Presentation on theme: "DECISION MODELING WITH Multi-Objective Decision Making"— Presentation transcript:
1DECISION MODELING WITH Multi-Objective Decision Making seg 7410DECISION MODELING WITHMICROSOFT EXCELChapter 12Multi-Objective Decision MakingCopyright 2001Prentice Hall
2ANALYTICAL HIERARCHY PROCESS seg 7410This section deals with the real-world topic of making a decision when there are multiple objectives or criteria to consider. For example:Choosing which employment offer to accept.Picking which computer (or car, etc.) to buy.Deciding which new product to launch first.Selecting a site for a new restaurant, hotel, etc.Rating the best cities in which to live.Choosing a new software package for your company.
3The alternative with the highest score would be the most preferred. seg 7410A simple way to attack such a decision would be to assign weights to each of the criteria that were to be considered in making the decision.Then, rank each decision alternative on a scale from 1 (worst) to 10 (best).Finally, you would multiply the weights times the rankings for each criterion and sum them up.The alternative with the highest score would be the most preferred.
41. Model A runs an AMD K6-II chip at 400 MHz seg 7410For example, you are in charge of purchasing the next computer for the office. You have to choose between the following three computers:1. Model A runs an AMD K6-II chip at 400 MHz2. Model B runs a Celeron chip at 333 MHz3. Model C runs a Pentium II chip at 450 MHzThe important criteria and their weights are:Criteria WeightPrice 50%Speed %Hard-disk Size 20%Warranty/Support %
5=SUMPRODUCT($C$4:$C$7,E4:E7) seg 7410Now, rank each of the three models on these four criteria. Rank them on a scale from 1 to 10 as described earlier.=SUM(C4:C7)=SUMPRODUCT($C$4:$C$7,E4:E7)Model B has the highest weighted score and thus would be the best computer to purchase.
6seg 7410This approach is quite simplistic and there are difficulties in setting the ranking scales on such different criteria.Analytic hierarchy process (AHP) also uses a weighted average approach idea, but it uses a method for assigning ratings (or rankings) and weights that is considered more reliable and consistent.(AHP) is based on pairwise comparisons between the decision alternatives on each of the criteria.Then, a similar set of comparisons are made to determine the relative importance of each criterion and thus produces the weights.
7Analytic Hierarchy Process seg 7410Analytic Hierarchy ProcessMultiple criteriaquantitativequalitative, “intangible”, subjectiveprovides measures of judgement consistencyderives priorities among criteria and alternatives“user-friendly” pair-wise comparisons
8Using AHP 1. Decompose the problem into a hierarchy seg 7410Using AHP1. Decompose the problem into a hierarchy2. Make pairwise comparisons and establish priorities among the elements in the hierarchy3. Synthesise the results (to obtain the overall ranking of alternatives w.r.t. goal)4. Evaluate the consistency of judgement
9The basic procedure is as follows: seg 7410The basic procedure is as follows:1. Develop the ratings for each decision alternative for each criterion bydeveloping a pairwise comparison matrix for each criterionnormalizing the resulting matrixaveraging the values in each row to get the corresponding ratingcalculating and checking the consistency ratio
102. Develop the weights for the criteria by seg 74102. Develop the weights for the criteria bydeveloping a pairwise comparison matrix for each criterionnormalizing the resulting matrixaveraging the values in each row to get the corresponding ratingcalculating and checking the consistency ratio3. Calculate the weighted average rating for each decision alternative. Choose the one with the highest score.
11Revenue Technology Corporation (RTC) PRAISE Strategic Solutions (PSS) seg 7410Consider the following example:Sleepwell Hotels is looking for some help in selecting the “best” revenue management software package from among several vendors. The director of revenue management for this chain of hotels has been given this task.Three vendors have been identified whose software meets the following basic needs:Revenue Technology Corporation (RTC)PRAISE Strategic Solutions (PSS)El Cheapo (EC)
12The important criteria are: seg 7410The important criteria are:1. The total cost of the installed system2. The follow-up service provided over the coming year3. The sophistication of the underlying math engines4. The amount of customization for Sleepwell
137 Very strongly preferred 9 Extremely strongly preferred RATING The first step in the AHP procedure is to make pairwise comparisons between the vendors for each criterion. Here is the standard scale for making these comparisons:seg 7410DESCRIPTION1 Equally preferred3 Moderately preferred5 Strongly preferred7 Very strongly preferred9 Extremely strongly preferredRATINGValues 2, 4, 6, or 8 may also be assigned and represent preferences halfway between the integers on either side.
14The vendor in the row is being compared to the vendor in the column. Start with the total cost criterion and generate the following data in a spreadsheet:seg 7410=1/C4=1/D4=1/D5The vendor in the row is being compared to the vendor in the column.A value between 1 and 9 indicates that the vendor in the row is preferred to the vendor in the column.If the vendor in the column is preferred to the vendor in the row, then the inverse of the rating is given.
