FIVE MANAGEMENT TECHNIQUES ACROSS THE WORLD

1. BASIL JOHN
I ST YEAR MBA SECTION B | DMS PONDICHERRY UNIVERSITY
FIVE MANAGEMENT TECHNIQUES
ACROSS THE WORLD
SUBMITTED TO,
DR. R PRABHAKARA RAYA
DEAN/ASSOCIATE PROFESSOR
SCHOOL OF MANAGEMENT
PONDICHERRY UNIVERSITY
HRM ASSIGNMENT

2. Statistical techniques
1.Time trends and forecasting
Time-series methods make forecasts based solely on historical patterns in the data. Time-series
methods use time as independent variable to produce demand. In a time series,measurements are
taken at successive points or over successive periods. The measurements may be taken every hour,
day, week, month, or year, or at any other regular (or irregular) interval. A first step in using time-
series approach is to gather historical data. The historical data is representative of the conditions
expected in the future. Time-series models are adequate forecasting tools if demand has shown a
consistentpatterninthe pastthat isexpectedtorecurin the future.Forexample,new homebuilders
in US may see variation in sales from month to month. But analysis of past years of data may reveal
that salesof newhomesare increasedgraduallyoverperiodof time.In thiscase trend isincrease in
newhome sales.Timeseriesmodelsare characterizedof fourcomponents:trendcomponent,cyclical
component,seasonal component,andirregularcomponent.Trendisimportantcharacteristicsof time
series models. Although times series may display trend, there might be data points lying above or
belowtrendline.Anyrecurringsequence of pointsabove andbelow the trendline thatlastformore
than a year is considered to constitute the cyclical component of the time series—that is, these
observationsinthe time seriesdeviate fromthe trenddue to fluctuations.The real Gross Domestics
Product(GDP) providesgoodexamplesof atime seriesthat displayscyclicalbehavior.The component
of the time series that captures the variability in the data due to seasonal fluctuations is called the
seasonal component.The seasonal component issimilartothe cyclical componentinthat theyboth
referto some regularfluctuationsina time series.Seasonal componentscapture the regularpattern
of variabilityinthe time serieswithinone-yearperiods.Seasonal commoditiesare bestexamplesfor
seasonal components.Randomvariationsintimesseriesisrepresentedbythe irregularcomponent.
The irregularcomponentof the time seriescannotbe predictedinadvance.The randomvariationsin
the time seriesare causedbyshort-term, unanticipated andnonrecurringfactorsthataffectthe time
series.
Smoothingmethods(stable series) are appropriate whena time seriesdisplaysnosignificant
effectsof trend,cyclical,orseasonalcomponents.Insuchacase,the goalistosmoothoutthe irregular
componentof the time seriesbyusinganaveragingprocess.The movingaveragesmethodisthe most
widelyusedsmoothingtechnique.Inthismethod,the forecastis the average of the last“x” number
of observations, where “x” is some suitable number. Suppose a forecaster wants to generate three-
period moving averages. In the three-period example, the moving averages method would use the
average of the most recentthree observationsof data in the time seriesas the forecastfor the next
period.Thisforecastedvalueforthe nextperiod,inconjunctionwiththe lasttwoobservationsof the
historical time series, would yield an average that can be used as the forecast for the secondperiod
in the future.
The calculationof a three-periodmovingaverage isillustratedinfollowingtable.Basedonthe three-
period moving averages,the forecastmay predict that 2.55 million new homes are most likely to be
sold in the US in year 2008.

