Planning Tools and Techniques

LEARNING OUTLINE

Techniques for Assessing the Environment

• List the different approaches to assess the environment.
• Explain what competitor intelligence is and ways that managers can
do it legally and ethically.
• Describe how managers can improve the effectiveness of
forecasting.
• List the steps in the benchmarking process.
Techniques for Allocating Resources
• List the four techniques for allocating resources.
• Describe the different types of budgets.
• Explain what a Gantt chart and a load chart do.

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Follow this Learning Outline as you read and study this chapter.

Techniques for Allocating Resources (cont’d)

• Describe how PERT network analysis works.
• Understand how to compute a breakeven point.
• Describe how managers can use linear programming.
Contemporary Planning Techniques
• Explain why flexibility is so important to today’s planning
techniques.
• Describe project management.
• List the steps in the project planning process.
• Discuss why scenario planning is an important planning tool.

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Assessing the Environment
Environmental Scanning
◦ The screening of large amounts of information to anticipate and interpret
change in the environment.
◦ Competitor Intelligence
◦ The process of gathering information about competitors—who they are; what they are doing
◦ Is not spying but rather careful attention to readily accessible information from employees,
customers, suppliers, the Internet, and competitors themselves.
◦ May involve reverse engineering of competing products to discover technical innovations.

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Assessing the Environment
(cont’d)
Environmental Scanning (cont’d)
◦ Global Scanning
◦ Screening a broad scope of information on global forces that might affect the organization.
◦ Has value to firms with significant global interests.
◦ Draws information from sources that provide global perspectives on world-wide issues and
opportunities.

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 Assessing the Environment
(cont’d)
Forecasting
◦ The part of organizational planning that involves creating predictions of outcomes
based on information gathered by environmental scanning.
◦ Facilitates managerial
decision making.
◦ Is most accurate in
stable environments.

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Assessing the Environment
(cont’d)
Forecasting Techniques
◦ Quantitative forecasting
◦ Applying a set of mathematical rules to a series of hard data to predict outcomes (e.g., units to
be produced).
◦ Qualitative forecasting
◦ Using expert judgments and opinions to predict less than precise outcomes (e.g., direction of
the economy).

Collaborative Planning, Forecasting, and Replenishment (CPFR)

Software
◦ A standardized way for organizations
to use the Internet to exchange data.

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Exhibit 9–1 Forecasting Techniques

• Quantitative
• Time series analysis
• Regression models
• Econometric models
• Economic indicators
• Substitution effect
• Qualitative
• Jury of opinion
• Sales force composition
• Customer evaluation

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 Making Forecasting More
Effective
1. Use simple forecasting methods.
2. Compare each forecast with its corresponding “no
change” forecast.
3. Don’t rely on a single forecasting method.
4. Don’t assume that the turning points in a trend can be
accurately identified.
5. Shorten the time period covered by a forecast.
6. Remember that forecasting is a developed managerial
skill that supports decision making.

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Benchmarking
The search for the best practices among competitors and
noncompetitors that lead to their superior performance.
By analyzing and copying these practices, firms can improve their
performance.

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 Exhibit 9–2 Steps in Benchmarking

Source: Based on Y.K. Shetty, “Aiming High: Competitive Benchmarking

for Superior Performance,” Long Range Planning. February 1993, p. 42.

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Allocating Resources
Types of Resources
◦ The assets of the organization
◦ Financial: debt, equity, and retained earnings
◦ Physical: buildings, equipment, and raw materials
◦ Human: experiences, skills, knowledge, and competencies
◦ Intangible: brand names, patents, reputation, trademarks, copyrights, and databases

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Allocating Resources:
Budgeting
Budgets
◦ Are numerical plans for allocating resources (e.g., revenues, expenses, and
capital expenditures).
◦ Are used to improve time, space, and use of material resources.
◦ Are the most commonly used
and most widely applicable
planning technique for
organizations.

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 Exhibit 9–3 Types of Budgets

Source: Based on R.S. Russell and B.W. Taylor III. Production and Operations
Management (Upper Saddle River, NJ: Prentice Hall, 1995), p. 287.

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Exhibit 9–4 Suggestions for Improving Budgeting

• Collaborate and communicate.

• Be flexible.
• Goals should drive budgets—budgets should not
determine goals.
• Coordinate budgeting throughout the organization.
• Use budgeting/planning software when appropriate.
• Remember that budgets are tools.
• Remember that profits result from smart
management, not because you budgeted for them.

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 Allocating Resources:
Scheduling
Schedules
◦ Plans that allocate resources by detailing what activities have to be done, the order
in which they are to be completed, who is to do each, and when they are to be
completed.
◦ Represent the coordination of various activities.

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Allocating Resources: Charting
Gantt Chart
◦ A bar graph with time on the horizontal axis and activities to be
accomplished on the vertical axis.
◦ Shows the expected and actual progress of various tasks.
Load Chart
◦ A modified Gantt chart that lists entire departments or specific resources on
the vertical axis.
◦ Allows managers to plan and control capacity utilization.

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Exhibit 9–5 A Gantt Chart

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Exhibit 9–6 A Load Chart

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Allocating Resources: Analysis
Program Evaluation and Review Technique (PERT)
◦ A flow chart diagram that depicts the sequence of activities needed to
complete a project and the time or costs associated with each activity.
◦ Events: endpoints for completion.

◦ Activities: time required for each activity.

◦ Slack time: the time that a completed activity waits for another activity to
finish so that the next activity, which depends on the completion of both
activities, can start.

◦ Critical path: the path (ordering) of activities that allows all tasks to be
completed with the least slack time.

