constant

Solutions: To get F2, we will consider the data from F1, refer to the computations below.

Week Yt = Sales Ft= forecasted Computations Notes

(Ft) (Actual Sales
Value)
1 17 17 Ft+1 = (a Yt) + ((1-a) Ft) Ft+1= forecast of
Note: To start the the time series
calculations, we Itemized Computation: for period t+1 =
let F1 equal the Ft+1 = F1+1 F1+1
actual value of the (a Yt) = (0.5) (17)
time series in ((1 – a) Ft) = (1 – 0.5) 17 Yt= actual value
period 1. of the time
Final Solution: series in period
F1+1 = (0.5) (17) + (1 – 0.5) t = 17
17
Ft= forecast of
Itemized Solution: the time series
F1+1 = F2 for period t = 17
(0.5) (17) = 8.5
(1 – 0.5) 17 = 8.5 a= smoothing
constant = 0.5

F2 = 8.5 + 8.5
F2 = 17
2 21 F2 = 17
(from previous
computation)
Using the data of F2, we can find the forecasted sales for Week 3 and so on. Therefore, after
using the actual and forecasted data of Week 12, we can now forecast the Weekly Sales of
Week 13. 19.78 is the forecasted sales for week 13.

Week Yt = Ft= Computations Answer

(Ft) Actual forecasted
Sales Sales
1 17 17 F1+1 = (0.5(17) + (1 – 0.5)17 F2 = 17
F2 = 8.5 + 8.5
2 21 F2 = 17 F2+1 = (0.5(21) + (1 – 0.5)17 F3 = 19
F3 = 10.5 + 8.5
3 19 F3 = 19 F3+1 = (0.5(19) + (1 – 0.5)19 F4 = 19
F4 = 9.5 + 9.5
4 23 F4 = 19 F4+1 = (0.5(23) + (1 – 0.5)19 F5 = 21
F5 = 11.5 + 9.5
5 18 F5 = 21 F5+1 = (0.5(18) + (1 – 0.5)21 F6 = 19.5
F6 = 9 + 10.5
6 16 F6 = 19.5 F6+1 = (0.5(16) + (1 – 0.5)19.5 F7 = 17.75
F7 = 8 + 9.75
7 20 F7 = 17.75 F7+1 = (0.5(20) + (1 – 0.5)17.75 F8 = 18.88
F8 = 10 + 8.8
8 18 F8 = 18.88 F8+1 = (0.5(18) + (1 – 0.5)18.88 F9 = 18.44
F9 = 9 + 9.44
9 22 F9 = 18.44 F9+1 = (0.5(22) + (1 – 0.5)18.44 F10 = 20.22
F10 = 11 + 9.22
10 20 F10 = 20.22 F10+1 = (0.5(20) + (1 – 0.5)20.22 F11 = 20.11
F11 = 10 + 10.11
11 15 F11 = 20.11 F11+1 = (0.5(15) + (1 – 0.5)20.11 F12 = 17.56
F12 = 7.5 + 10.06
12 22 F12 = 17.56 F12+1 = (0.5(22) + (1 – 0.5)17.56 F13 = 19.78
F13 = 11 + 8.78
13 F13 = 19.78

Example Problem 2: Answer the following using the data below and the appropriate smoothing
methods.
Week Sales Week Sales
1 55 7 80
2 63 8 84
3 74 9 90
4 70 10 88
5 79 11 93
6 78 12 95
1. Moving Averages – forecast gasoline sales for week 13 to 15 using a 5 week moving
average.

2. Weighted moving averages - forecast gasoline sales for week 13 to 15 using a 4

week moving average, using the weights 0.1, 0.2, 0.3, and 0.4.