3. Year Actual sale(inmillion) Forecast(inmillion) Calculation
2003 4
2004 3
2005 2
2006 1.5 3 (4+3+2)/3
2007 1 2.67 (3+2+3)/3
2008 2.55 (2+3+2.67)/3
Example:Three-periodmovingaverages
In calculatingmovingaveragestogenerateforecasts,the forecastermayexperimentwithdifferent-
lengthmovingaverages.The forecasterwillchoose the lengththatyieldsthe highestaccuracyfor
the forecastsgenerated.Weightedmovingaveragesmethodisavariantof movingaverage
approach.In the movingaveragesmethod,eachobservationof datareceivesthe same weight.In
the weightedmovingaverages method,differentweightsare assignedtothe observationsondata
that are usedincalculatingthe movingaverages.Suppose,once again,thata forecasterwantsto
generate three-periodmovingaverages.Underthe weightedmovingaveragesmethod,the three
data pointswouldreceivedifferentweightsbefore the average iscalculated.Generally,the most
recentobservationreceivesthe maximumweight,withthe weightassigneddecreasingforolder
data values.
Year Actual sale(inmillion) Forecast(inmillion) Calculation
2005 2 (.2)
2006 1.5 (.3)
2007 1 (.4)
2008 .42 (2*.2+1.5*.3+1*.4)/3
Example:Weightedthree-periodmovingaveragesmethod
A more complex formof weightedmovingaverage isexponential smoothing.Ithismethodthe
weightfall off exponentiallyasthe data ages.Exponentialsmoothingtakesthe previousperiod’s
forecastand adjustsitby a predeterminedsmoothingconstant,ά (calledalpha;the value foralphais
lessthanone) multipliedbythe difference inthe previousforecastandthe demandthatactually
occurredduringthe previouslyforecastedperiod(calledforecasterror).Exponentialsmoothingis
mathematicallyrepresentedasfollows:New forecast=previousforecast+alpha(actual demand−
previousforecast) Orcanbe formulatedas F = F + ά(D− F)
Othertime-seriesforecastingmethodsare,forecastingusingtrendprojection,forecastingusing
trendand seasonal componentsandcausal methodof forecasting.Trendprojectionmethodused
the underlyinglong-termtrendof time seriesof datatoforecastitsfuture values.Trendand
seasonal componentsmethodusesseasonal componentof atime seriesinadditiontothe trend

4. component.Causal methodsuse the cause-and-effectrelationshipbetweenthe variablewhose
future valuesare beingforecastedandotherrelatedvariablesorfactors.The widelyknowncausal
methodiscalledregressionanalysis,astatistical technique usedtodevelopamathematical model
showinghowa setof variablesisrelated.Thismathematical relationshipcanbe usedto generate
forecasts.There are more complex time-seriestechniquesaswell,suchasARIMA and Box-Jenkins
models.These are heavierdutystatistical routinesthatcancope withdata withtrendsandthe
seasonalityinthem.
Time seriesmodelsare usedinFinance toforecaststock’sperformance orinterestrate
forecast,usedinforecastingweather.Time-seriesmethodsare probablythe simplestmethodsto
deployandcan be quite accurate,particularlyoverthe shortterm. Variouscomputersoftware
programsare available tofindsolutionusingtime-seriesmethods.
For ex., Epidemiologistcanconstruct endemiccurvesbasedonincidence of disease andalso
establishthe likelylimitsof variations.
If the incidence of adisease exceedsthe expectationbycertainlimits,the occurrence of an
increasedincidence orepidemiccanbe anticipated.
Activity analysis
2. Work sampling and activity analysis
Work samplingisthe statistical technique fordeterminingthe proportionof time spentbyworkers
invariousdefinedcategoriesof activity(e.g.settingupamachine,assemblingtwoparts,idle…etc.).
It isas importantas all otherstatistical techniquesbecauseitpermitsquickanalysis,recognition,and
enhancementof jobresponsibilities,tasks,performance competencies,andorganizational work
flows.Othernamesusedforitare 'activitysampling','occurrence sampling',and'ratiodelaystudy'.
In a worksamplingstudy,alarge numberof observations are made of the workersoveran extended
periodof time.Forstatistical accuracy,the observationsmustbe takenatrandom timesduringthe
periodof study,andthe periodmustbe representativeof the typesof activitiesperformedbythe
subjects.
One importantusage of the work samplingtechnique isthe determinationof the standardtime fora
manual manufacturingtask.Similartechniquesforcalculatingthe standardtime are time study,
standarddata, and predeterminedmotiontimesystems.
Characteristics ofwork samplingstudy
The study of worksamplinghassome general characteristicsrelatedtothe workcondition:
 One of themisthe sufficienttimeavailable toperformthe study.A worksamplingstudy
usuallyrequiresasubstantialperiodof time tocomplete.There mustbe enoughtime
available (severalweeksormore) toconduct the study.
 Anothercharacteristicismultiple workers. Worksamplingiscommonlyusedtostudythe
activitiesof multipleworkersratherthanone worker.

