Lesson 3: Prelims Week 3

2/21/22, 11:23 AM 741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT - https://usl-tuguegarao.neolms.com/student_lesson/show/3150285?
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741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT

PRELIMS WEEK 3
Lesson 3
For this week, the following shall be your guide for the different lessons prepared for you. Be patient, read them carefully as learning tasks will be given to you later.
HAVE A FRUITFUL LEARNING EXPERIENCE!!!
After reading this module, you are expected to:

Learning Determine the different criteria in making a
Outcomes: decision;
Determine the favorable payoff using the

different criteria;
Make a decision using quantitative techniques.
Before starting, may I invite you to say this prayer silently. . . . as we continue to pray for one another and offer all our prayers to the
LORD. . . .
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2/21/22, 11:23 AM 741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT - https://usl-tuguegarao.neolms.com/student_lesson/show/3150285?lesson_id=14633194§io…
LEARNING CONTENT
Introduction:
Operations managers make many choices as they deal with various decision areas (see the Operations as a Competitive Weapon). Although the specifics of each situation vary, decision
making generally involves the same basic steps:
(1) recognize and clearly define the problem;
(2) collect the information needed to analyze possible alternatives, and
(3) choose and implement the most feasible alternative.
Sometimes hard thinking in a quiet room is sufficient.
Lesson Proper:
DECISION ENVIRONMENT

Operation management’s decision environments are classified according to degree of certainty present:

BASIC CATEGORIES:

CERTAINTY
Environment in which relevant parameters have known values.
Means that relevant parameters such as cost, capacity, and demand have known values
The decision maker knows which state of nature will occur
e. g. profit/unit is P50. You have an order for 200 units. How much profit will you make? (profits and total demand are known)
RISK
Environment in which certain future events have probable outcomes
Means that certain parameters have probabilistic outcomes
The decision maker does not know which state of nature will occur but can estimate the probability that any one state will occur.
e. g profit/ unit is P50. Based on previous experience there is a 50% chance of an order for 100 units and a 50% chance of an order for 200 units. What is expected profit? (demand outcome are
probabilistic)

UNCERTAINTY
Environment in which it is impossible to assess the likelihood of various future events
Means that it is impossible to assess the likelihood of various future events
The decision maker lacks sufficient information even to estimate the probabilities of the possible states of nature
e.g. profit is to P50/unit. The probabilities of potential demand are unknown.
NOTE: These three decision environments require different analysis techniques. Some techniques are better suited for one category than for others.
DECISION THEORY
Decision theory is a general approach to decision making when the outcomes associated with alternatives are often in doubt. It helps operations managers with decisions on process, capacity,
location, and inventory because such decisions are about an uncertain future. Decision theory can also be used by managers in other functional areas. With decision theory, a manager makes
choices using the following process.
The decision theory is suitable for a wide range of operations management decisions, e.g. capacity planning, product and service design, equipment selection and location planning and
inventory, because these are about an uncertain future. It is a general approach to decision making when the outcomes associated with alternatives are often in doubt.
Process of Decision Making
1.
List the feasible alternatives
One alternative that should always be considered as a basis for reference is to do nothing or to maintain Status Quo.
Example.: where to locate a new retail store in a certain part of the city

2.
List the events (chance events or states of nature) that have an impact on the outcome of the choice but aren’t under the managers’ control

States of Nature- possible future conditions; these events must be mutually exclusive and exhaustive- they don’t overlap and that they cover all eventualities.
Examples.:
Number of contracts awarded will be one, two or three

Competitors will or will not introduce a new product
Demand experienced by the new facility could be: low, medium or high
3.
Calculate/determine/estimate the payoff for each alternative in each event.
Note: Typically the payoff is in terms of total profit or total cost. These payoffs can be entered into a payoff table
Payoff table- shows the expected payoffs for each alternative under the various possible states of nature
helpful in choosing among alternatives because they facilitate comparison of alternatives

POSSIBLE FUTURE DEMAND (in millions)
Alternatives Low Moderate High
Small Facility P10 P10 P10

Medium Facility 7 12 12
Large Facility -4 2 16

Payoffs are in terms of present values which represent equivalent current peso values of expected future. income
4.
Estimate the likelihood of each event using past data, executive opinion and other forecasting methods.
Express it as probability, making sure that the probabilities sum to 1.0; develop probability estimates from past data if the past is considered a good indicator of the future.

5.
Select a decision rule or criterion to evaluate the alternatives and select the best alternative
Examples: choosing the alternative with the lowest expected cost
The following are the Decision Environments
DECISION MAKING UNDER CERTAINTY
- manager knows which event will definitely occur under each alternative
- decision rule is to pick the alternative with the best payoff for the known event
- the best alternative is the highest payoff if the payoffs are expressed as profit, if the payoffs are expressed as costs, the best alternative is the one having the lowest payoff
- the decision is usually relatively straight forward: simply choose the alternative that has the best payoff under state of nature

Example:
A manager is deciding whether to build a small or a large facility. Much depends on the future demand that the facility must serve and demand may be small or large. The manager knows
which certainty the payoffs that will result under each alternative. The payoffs, in thousands (P 000), are the present values of future revenues minus costs for each alternative in each event.

