Presentation on theme: "Decision Process Identify the Problem"— Presentation transcript:
1 Decision Process Identify the Problem Specify objectives and the criteria for choosing a solutionDevelop alternativesAnalyze and compare alternativesSelect the best alternativeImplement the chosen alternativeMonitor the resultsThe optimal alternative may turn out to be less than optimum.There is usually a certain amount of backtracking and feedback, especially in terms of developing and analyzing alternatives.
2 Causes of Poor Decisions Bounded RationalityThe limitations on decision making caused by costs, human abilities, time, technology, and availability of information.SuboptimizationThe result of different departments each attempting to reach a solution that is optimum for that department.manager's ego and unwillingness to admit a mistake.departmentalize decisions.bounded rationality: the limitations on decision making caused by costs, human abilities, time, technology, and availability of information.
3 product and service design Decision TheoryDecision Theory represents a general approach to decision making which is suitable for a wide range of operations management decisions, including:capacity planningproduct and service designlocationplanningequipmentselection
4 Decision Theory Elements A set of possible future conditions exists that will have a bearing on the results of the decisionA list of alternatives for the manager to choose fromA known payoff for each alternative under each possible future condition
5 Possible future demand* Payoff TablePossible future demand*Present value in $ millions
6 Decision Making Environments Certainty - Environment in which relevant parameters have known valuesRisk - Environment in which certain future events have probable outcomesUncertainty - Environment in which it is impossible to assess the likelihood of various future events
7 Decision Making under Certainty Possible future demand*Choose the alternative that has the best payoff under that state of nature.Present value in $ millions
8 Decision Making under Risk Possible future demand*1010.518.104.22.168Present value in $ millions
9 Decision Making under Uncertainty Maximin (pessimistic) - Choose the alternative with the best of the worst possible payoffsMaximax (optimistic) - Choose the alternative with the best possible payoffLaplace - Choose the alternative with the best average payoff of any of the alternativesMinimax Regret - Choose the alternative that has the least of the worst regrets
10 Decision Making under Uncertainty: Maximin (Pessimistic) Possible future demand*Present value in $ millions
11 Decision Making under Uncertainty: Maximax (Optimistic) Possible future demand*Present value in $ millions
12 Decision Making under Uncertainty: Laplace Possible future demand*1010.334.67Present value in $ millions
13 Decision Making under Uncertainty: Minimax Regret Possible future demand*26341410Present value in $ millions
14 Format of a Decision Tree Decision PointState of nature 1BPayoff 1State of nature 2Payoff 2Payoff 32Choose A’1Choose A’2Payoff 6Payoff 4Payoff 5Choose A’3Choose A’4Choose A’1Chance Event
15 Decision Tree Example Chance Event Decision Point Low demand, 0.4 $40 Do nothing, $40Build smallxxOvertime, $50High demand, 0.6Expand, $55Low demand, 0.4xBuild largeDo nothing, ($10)Reduce prices, $50High demand, 0.6$70Chance EventDecision Point
16 Expected Value of Perfect Information Expected value of perfect information the difference between the expected payoff under certainty and the expected payoff under risk Expected value of Expected payoff Expected payoff perfect information under certainty under risk_=
17 Expected Value of Perfect Information Example Possible future demand*1010.522.214.171.124Present value in $ millions
18 Sensitivity Analysis Payoff Table AlternativeStates of NatureState 1State 2ProbabilityP1P2A412B162C8
19 Sensitivity Analysis#1 Payoff#2 Payoff161412108642B161412108642ACB bestC bestA bestSensitivity analysis: determine the range of probabilityfor which an alternative has the best expected payoff
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