5.  The third characteristicislongcycle time.The jobcoveredinthe studyhas relativelyalong
cycle time.
 The last conditionisthe non-repetitiveworkcycles.The workisnothighlyrepetitive.The
jobsconsistof varioustasksrather than a single repetitive task.However,itmustbe possible
to classifythe workactivitiesintoadistinctnumberof categories.
Stepsin conducting a work samplingstudy
There are several recommendedstepswhenstartingtoprepare awork samplingstudy:
1. Define the manufacturingtasksforwhichthe standardtime isto be determined.
2. Define the taskelements.Theseare the definedbroken-downstepsof the taskthatwill be
observedduringthe study.Since aworkerisgoingtobe observed,additionalcategorieswill
likelybe includedaswell,suchas"idle","waitingforwork",and"absent".
3. Designthe study.Thisincludesdesigningthe formsthatwill be usedtorecordthe
observations,determininghowmanyobservationswill be required,decidingonthe number
of daysor shiftstobe includedinthe study,schedulingthe observations,andfinally
determiningthe numberof observersneeded.
4. Identifythe observerswhowilldothe sampling.
5. Start the study.All those whoare affectedbythe studyshouldbe informedaboutit.
6. Make randomvisitstothe plant andcollectthe observations.
7. Aftercompletingthe study,analyze andpresentthe results.Thisisdone bypreparinga
reportthat summarizesandanalyzesall dataandmakingrecommendationswhenrequired.
Example A work sampling study was made of a cargo loading operation for the purpose of
developing its standard time. The study was conducted for duration of 1500 minutes during
which 300 instantaneous observations were made at random intervals. The results of study
indicated that the worker on the job was working 80 percent of the time and loaded 360
pieces of cargo during the study period. The work analyst rated the performance at 90 %. If
the management wishes to permit a 13 % allowance for fatigue, delays and personal time,
what is the standard time of this operation?
Ans:
Here, total study period = 1500 minutes
Working fraction = 80 percent
Average rating = 90 percent
Number of units loaded = 360
Allowances = 13 %
Example

6. 1: Bulldozer #224 was used 52 hours over the past 14 days, a use rate of 15.5% (52 divided
by 336), assuming that a bulldozer, in theory, could be used 24 hours a day.
Output rate — units of output produced by a person or machine, divided by time of work or
operation.
Example: Bulldozer #224 moved 87 cubic tons of material during the five days ending
September 22. Workdays were eight hours each, so #224 averaged 2.175 cubic tons of
material per hour of uptime during this week.
For example:Inastudydone on PHCsnursesinPunjabrevealedthat
– 15% of time wasspenton the directservicesincludingactual treatment,
– 34% of time wasspenton supportive serviceslike administration,recordkeeping,
maintenance,supervision,etc.;
– 21% of time wasspenton travel and
– 30% time wasspentonpersonal nonproductive.
Such analysisthusenablesnotonlyascrutinyof activitesundertakenbutalsosuggestspossible
modifications.
Mathematical techniques
3. Linear programming
Linear programming is one of the widelyused modeling techniques. Linear programming problems
consistof an objective function(alsoknow ascostfunction) whichhasto be minimizedormaximized
subject to a certain number of constraints. The objective function consists of a certain number of
variables. The constraints are linear inequalities of the variables usedin the objective function. This
technique is closely related to linear algebra and uses inequalities in the problem statement rather
thanequalities.A linearprogrammingproblemcanfall inthreecategories:infeasible,unboundedand
an optimal solution.In an infeasible problem values of decision variables do not satisfy constraint
condition.A problemisunboundedifthe constraintsdonotsufficientlyrestrainthe objectivefunction
so that for any given feasible solution, another feasible solution can be found that makes further
improvement to the objective function. In an optimal solution, the objective function has a unique
maximum or minimum value. Linear programming problems can be solved using graphical analysis
method. Sensitive analysisis extensionto solution foundin linear programming to find out effect of
parameter changes on the optimal solution. The parameters are called coefficients and can be
quantity or value used in objective function. In linear programming results are rounded to get
reasonable output, however rounded solution might not be feasible and many not give an optimal
solution.Therefore,Integerprogrammingmodel isusedwithfractional values.Linearprogrammingis
alsouse tosolve transportation,transshipment,andassigningproblems.Linearprogrammingiswidely
usedinproductionplanningandscheduling.Itisverywellusedinairlineindustryforaircraftandcrew
scheduling.