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Exhibit 9–7 Steps in Developing a PERT Network

1. Identify every significant activity that must be achieved for

a project to be completed.
2. Determine the order in which these events must be
completed.
3. Diagram the flow of activities from start to finish, identifying
each activity and its relationship to all other activities.
4. Compute a time estimate for completing each activity.
5. Using the network diagram that contains time estimates for
each activity, determine a schedule for the start and finish
dates of each activity and for the entire project.

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Exhibit 9–8 Events and Activities in Constructing an Office Building

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Exhibit 9–9 A Visual PERT Network for Constructing an Office Building

Critical Path: A - B - C - D - G - H - J - K

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 Allocating Resources: Analysis
(cont’d)
Breakeven Analysis
◦ Is used to determine the point at which all fixed costs have been recovered and
profitability begins.
◦ Fixed cost (FC)
◦ Variable costs (VC)
◦ Total Fixed Costs (TFC)
◦ Price (P)

The Break-even Formula:

Total Fixed Costs
Breakeven:
Unit Price - Unit Variable Costs

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Exhibit 9–10 Breakeven Analysis

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A small firm produces and sells
automotives items in 5-state area.
Revenue is $7 per unit, variable cost is $3
per uit, fixed cost is $42,000 per month.
Prepare a table that show the total profit
for these data with monthly volume of
10k, 12k and 15k units. What is the
break even point.

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Seatwork
A producer of pottery is considering the addition of a new plant to
absorb the the backlog of demand that now exis. The primary location
being considered will have affixed cost of $9200 per month and a
variable cost of 70 cents per unit produced. Each item is sold to
retailers at a price that averages 90 cents.
A. What volume per month is required in order to break even?
B. What profit would be realized on a montly voume of 61k? 87k?
C. What volume is needed to provide a revenue of $16,000 per month.
D. What volume is needed to provide a revenue of $23,000 per month.

© 2007 PRENTICE HALL, INC. ALL RIGHTS RESERVED. 9–27

 Allocating Resources: Analysis
(cont’d)
Linear Programming
◦ A technique that seeks to solve resource allocation problems using the
proportional relationships between two variables.

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4 Components of LP
1. Objective Cost
◦ A. Maximize profits
◦ B. Minimize profits

2. Decision variables
◦ - represents choices available to the decision maker in terms of amounts of
either inputs or outputs

3. Constraints
◦ - limitations that restrict the alternatives available to decision makers. Its
three type are greater than or equal, less than or equal, and equal

4. Parameters
◦ Decision variable and numerical values

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Decision Variables
◦ X1 = Quantity of product 1 to produce
◦ X2 = Quantity of product 2 to produce
◦ X3 = Quantity of product 3 to produce

Maximize 5X1 + 8X2 + 4X3 (Objective Function)

Subject to (Constraints)
Labor 2X1 + 4X2 + 8X3 ≤ 250 hours
Material 7X1 + 6X2 + 5X3 ≤ 100 kgs.
Product 1 X1 ≥ 10 unit
X1 , X2, X3 ≥ 0 (Nonnegativity constraints)

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 Problem:
A firm that assembles computers and computer equipment is about to start production of
two new types of microcomputers. Each type will require assembly time, inspection time,
and storage space. The amounts of each these resources that can be devoted to the
production of the microcomputers is limited. The manager of the firm would like to
determine the quantity of each microcomputer to produce in order to maximize the profit
generated by sales of these microcomputers. In order to develop a suitable model of the
problem, the manager has met with the design and production personnel. As a result of
those meetings, the manager has obtained the following information:

Amount
Type 1 Type 2 Available

Profit per unit $60 $50

hours per hours per
Assembly time 4 unit 10 unit 100 hours
hours per hours per
Inspection time 2 unit 1 unit 22 hours
cub. m. cub. m.
Storage space 3 per unit 3 per unit 39 cub. m.

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Exhibit 9–11 Production Data for Cinnamon-Scented Products

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Exhibit 9–12 Graphical Solution to Linear Programming Problem

Max. Assembly

Max. Manufacturing

Max. Profits

Max. Assembly

Max. Manufacturing

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Contemporary Planning
Techniques
Project
◦ A one-time-only set of activities that has a definite beginning and ending
point time.

Project Management
◦ The task of getting a project’s activities done on time, within budget, and
according to specifications.
◦ Define project goals
◦ Identify all required activities, materials, and labor
◦ Determine the sequence of completion

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 Exhibit 9–13 Project Planning Process

Source: Based on R.S. Russell and B.W. Taylor III, Production and Operations
Management (Upper Saddle River, NJ: Prentice Hall, 1995), p. 287.

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Contemporary Planning Techniques
(cont’d)
Scenario
◦ A consistent view of what the future is likely to be.
Scenario Planning
◦ An attempt not try to predict the future but to reduce uncertainty by playing out
potential situations under different specified conditions.
Contingency Planning
◦ Developing scenarios that allow managers determine in advance what their actions
should be should a considered event actually occur.

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 Exhibit 9–14 Preparing for Unexpected Events

• Identify potential unexpected events.

• Determine if any of these events would have
early indicators.
• Set up an information gathering system to
identify early indicators.
• Have appropriate responses (plans) in place if
these unexpected events occur.

Source: S. Caudron, “Frontview Mirror,” Business Finance, December 1999, pp. 24–30.

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 Terms to Know
environmental scanning PERT network
competitor intelligence events
forecasts activities
quantitative forecasting slack time
qualitative forecasting critical path
benchmarking breakeven analysis
resources linear programming
budget project
scheduling project management
Gantt chart scenario
load chart

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