3. Exponential smoothing – calculate exponential smoothing forecasts for week 13

using a=0.4
 Chapter 5: Linear Regression Analysis

Intended Learning Outcomes: After studying this chapter, you should be able to do the following
a. Describe the nature and concept of linear regression analysis
b. Distinguish explanatory/independent variable from dependent variable
c. Understand the importance and use of a linear regression table
d. Master the regression line equation y = a + bx
e. Identify fixed cost, and variable cost as part of total cost
f. Solve linear regression analysis problems using equations

Linear regression attempts to model the relationship between two variables by fitting a
linear equation to observe data. One variable is considered to be an
explanatory/independent variable, and the other is considered to be a dependent variable.

A linear regression line has an equation of the form Y = a + bX, where X is the
explanatory/independent variable and Y is the dependent variable. The slope of the line is
b, and a is the intercept (the value of y when x = 0). The values of ‘a’ and ‘b’ may be found
using the following formulas.

Problem Number 1: The following data show the annual sales of five University-based
restaurants owned by FJT Corporation, and the corresponding student population per
University where the restaurants are located. FJT Corporation is planning to build a 6th and
7th restaurant branch in two more Universities. Forecast the monthly sale of the 6th and
7th restaurants using the recorded sales of the existing five restaurants:

Restaurant Student Population Monthly Sales (in

(in thousands) thousands)
1 15 200
2 12 160
3 10 150
4 8 120
5 6 105
a. Find the Linear Regression Formula.
b. Forecast the quarterly sales of the 6th and 7th restaurants with:
b.1. 17 (thousand) b.2. 20 (thousand)

Solution: First, we need to complete the linear regression table by using the data available
before using the regression formula. Let n be the number of variables. In problem number
1, FJT owns five restaurants, so n = 5. To identify the x and y, we need to distinguish what
is being forecasted. In this problem, we are trying to forecast the quarterly sales of the sixth
and seventh restaurants therefore the quarterly sales shall be the y or the dependent
variable because the forecasted sales is dependent to the student’s population. Therefore,
student population is our independent variable or the x. To get ∑x or the summation of x,
just add all the values under x or the student population of the five restaurants
(15+12+10+8+6=51). To get ∑y or the summation of y, simply add the values under y
(200=160+150+120+105 = 735). To get xy, just multiple the value of x to the value of y per
variable. For example, under variable 1 or restaurant 1, student population is 15 multiplied
to the quarterly sales of 200, the value of xy is 3000 (15x200=3000). To get ∑xy, simply add
all the values that we computed under xy (3000+1920+1500+960+630 = 8010). To get ,
simply square the value of x (multiply it by itself). For example, 15 squared is 225
(15x15=225), 12 squared is 144 (12x12) and so on. The values under x in this problem is 15,
12, 10, 8, 6 or the student population. To get , simply add all values under
(225+144+100+64+36=569).

Restaurant Student Population Quarterly Sales (in xy

(in thousands) thousands)
x y
1 15 200 3000 225
2 12 160 1920 144
3 10 150 1500 100
4 8 120 960 64
5 6 105 630 36
n=5 ∑x = 51 ∑y = 735 ∑xy = 8010 = 569

After getting the summations of values in the linear regression table, we can now use this
formula to get the values of a and b. Going back, n = 5, ∑x = 51, ∑y = 735, ∑xy = 8010,
= 569. Simply put the values based on the formula. We need to get the value of b first
because we need its value to get the value of a.

= 5 (8010) – (51) (735) = (735) – (10.51 (51))

5 (569) – (51) 5
= 40050 – 37485 = 735 – 536.01
2845 – 2601 5
= 2565/244 a = 39.80
b = 10.51

Going back, a linear regression line has an equation of the form Y = a + bX, where X is the
explanatory/independent variable and Y is the dependent variable. The slope of the line is
b, and a is the intercept (the value of y when x = 0). Let’s go back to our problem number
1. We need to forecast the quarterly sales of the 6th and 7th restaurants with:

a. 17,000 students
b. 20,000 students

Going back further, we assigned the quarterly sales of the restaurant as the dependent
variable or the y, and the student population as the x. Simply substitute the value of a, b,
and x to the linear regression formula Y = a + bX. The values of x

a. For the 6th restaurant with 17 (thousand) students: b. For the 7th restaurant with 20
(thou) students