7. Example
Revisit the above example of the farmer who may grow wheat and barley with the set
provision of some L land, F fertilizer and P pesticide. Assume now that y unit prices for each
of these means of production (inputs) are set by a planning board. The planning board's job
is to minimize the total cost of procuring the set amounts of inputs while providing the farmer
with a floor on the unit price of each of his crops (outputs), S1 for wheat and S2 for barley. This
corresponds to the following linear programming problem:
To each variable in the primal space corresponds an inequality to satisfy in the dual space,
both indexed by output type. To each inequality to satisfy in the primal space corresponds a
variable in the dual space, both indexed by input type.
The coefficients that bound the inequalities in the primal space are used to compute the
objective in the dual space,input quantities in this example. The coefficients used to compute
the objective in the primal space bound the inequalities in the dual space, output unit prices
in this example.Both the primal and the dual problems make use of the same matrix. In the
primal space,this matrix expresses the consumption of physicalquantities of inputs necessary
to produce set quantities of outputs. In the dual space, it expresses the creation of the
economic values associated with the outputs from set input unit prices.
Since each inequality can be replaced by an equality and a slack variable, this means each
primal variable corresponds to a dual slack variable, and each dual variable corresponds to a
primal slack variable. This relation allows us to speak about complementary slackness.
Example
Covering and packing LPs commonly arise as a linear programming relaxation of a
combinatorial problem and are important in the study of approximation algorithms.[4] For
example, the LP relaxations of the set packing problem, the independent set problem, and
the matching problem are packing LPs. The LP relaxations of the setcover problem, the vertex
cover problem, and the dominating set problem are also covering LPs.Finding a fractional
coloring of a graph is another example of a covering LP. In this case, there is one constraint
for each vertex of the graph and one variable for each independent set of the graph.
Example
Restaurants uselinear programming for menu planning. It uses basicalgebrato optimize meal
production and thereby increase restaurant profits. Linear algebra reflects a direct
relationship between an increase or decrease in food resources, and an increase or decrease
in meal production. For example, if the kitchen has only half its needed supply of cream base,
then it can only prepare half its normal amount of cream soups. Additionally, management
can determine the cost of preparing different menu items to decide how many of each menu
item to prepare for optimal profit.