15The average is calculated for the “Total Cost” criterion. The next step is to normalize the matrix. This is done by totaling the numbers in each column.seg 7410=SUM(B4:B6)Each entry in the column is then divided by the column sum to yield its normalized score.=B4/B$8=AVERAGE(B12:D12)The average is calculated for the “Total Cost” criterion.Highest average score
16There are 3 steps to arrive at the consistency ratio: seg 7410Now, calculate the consistency ratio and check its value. The purpose for doing this is to make sure that the original preference ratings were consistent.There are 3 steps to arrive at the consistency ratio:1. Calculate the consistency measure for each vendor.2. Calculate the consistency index (CI).3. Calculate the consistency ratio (CI/RI where RI is a random index).To calculate the consistency measure, we can take advantage of Excel’s matrix multiplication function =MMULT().
17=MMULT(B4:D4,$E$12:$E$14)/E12 =(AVERAGE(F12:F14)-3)/2 seg 7410Multiply the average rating for each vendor times the scores in the first row one-at-a-time, sum these products up and divide this sum by the average rating for the first vendor.=MMULT(B4:D4,$E$12:$E$14)/E12=(AVERAGE(F12:F14)-3)/2Provided by AHP (see next slide)=F16/F18)
18Approximation of the Consistency Index seg 7410Approximation of the Consistency Index1. Multiply each column of the pairwise comparison matrix by the corresponding weight.2. Divide of sum of the row entries by the corresponding weight.3. Compute the average of the values from step 2, denote it by Lmax.4. The approximate CI is
19seg 7410RANDOM INDEXNRandom Index (RI)the CI of a randomly-generated pairwise comparison matrix
20If we are perfectly consistent, then the consistency measures will equal n and therefore, the CIs will be equal to zero and so will the consistency ratio.seg 7410If this ratio is very large (Saaty suggests > 0.10), then we are not consistent enough and the best thing to do is go back and revise the comparisons.Now, continue for the other three criteria. You can easily do this by copying the “Total Cost” sheet into three other sheets (“Service,” “Sophistication,” and “Custom”) and then simply changing the pairwise comparisons.
24seg 7410In all three cases, the CR value ranges from 0.0 to which means that we are being consistent.Note also that PSS is the winner on the Service criterion, RTC and PSS are tied for the best in terms of Sophistication, and PSS is considered the best on Customization.All of this work concludes the first step in the procedure. The next step is to use similar pairwise comparisons to determine the appropriate weights for each of the criteria.The process is the same in that we make comparisons, except that now we make the comparisons between the criteria not the vendors.
25Consistency ratio for weights on criterion. seg 7410=1/C4=1/D5=1/E5=1/E6=1/D4=1/E4=AVERAGE(B12:E12)=SUM(B4:B7)=MMULT(B4:E4,$F$12:$F$15)/F12=B4/B$8=(AVERAGE(G12:G15)-4)/3=G16/G18)
26=SUMPRODUCT($B$3:$B$6,C3:C6) The final step is to calculate the weighted average ratings of each decision alternative and use the results to decide from which vendor to purchase the software.seg 7410=WEIGHTS!F12=TOTAL COST!E12=TOTAL COST!E13=TOTAL COST!E14=SERVICE!E12=SERVICE!E13=SERVICE!E14=SOPHISTICATION!E12=SOPHISTICATION!E13=SOPHISTICATION!E14=CUSTOM!E12=CUSTOM!E13=CUSTOM!E14=SUMPRODUCT($B$3:$B$6,C3:C6)These results are pulled from all the other worksheets. From these results, we find that RTC barely edges out PSS for the software contract.
27seg 7410The mathematics of AHPSuppose we already know the weights [w1, w2, w3, wn] of the n criteria and we form the following n x n pairwise-ratio matrix:
28seg 7410This pairwise-ratio matrix A and the vector of weights satisfy the following equation:
29This equation is of the form: A w = l w seg 7410This equation is of the form:A w = l wSo w is an eigenvector of matrix A corresponding to eigenvalue l.(In fact, l is the only non-zero eigenvalue, and w the unique eigenvector.)Now, if we only know A, but not w, we can find what w is by solving for the eigenvalues and eigenvectors of A.
30seg 7410Back to AHP ...If :we use a continuous scale instead of a 9-point scale, and,more importantly, our judgement is consistent, then the pairwise comparison matrix is exactly of the form Aand the weights for the criteria are given by the eigenvector corresponding to eigenvalue l.
31Computing the weights for AHP seg 7410Computing the weights for AHPEigenvector Method:1. Find largest eigenvalue of the pairwise comparison matrix2. Find corresponding eigenvectorApproximate Method:1. Normalise each column (i.e. divide each entry by its column total)2. The average values of row i in the normalised matrix is the estimate for weight i.
32Consistency Index Random Index (RI) seg 7410Consistency Indexreflects the consistency of one’s judgementCI = . lmax - n .n - 1Random Index (RI)the CI of a randomly-generated pairwise comparison matrixTabulated by size of matrix:. n RI .2 0.0
33Consistency Ratio CR = CI / RI seg 7410Consistency RatioCR = CI / RIIn practice, a CR of 0.1 or below is considered acceptable.Any higher value at any level indicate that the judgements warrant re-examination.
34AHP - Summary Issues: Easy to use Intuitive? General framework seg 7410AHP - SummaryIssues:InterdependenceInterval JudgementsIs a multiplicative scale appropriate?Easy to useIntuitive?General frameworkWidely usedCost/Benefit AnalysisVendor SelectionStrategic Planning