Y = a + bx Y = a + bx

Y = 39.80 + (10.51) 17 Y = 39.80 + (10.51) 20

Y = 39.80 + 178.67 Y = 39.80 + 210.2

Y = 218.47 Y = 250

a. The forecasted sales for the 6th restaurant with 17,000 students is 218,470.
b. The forecasted sales for the 7th restaurant with 20,000 students is 250,000.

Linear regression analysis is also a method to segregate fixed cost and variable cost
components from a mixed cost figure. It is also known as Least squares regression method.
It is deemed to be the most accurate and reliable method to divide the company’s mixed
cost into its fixed and variable cost components. The following equation should represent
the required cost line: Y=a + bx Where, y = total cost, a = total fixed cost, b = variable cost,
and x = number of units.

Fixed Cost – remains the same no matter how much output a company produces. A fixed
cost is the other cost incurred by businesses and corporations. It may include lease and rent
payments, utilities, insurance, certain salaries, and interest payments.

Variable Cost – varies with the amount produced. A variable cost is a company’s cost that
is associated with the amount of goods and services it produces. Examples of variable cost
includes labor and the cost of raw materials.

Problem Number 2: For example, Master Chemicals produces bottles of a cleaning

lubricant. The activity levels and the attached costs are shown below:

Batch Number of Bottles (in Total Cost (in

thousands) thousands)
1 4.1 66
2 3.6 53
3 3.2 52
4 2.8 48
5 1.9 36
6 1.5 31

Required: On the basis of above data, determine the cost function using the Linear
regression analysis and calculate the total cost at activity levels of the 7th and 8th batches
with 6,000 and 10,000 bottles.

Note: Try solving the problem first before looking at the solutions on the next page.

Problem Number 2 Solution: Linear Regression Table, and formulas:

Batch Number of Bottles Total Cost (in xy

(in thousands) thousands)
x y
1 4.1 66 270.60 16.81
2 3.6 53 190.80 12.96
3 3.2 52 166.4 10.24
4 2.8 48 134.4 7.84
5 1.9 36 68.4 3.61
6 1.5 31 46.5 2.25
n=6 ∑x = 17.10 ∑y = 286 ∑xy = 877.1 = 53.71
 = 6 (877.1) – (17.10) (286) = (286) – (12.46 (17.10))
6 (53.71) – (17.10) 6
= 5262.6 – 4890.6 = 286 – 213.07
322.26 – 292.41 6
= 372 / 29.85 a = 12.16
b = 12.46

a. For the 7th batch with 6 (thousand) bottles: b. For the 8th batch with 10 (thousand)
students
Y = a + bx Y = a + bx
Y = 12.16 + (12.46) 6 Y = 12.16 + (12.46) 10
Y = 86.92 Y = 136.76

a. The total cost of producing the 7th batch with 6,000 bottles is 86,920.
b. The total cost of producing the 8th batch with 10,000 bottles is 136, 760.
 Chapter 6: Project Management

Intended Learning Outcomes: After studying this chapter, you should be able to do the following
a. Describe the nature and concept of PERT-CPM
b. Discuss the use of PERT-CPM in planning, scheduling, and control of a wide variety of
projects.
c. Distinguish the reasons why Managers rely on PERT/CPM to help them answer certain
questions
d. Create a Project Network
e. Determine the project’s Critical Path and Critical activities
f. Identify the Project Completion Time

Basically, PERT-CPM are project management techniques which have been created out of
the need of industrial and military establishments to plan, schedule and control complex
projects.

PERT / Program Evaluation and Review Technique - Developed by U.S. Navy to handle
uncertain activity times, initially for the Polaris missile nuclear submarine project.