8. Financial techniques
4. Cost accounting and analysis
Cost Accounting refers to "Accounting for Costs" and Management Accounting refers to
"Accounting for management". If the term Cost & Management is analysed, it consists of
three words – Accounting, Management and cost. 'Accounting' refers to art and science of
recording, classifying, summarizing and interpreting the financial transactions of a business.
'Management' refers to planning, organizing, directing and controlling of resources to attain
stated objectives. Cost refers to expenditure incurred in the business. So, it can be said that
Cost and management accounting in simple terms means recording, classifying, summarizing
and interpreting the cost transactions for the management's decision-making. Recent
developments in cost & management accounting stands for development in the area of cost
and management accounting in addition to its traditional techniques viz., Standard Costing,
Responsibility Accounting, Marginal Costing, etc. Modern techniques used by the
management in Cost & Management Accounting for its decision making are as follows:
* Back Flush Accounting – It is a system in which costing is delayed until goods are finished.
Standard costs are then flushed backward through the system to assign costs to products. The
result is that detailed tracking of costs is eliminated. The system is best suited to companies
that maintain low inventories because costs then flow directly to cost of goods sold. Work-in-
progress is usually eliminated, journal entries to inventory accounts may be delayed until the
time of product completion or even the time of sale, and standard costs are used to assign
costs to units when journal entries are made, that is, to flush costs backward to the points at
which inventories remain. This system is possible only with a JIT type system of operation.
* Throughput Accounting – It seeks to increase the pace with which products move through
an organization by eliminating the bottlenecks with in the organization. The purpose of
throughput accounting is not to control costs but as to demonstrate ways of improving profit
by increasing production flow. Throughput Accounting is the only management accounting
methodology that considers constraints as factors limiting the performance of organizations.
It is based on Theory of Constraints (TOC). The theory focuses on constraints or bottlenecks
to speedy production within an organization, cost gets reduced if raw materials are turned
into products for immediate shipment to customers at minimum possible time. Throughput
accounting's primary concern is the rate at which a business can generate profits.
* Alternative Costing – ABC (Activity based Costing) is an alternative to the traditional way of
accounting. ABCis a costing model thatidentifies the costpool, or activity centers, in an organization
and assignscoststo productsandservices(costdrivers) basedon thenumberof eventsortransactions
involved in theprocessof providing a productorservice. Asa result,ABCcansupportmanagersto see
how to maximize shareholdervalue andimprove corporate performance.Ina businessorganization,
the ABCmethodologyassignsanorganization'sresource coststhroughactivitiestothe products and
services provided to its customers. It is generally used as a tool for understanding product and
customer cost and profitability. An activity-based cost system provides management with an
economicmapof theirenterprise;itidentifieswhere money isbeingmade andlost.Assuch,ABChas

9. predominantlybeenusedtosupportstrategicdecisionssuchaspricing,outsourcingandidentification
and measurement of process improvement initiatives.
Examples
MANUFACTURING VS. NON-MANUFACTURING COSTS
Manufacturing costs are those costs incurred by a producer of goods that are needed to
transform raw materials into finished products, ready to sell. These costs consist of the cost
of basic materials and components, plus the costs of labor and factory overhead needed to
convert the materials into finished products.
Materials and labor canbe classifiedas eitherdirect or indirect in relation to the final product.
Direct materials are those major components that can be easily traced to the finished good
and are accounted for carefully due to their significance to the product. In the case of
manufacturing a lawn mower, for example, these types of materials would include the engine,
housing, wheels, and handle. Indirect materials would include those minor items that are
essential but which cannot be easily traced to the finished product. Examples of these would
be screws, nuts, bolts, washers, and lubricants. One might say that the cost of keeping an
account of each of these indirect items exceeds the benefit derived from having the
information. Consequently, the costs of these items are accumulated as part of factory
overhead and prorated to products on some appropriate basis.
Direct labor refers to the efforts of factory workers that can be directly associated with
transforming the materials into the finished product, such as laborers who assemble the
product. Indirect laborers are those whose efforts cannot be traced directly or practically to
the finished product. The indirect laborers would include maintenance personnel and
supervisors.
COMPUTING THE COSTS OF PRODUCING A PRODUCT OR SERVICE
Manufacturing companies use a variety of production processes in creating goods. These
processes include job shops, batch flows, machine-paced line flows, worker-paced line flow,
continuous flows, and hybrids that consist of more than one of the previous separate flow
process. The type of production process to a certain extent determines the type of product
costing system that a company utilizes.
Job shops, such as machine shops, receive orders for products that are manufactured to the
unique blue-print specifications of the requesting customer. As such, it would be rare for
these products to meet the needs of any other customer. Thus each "job" must be accounted
for separately as the goods are produced and no goods would be produced on a speculative
basis. An appropriate method to determine the cost of each unique item produced is activity-
based costing (ABC). This method is discussed in detail elsewhere in this publication; please
see Activity-Based Costing. The essence of ABC costing is that the exact costs of materials and
labor, and a highly accurate estimate of factory overhead costs basedon the specificactivities
(cost drivers) incurred to produce the goods, are determined for each unique product.