Possible Future Demand
Alternative Low High
Small Facility 200 270
Medium Facility 160 800
Large Facility 0 0
Question: If you would make the decision, which is the best choice if the future demand will be low?
Answer: The best choice is the one with the highest payoffs. So the decision would be:
If the manager knows the future demand will be low, the company should build a small facility and enjoy a payoff of P200 000.
DECISION MAKING UNDER RISK
The manager or decision maker has estimates of the probabilities of the various states of nature or is willing to make them
The manager can list the events and estimate their probabilities; the manager has less information than with decision making under certainty but more information than with decision making
under uncertainty
Widely used approach under this is the Expected Monetary Value Criterion.
Expected Monetary Value (EMV)
The best expected value among the alternatives

Sum of the payoffs for an alternative where each payoff is weighted by the probability for the relevant state of nature or the expected value for an alternative is found by weighing each payoff with
its associated probability and then adding the weighted payoff scores- the alternative with the best expected value (highest for profit and lowest for cost) is chosen.
EMV Criterion
Determine the expected payoff of each alternative and choose the alternative that has the best expected payoff
Note: This EMV approach is most appropriate when a decision maker is neither risk- averse nor risk- seeking, but is risk- neutral.
The expected value is what the average payoff would be if the decision would be repeated time after time.
The rule should not be used if the manager is inclined to avoid risk. This approach provides an indication of the long run, average payoff that is, the expected value amount is not an actual
payoff but an expected or average amount that would be approximated if a large number of identical decision, were to be made.
Example 1
Possible Future Demand (000)
Alternative Low High
Small Faculty 200 270
Large Faculty 160 800
Do Nothing 0 0
Which is the best alternative if the probability of small demand is estimated to be .40 and the probability of large demand is estimated to be .6?
Solution: The expected value for each alternative is:
Alternative Expected Value
Small Facility .4(200) +.6(270) = 242
Large Facility .4(160) + .6(800) = 544
Choose a large facility because its expected value is the highest at P544,000
Example 2
Using the expected monetary value criterion, identify the best alternative for previous payoff table for these probabilities: low= .30, moderate= .50 and high= .20
Solution:
EV small= .30(P10) + .50(P10) + .2(P10) = P10
EV medium=. 30(P7) + .50(P12) + .2(P12) = P10.50
EV large= .30(-4) + .50(P2) + .2(P16) = P3
Choose the medium facility because it has the highest expected value
*** END of LESSON***
WARNING: No part of this E-module/LMS Content can be reproduced, or transported or shared to others without permission from the University. Unauthorized use of the materials, other than personal learning use, will be
penalized. Please be guided accordingly.
REFERENCES
Textbooks
Stevenson, William J. (2018). Operations management thirteenth edition. McGraw Hill Education, 2 Penn Plaza, New York, NY 10121.

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2/21/22, 11:23 AM 741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT - https://usl-tuguegarao.neolms.com/student_lesson/show/3150285?

741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT

HAVE A FRUITFUL LEARNING EXPERIENCE!!!

After reading this module, you are expected to:

(1) recognize and clearly define the problem;

(2) collect the information needed to analyze possible alternatives, and

(3) choose and implement the most feasible alternative.

Sometimes hard thinking in a quiet room is sufficient.

e.g. profit is to P50/unit. The probabilities of potential demand are unknown.

Process of Decision Making

Number of contracts awarded will be one, two or three

helpful in choosing among alternatives because they facilitate comparison of alternatives

POSSIBLE FUTURE DEMAND (in millions)

Alternatives Low Moderate High

Small Facility P10 P10 P10

The following are the Decision Environments

DECISION MAKING UNDER CERTAINTY

Possible Future Demand

Small Facility 200 270

Medium Facility 160 800

Large Facility 0 0

DECISION MAKING UNDER RISK

Expected Monetary Value (EMV)

The best expected value among the alternatives

Possible Future Demand (000)

Alternative Low High

Small Faculty 200 270

Large Faculty 160 800

Do Nothing 0 0

Solution: The expected value for each alternative is:

Alternative Expected Value

Small Facility .4(200) +.6(270) = 242

Large Facility .4(160) + .6(800) = 544

EV small= .30(P10) + .50(P10) + .2(P10) = P10

EV medium=. 30(P7) + .50(P12) + .2(P12) = P10.50

EV large= .30(-4) + .50(P2) + .2(P16) = P3

*** END of LESSON***

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* END of LESSON*