In a PERT diagram, the main building block is the event, with connections to its predecessor
events and successor events.

CPM / Critical Path Method - Developed by DuPont & Remington Rand in 1957 for industrial
projects for which activity times generally were known.

Today’s project management have combined the best features of both approaches.

PERT and CPM have been used to plan, schedule, and control a wide variety of projects:

Planning, Scheduling and Control are considered to be basic managerial functions and PERT-
CPM has been rightfully accorded due importance.

a. R&D of new products and processes

b. Construction of buildings and highways
c. Maintenance of large and complex equipment
d. Design and installation of new systems

Project managers rely on PERT/CPM to help them answer questions such as:

a. What is the total time to complete the project?

b. What are the scheduled start and finish dates for each specific activity?
c. Which activities are critical and must be completed exactly as scheduled to keep the project
on schedule?
d. How long can noncritical activities be delayed before they cause an increase in the project
completion time?

Example Problem 1: Frank’s Fine Floats is in the business of building elaborate parade
floats. Frank‘s crew has a new float to build and want to use PERT/CPM to help them
manage the project. Frank wants to know the total time to complete the project, which
activities are critical, and the earliest and latest start and finish dates for each activity. The
description of activities, immediate predecessors, and completion time are as follow:
 Description Immediate Completion
Activity Predecessor Time (Days)
A Initial Paperwork --- 3
B Build Body A 3
C Build Frame A 2
D Finish Body B 3
E Finish Frame C 7
F Final Paperwork B,C 3
G Mount Body to Frame D, E 6
H Install Skirt on Frame C 2

Note that this is the position of activities in the network:

Step 1: Create a network. Refer to the network below. At the top of the table, you need to
put the activity code, A is for Initial paperwork, B is Build Body, and so on. At the bottom of
the table, indicate the time (number of days) that the activity needs to be completed. For
example, Activity A’s completion time is 3, Activity C’s completion time is 2 days, while
Activity G’s completion time is 6 days. Focus on the arrows. Because Activity A is the
predecessor of Activity B and C, notice that the arrows pointing Activity B and C is from
Activity A. Activity F’s immediate predecessors are activities B and C, so notice that the
arrows pointing Activity F is from Activity B and C. Another example, Activity C is the
immediate predecessor of Activity H, so the arrow pointing to activity H is coming from
Activity C. If the activity is not an immediate predecessor like Activities F, G, and H, they
should point to the FINISH table.
Step 2: Make a forward pass through the network as follows: For each activity beginning
at the Start node, compute:

a. Earliest Start Time = the maximum of the earliest finish times of all activities immediately
preceding activity. (This is 0 for an activity with no predecessors.)
b. Earliest Finish Time = (Earliest Start Time) + (Time to complete activity)

Note (Refer to the figure above): Zero is the earliest start for activities with no predecessors.
In this problem, only Activity A has no predecessor so the ES (Earliest start) of Activity A is
Zero. To compute the Earliest Finish Time (EF), simply add the earliest start to the Time to
complete the activity. For example, Activity A’s ES is 0 and the time to complete Activity A
is 3, so 0 + 3 = 3. Therefore, activity A’s earliest finish or EF is 3.

For activities B and C, their earliest start or ES is the EF of the activity immediately preceding
them which is activity A. Therefore, the ES of Activities B and C is 3 based on the EF of
Activity A. To compute the EF of Activity B, simply add its ES which is 3 to its time to
complete the activity which is also 3, 3+3=6, Activity B’s EF is 6. To compute the EF of
Activity C, simply add its ES which is 3 to the Time to complete the activity which is 2, 3+2=5.
For activity D, the ES is 6 because it is an immediate predecessor of activity B, and Activity
B’s EF is 6. For activity E, the ES is 5 because it is an immediate predecessor of activity C,
and Activity C’s EF is 5. Take note of Activity F, its immediate predecessors are both Activity
B and Activity C. Based on the rules above, Earliest Start Time is the maximum of the earliest
finish times of all activities immediately preceding activity. Therefore, Activity F’s ES is 6
because it is the maximum of the EF of Activity B (6) and C (5).