10. 5. Zero Based Budgeting
According to Sarant, ZBB is a technique which complements and links to existing planning,
budgeting and review processes. It identifies alternative and efficient methods of utilizing
limited resources . It is a flexible management approach which provides a credible rationale
for reallocating resources by focusing on a systematic review and justification of the funding
and performance levels of current programs.”
A method of budgeting in which all expenses must be justified for each new period. Zero-
based budgeting starts from a "zero base" and every function within an organization is
analyzed for its needs and costs. Budgets are then built around what is needed for the
upcoming period, regardless of whether the budget is higher or lower than the previous one.
ZBB allows top-level strategic goals to be implemented into the budgeting process by tying
them to specific functional areas of the organization, where costs can be first grouped, then
measured against previous results and current expectations
Zero Base Budgeting (ZBB) in the public sector and the private sector are very different
processes, and this must be understood when implementing a ZBB process in the public
sector. “The use of ZBB in the private sector has been limited primarily to administrative
overhead activities (i.e. administrative expenses needed to maintain the organization…)”. For
example, Peter Pyhrr used ZBB successfully at Texas Instruments in the 1960s and authored
an influential 1970 article in Harvard Business Review. In 1973, President Jimmy Carter, while
governor of Georgia, contracted with Pyhrr to implement a ZBB system for the State of
Georgia executive budget process.
President Carter later required the adoption of ZBBby the federal government during the late
1970s. “Zero-Base Budgeting (ZBB) was an executive branch budget formulation process
introduced into the federal government in 1977. Its main focus was on optimizing
accomplishments available at alternative budgetary levels. Under ZBB agencies were
expected to set priorities based on the program results that could be achieved at alternative
spending levels, one of which was to be below current funding.”
According to Peter Sarant, the former director of management analysis training for the US
Civil Service Commission during the Carter ZBB implementation effort, “ZBB means “different
things to different people.” Some definitions are implying that zero-base budgeting is the act
of starting budgets from scratch or requiring each program or activity to be justified from the
ground up. This is not true; the acronym ZBB, is a misnomer. ZBB is a misnomer because in
many large agencies a complete zero-base review of all program elements during one budget
period is not feasible;itwould result in excessivepaperwork and be an almost impossibletask
if implemented.” In many respects the “common misunderstanding” of ZBB noted above
resemble a “sunset review” process more than a traditional public sector ZBB process.

11. Examples
There are many ways to create company budgets. Let's take the marketing department of
Company XYZ as an example. Lastyear, the department spent $1 million. What's the right way
to set a budget for next year?
You might simply give the department $1 million again, but this might not reflect the changes
in the marketing programs next year, the need to hire more marketing people due to
additional sales, or other factors.
Another way might be to give all departments a 10% increase or decrease based on what the
board of directors would like earnings per share to be next year. This would give the
department $1.1 million or $900,000, depending on which way the board goes.
A third way would be zero-based budgeting, whereby the department starts with no
budgeted funds and must justify every person and expense that should be included in the
budget for the coming year. This might result in a budget of, say, $1,024,314, which is higher
than last year but reflective of the actual needs next year.
Use in Government
Zero-base budgeting was introduced in the federal government by President Jimmy Carter in
1977 as a means to control program costs. It has since been heavily modified or replaced in
various governments, but severalstates,such as Iowa for example, stilluseamodified version
of zero-base budgeting to allocate funding. In Iowa, state agencies prepare for the governor
performance measures and goals based on their statutory mission, and each budget item is
considered in terms of its causal link to those performance measures. Legislators may opt to
review or adopt this zero-base budget approach in their appropriations decisions.
Use in Private Business
Zero-base budgeting became popular with private businesses about the same time it was
adopted for use in the federal government. In some cases,private businesses havebeen more
successful with implementation than governments. In one example, the Florida Power and
Light Company began using zero-based budgeting in 1977 -- the same year it was introduced
in the U.S. Congress -- to administer the budgets for each of its staff departments. The
company's systemtreated new and old problems the samewhen management developed the
budget, where budgets based on prior years' expenditures may be more likely to treat older
problems as higher priorities because money was budgeted for them already. According to
the Encyclopedia of Management, the company's director found the strategy highly effective
in controlling costs.