Decision Making (Chapter 9)
Decision Making (Chapter 9)
Decision Making (Chapter 9)
OPERATIONS DECISION-MAKING
CHAPTER OUTLINE
9.1 Introduction
9.2 Management as a Science
9.3 Characteristics of Decisions
9.4 Framework for Decision-Making
9.5 Decision Methodology
9.6 Decision Support System
9.7 Economic Models
9.8 Statistical Models
9.9 Decision Tree
9.1 INTRODUCTION
Thousand of business decisions are made everyday. Not
all the decisions will make or break the organization. But
each one adds a measure of success or failure to the
operations. Hence decision-making essentially involves
choosing a particular course of action, after considering
the possible alternatives. This chapter examines
management as a science and the characteristics of
decisions.
The use of economic and statistical models is discussed
along with decision trees.
9.2 MANAGEMENT AS A SCIENCE
Management scientists hold that, education, scientific
training and experience can improve a person’s ability to
make decisions. Scientific decision-making rests upon
organized principles of knowledge and depends largely
upon the collection of empirical data and analysis of the
data in a way that repeatable results will be obtained.
The association of management with the scientific
method involves drawing objective conclusions from the
facts. Facts come from the analysis of data, which must
be gathered, compiled and digested into meaningful form,
such as graphs and summary statistics.
Computers are helpful in these tasks because they
can easily store data and provide us with the more
sophisticated and statistical analysis. But not all
variables are quantifiable, so decision-makers must
still use some value-based judgments in a decision
process.
Thus management as a science is characterized by:
Organized principle of knowledge.
Use of empirical data.
Systematic analysis of data.
Repeatable results
9.3 CHARACTERISTICS OF DECISIONS
Operations decision range from simple judgments to
complex analyses, which also involve judgment.
Judgment typically incorporates basic knowledge,
experience, and common sense. They enable to blend
objectives and sub-objective data to arrive at a choice.
The appropriateness of a given type of analysis
depends on:
The significant or long lasting decisions,
The time availability and the cost of analysis, and
The degree of complexity of the decision.
The significant or long lasting decisions deserve more
considerations than routine ones. Plant investment,
which is a long-range decision, may deserve more
thorough analysis.
The time availability and the cost of analysis also
influence the amount of analysis.
The degree of complexity of the decision increases
when many variables are involved, variables are highly
independent and the data describing the variables are
uncertain.
Business decision-makers have always had to work with
incomplete and uncertain data.
Fig. 9.1 below depicts the information environment of
decisions. In some situations a decision maker has
complete information about the decision variables; at
the other extremes, no information is available.
Operations management decisions are made all along
this continuum.
Complete certainty in decision-making requires data on
all elements in the population. If such data are not
available, large samples lend more certainty than do
small ones. Beyond this, subjective information is likely
to be better than no data at all.
Fig. 9.1 Information Continuum
9.4 FRAMEWORK FOR DECISION-MAKING
Small facility 10 10 10
Medium facility 7 12 12
Large facility -4 2 16
SOLUTION
(a) Using Maximin, the worst pay-offs for the alternatives are:
Small facility: Birr 10 million
Medium facility: Birr 7 million
Large facility: Birr –4 million
Hence, since Birr 10 million is the best, choose to build the
small facility using the maximum strategy.
(b) Using Maximax, the best pay-offs are:
Small facility: Birr 10 million
Medium facility: 12 million
Large facility: 16 million
The best overall pay-off is the Birr 16 million in the third row.
Hence, the Maximax criterion leads to building a large facility.
(c) For the Laplace criterion, first find the row totals, and
then divide each of those amounts by the number of states of
nature (three in this case). Thus, we have:
Small Facility 0 2 6 6
Medium Facility 3 0 4 4
Large Facility 14 10 0 14
Small facility 10 10 10
Medium facility 7 12 12
Large facility -4 2 16
SOLUTION: For each state of nature by the pay-off for that state of
nature and summing them:
EVsmall = 0.30 (Birr 10) + 0.50 (Birr 10) + 0.20 (Birr 10) = Birr 10
EVmedium = 0.30 (Birr 7) + 0.50 (Birr 12) + 0.20 (Birr 12) = Birr 10.5
EVlarge = 0.30 (–4) + 0.50 (Birr 2) + 0.20 (Birr 16) = Birr 3
Hence, choose the medium facility because it has the highest
expected value.
ILLUSTRATION 4: Global Telecom Corp. must choose one
of three partnering firms (X Co., Y Co., or Z Co.) with which
to develop a personal communicator. The possible states of
nature are that future demand may be low, medium, or high.
Estimated dollar pay-offs (in net present value terms) for
each alternative under each state of nature are shown in the
accompanying Table. Which partnering firm should be
chosen under the criterion of:
a) maximax,
b) Maximin, and
c) Laplace?
Pay-off Table
Profit (Birr, Million) If Future
Alternatives Demand Is
X Co. Partner 10 50 70