Look at the complete ES and EF of our Project Network below:

Step 3: Make a backwards pass through the network as follows: Move sequentially
backwards from the Finish node to the Start node. For each of these activities, compute:

a. Latest Finish Time = the minimum of the latest start times.

b. Latest Start Time = (Latest Finish Time) - (Time to complete activity).

Note: The Latest Finish Time (LF) of activities that are not immediate predecessors is the
Maximum Earliest Finish Time of all activities. In this problem, Activity F, Activity G, and
Activity H are not immediate predecessors, therefore their LF is 18 which is the maximum
Finish time or LF of the Project Network.
Refer to the complete Project Network below, to get the LS or latest start time, simply
subtract the Latest Finish Time (LF) to the time to complete the activity. For example, in
Activity H, 18 is the LF, and 2 is the time to complete the activity, 18-2=16, 16 is the LS of
Activity H. In Activity G, 18 is the LF, and 6 is the time to complete the activity, 18-6=12, 12
is the LS of Activity G.

To get the LF of activities that are immediate predecessors, simply get the LS of the activities
succeeding them (or the activities that they are the immediate predecessor). For example,
Activity D’s LF is 12 because Activity G’s LS is 12 and Activity D is the immediate predecessor
of Activity G. Activity E’s LS is 12 because Activity G’s LS is 12 and Activity E is the immediate
predecessor of Activity G.

For activities that are immediate predecessors of two activities, their Latest Finish Time is
the minimum of the latest start times of the activities succeeding them. For example,
Activity A is the immediate predecessor of Activity B and C. To get the LF of Activity A, simply
choose the minimum LS among Activity B (6), and Activity C (3). Because 3 is the minimum
LS, 3 is the LF of Activity A. Another example, Activity C is the immediate predecessor of
Activity E, F, and H. To get the LF of Activity C, simply choose the minimum LS among Activity
E (5), Activity F (15), and Activity H (16). Because 5 is the minimum LS of the three activities,
5 is the LF of Activity C.

Step 4: Calculate the slack time for each activity by:

Slack = (Latest Start) - (Earliest Start), or = (Latest Finish) - (Earliest Finish).

Activity ES EF LS LF Slack Status

A 0 3 0 3 0 Critical

B 3 6 6 9 3

C 3 5 3 5 0 Critical

D 6 9 9 12 3

E 5 12 5 12 0 Critical

F 6 9 15 18 9
 G 12 18 12 18 0 Critical

H 5 7 16 18 11

Determining the Critical Path

A critical path is a path of activities, from the Start node to the Finish node, with 0 slack
times.

Critical Path: A–C–E–G

The project completion time equals the maximum of the activities’ earliest finish times.

Project Completion Time: 18 days

Going back Project managers rely on PERT/CPM to help them answer questions such as:

a. What is the total time to complete the project? 18 days

b. What are the scheduled start and finish dates for each specific activity? Refer to table above
c. Which activities are critical and must be completed exactly as scheduled to keep the project
on schedule? Which are the critical activities or tasks in the project which could delay the
entire project if they were not completed on time. A-C-E-G
d. How long can noncritical activities be delayed before they cause an increase in the project
completion time? B-3, D-3, F-9, H-11

Example Problem 2: Create a Project Network using the data below. Determine the Critical
Path, and the Project Completion Time.
Activity Description Immediate Predecessor Completion Time (Days)
A Initial Paperwork ---- 10
B Procurement of Materials ---- 12
C Build Body A, B 15
D Build Frame C 8
E Finish Body C 14
F Finish Frame E 13
G Final Paperwork D,E,F 11
H Mount Body to Frame G 5
I Install Skirt on Frame G, H 7
J Attach Motor H 10
K Add Special Features J 12