1. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Supplement A Decision Making

2. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Learning Objectives Be able to apply concepts in learning goals Be able to use decision-making solvers manually –Breakeven analysis –Decision theory –Preference matrix Be able to formulate a decision tree manually and solve for optimum expected value

3. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Learning Objectives Understand & be able to apply the following formulas

4. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Break-Even Analysis 400 – 300 – 200 – 100 – 0 – Patients (Q) Dollars (in thousands) |||| 500100015002000 Example A.1 QuantityTotal AnnualTotal Annual (patients)Cost ($)Revenue ($) (Q)(100,000 + 100Q)(200Q) 0100,0000 2000300,000400,000

5. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Break-Even Analysis 400 – 300 – 200 – 100 – 0 – Total annual revenues Patients (Q) Dollars (in thousands) |||| 500100015002000 (2000, 400) Example A.1 QuantityTotal AnnualTotal Annual (patients)Cost ($)Revenue ($) (Q)(100,000 + 100Q)(200Q) 0100,0000 2000300,000400,000

6. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Break-Even Analysis Total annual revenues Total annual costs Patients (Q) Dollars (in thousands) 400 – 300 – 200 – 100 – 0 – |||| 500100015002000 Fixed costs (2000, 400) (2000, 300) Example A.1 QuantityTotal AnnualTotal Annual (patients)Cost ($)Revenue ($) (Q)(100,000 + 100Q)(200Q) 0100,0000 2000300,000400,000

7. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Break-Even Analysis Total annual revenues Total annual costs Patients (Q) Dollars (in thousands) 400 – 300 – 200 – 100 – 0 – |||| 500100015002000 Fixed costs Break-even quantity (2000, 400) (2000, 300) Profits Loss Example A.1 QuantityTotal AnnualTotal Annual (patients)Cost ($)Revenue ($) (Q)(100,000 + 100Q)(200Q) 0100,0000 2000300,000400,000

8. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Break-Even Analysis 400 – 300 – 200 – 100 – 0 – Figure A.1 Total annual revenues Total annual costs Patients (Q) Dollars (in thousands) |||| 500100015002000 Fixed costs Break-even quantity (2000, 400) (2000, 300) Profits Loss

9. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Sensitivity Analysis 400 – 300 – 200 – 100 – 0 – Total annual revenues Total annual costs Patients (Q) Dollars (in thousands) |||| 500100015002000 Fixed costs Profits Loss Example A.2

10. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Sensitivity Analysis 400 – 300 – 200 – 100 – 0 – Example A.2 Total annual revenues Total annual costs Patients (Q) Dollars (in thousands) |||| 500100015002000 Fixed costs Profits Loss Forecast = 1,500

11. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Sensitivity Analysis 400 – 300 – 200 – 100 – 0 – Total annual revenues Total annual costs Patients (Q) Dollars (in thousands) |||| 500100015002000 Fixed costs Profits Loss Example A.2 Forecast = 1,500 pQ – ( F + cQ )

12. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Sensitivity Analysis 400 – 300 – 200 – 100 – 0 – Total annual revenues Total annual costs Patients (Q) Dollars (in thousands) |||| 500100015002000 Fixed costs Profits Loss Example A.2 Forecast = 1,500 pQ – ( F + cQ ) 200(1500) – [100,000 + 100(1500)] $50,000

13. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Preference Matrix PerformanceWeightScoreWeighted Score Criterion(A)(B)(A x B) Market potential Unit profit margin Operations compatibility Competitive advantage Investment requirement Project risk Threshold score =.800

14. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Preference Matrix PerformanceWeightScoreWeighted Score Criterion(A)(B)(A x B) Market potential.30 Unit profit margin.20 Operations compatibility.20 Competitive advantage.15 Investment requirement.10 Project risk.05 Threshold score =.800

15. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Preference Matrix PerformanceWeightScoreWeighted Score Criterion(A)(B)(A x B) Market potential.30.8 Unit profit margin.201.0 Operations compatibility.20.6 Competitive advantage.151.0 Investment requirement.10.2 Project risk.05.4 Threshold score =.800

16. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Preference Matrix PerformanceWeightScoreWeighted Score Criterion(A)(B)(A x B) Market potential.30.8.240 Unit profit margin.201.0.200 Operations compatibility.20.6.120 Competitive advantage.151.0.150 Investment requirement.10.2.020 Project risk.05.4.020 Threshold score =.800

17. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Preference Matrix PerformanceWeightScoreWeighted Score Criterion(A)(B)(A x B) Market potential.30.8.240 Unit profit margin.201.0.200 Operations compatibility.20.6.120 Competitive advantage.151.0.150 Investment requirement.10.2.020 Project risk.5.4.020 Weighted score =.750 Threshold score =.800

18. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Preference Matrix PerformanceWeightScoreWeighted Score Criterion(A)(B)(A x B) Market potential.30.8.240 Unit profit margin.201.0.200 Operations compatibility.20.6.120 Competitive advantage.151.0.150 Investment requirement.10.2.020 Project risk.05.4.020 Weighted score =.750 Threshold score =.800 < 800

19. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Preference Matrix PerformanceWeightScoreWeighted Score Criterion(A)(B)(A x B) Market potential.30.8.240 Unit profit margin.201.0.200 Operations compatibility.20.6.120 Competitive advantage.151.0.150 Investment requirement.10.2.020 Project risk.05.4.020 Weighted score =.750 Threshold score =.800 Not At This Time

20. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Certainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand

21. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Certainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand If future demand will be low —

22. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Certainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand If future demand will be low—Choose the small facility.

23. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Certainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand If future demand will be low—Choose the small facility.

24. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand

25. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin —

26. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin— Best of the worst

27. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin—Small Best of the worst

28. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin - Small Maximax -

29. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin—Small Maximax— Best of the best

30. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin—Small Maximax—Large Best of the best

31. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin—Small Maximax—Large Laplace—

32. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin—Small Maximax—Large Laplace— Best weighted payoff Small facility0.5(200) + 0.5(270) = 235

33. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin—Small Maximax—Large Laplace— Best weighted payoff Small facility0.5(200) + 0.5(270) = 235 Large facility0.5(160) + 0.5(800) = 480

34. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin—Small Maximax—Large Laplace—Large Best weighted payoff Small facility0.5(200) + 0.5(270) = 235 Large facility0.5(160) + 0.5(800) = 480

35. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin—Small Maximax—Large Laplace—Large Minimax Regret—

36. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin—Small Maximax—Large Laplace—Large Minimax Regret— Best worst regret Regret Low DemandHigh Demand Small facility200 – 200 = 0800 – 270 = 530

37. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin—Small Maximax—Large Laplace—Large Minimax Regret— Best worst regret Regret Low DemandHigh Demand Small facility200 – 200 = 0800 – 270 = 530 Large facility200 – 160 = 40800 – 800 = 0

38. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin—Small Maximax—Large Laplace—Large Minimax Regret—Large Best worst regret Regret Low DemandHigh Demand Small facility200 – 200 = 0800 – 270 = 530 Large facility200 – 160 = 40800 – 800 = 0

39. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Uncertainty AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand Maximin—Small Maximax—Large Laplace—Large Minimax Regret—Large

40. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Risk AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand P low = 0.4 P high = 0.6

41. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Risk AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand P low = 0.4 P high = 0.6 AlternativeExpected Value Small facility0.4(200) + 0.6(270) = 242

42. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Risk AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand P low = 0.4 P high = 0.6 AlternativeExpected Value Small facility0.4(200) + 0.6(270) = 242 Large facility0.4(160) + 0.6(800) = 544

43. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Under Risk Highest Expected Value AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand P low = 0.4 P high = 0.6 AlternativeExpected Value Small facility0.4(200) + 0.6(270) = 242 Large facility0.4(160) + 0.6(800) = 544

44. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Perfect Information AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand P low = 0.4 P high = 0.6

45. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Perfect Information AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand P low = 0.4 P high = 0.6 EventBest Payoff Low demand200 High demand800

46. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Perfect Information EventBest Payoff Low demand200EV perfect = 200(0.4) + 800(0.6) = 560 High demand800 AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand P low = 0.4 P high = 0.6

47. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Perfect Information AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand P low = 0.4 P high = 0.6 EventBest Payoff Low demand200EV perfect = 200(0.4) + 800(0.6) = 560 High demand800EV imperfect = 160(0.4) + 800(0.6) = 544

48. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Perfect Information AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand P low = 0.4 P high = 0.6 EventBest Payoff Low demand200EV perfect = 200(0.4) + 800(0.6) = 560 High demand800EV imperfect = 160(0.4) + 800(0.6) = 544 Value of perfect information = $560,000 - $544,000

49. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Perfect Information AlternativeLowHigh Small facility200270 Large facility160800 Do nothing00 Possible Future Demand P low = 0.4 P high = 0.6 EventBest Payoff Low demand200EV perfect = 200(0.4) + 800(0.6) = 560 High demand800EV imperfect = 160(0.4) + 800(0.6) = 544 Value of perfect information = $16,000

50. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Decision Trees = Event node = Decision node E i = Event i P(E i ) = Probability of event i 1st decision Possible 2nd decision Payoff 1 Payoff 2 Payoff 3 Alternative 3 Alternative 4 Alternative 5 Payoff 1 Payoff 2 Payoff 3 E 1 [P(E 1 )] E 2 [P(E 2 )] E 3 [P(E 3 )] E 2 [P(E 2 )] E 3 [P(E 3 )] E 1 [P(E 1 )] Alternative 1 Alternative 2 Payoff 1 Payoff 2 12

51. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Decision Trees Small facility Large facility 1

52. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Decision Trees Small facility Large facility Low demand [0.4] Don’t expand Expand $200 $223 $270 High demand [0.6] 1 2

53. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Decision Trees Low demand [0.4] Small facility Large facility Low demand [0.4] Don’t expand Expand Do nothing Advertise $200 $223 $270 $40 $800 Modest response [0.3] Sizable response [0.7] $20 $220 High demand [0.6] 1 2 3

54. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Decision Trees Low demand [0.4] Small facility Large facility Low demand [0.4] Don’t expand Expand Do nothing Advertise $200 $223 $270 $40 $800 Modest response [0.3] Sizable response [0.7] $20 $220 High demand [0.6] 1 2 3

55. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Decision Trees Low demand [0.4] Small facility Large facility Low demand [0.4] Don’t expand Expand Do nothing Advertise $200 $223 $270 $40 $800 Modest response [0.3] Sizable response [0.7] $20 $220 High demand [0.6] 1 2 3 0.3(20) + 0.7(220)

56. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Decision Trees $160 Low demand [0.4] Small facility Large facility Low demand [0.4] Don’t expand Expand Do nothing Advertise $200 $223 $270 $40 $800 Modest response [0.3] Sizable response [0.7] $20 $220 High demand [0.6] 1 2 3 0.3(20) + 0.7(220)

57. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Decision Trees $160 Low demand [0.4] $160 Small facility Large facility Low demand [0.4] Don’t expand Expand Do nothing Advertise $200 $223 $270 $40 $800 Modest response [0.3] Sizable response [0.7] $20 $220 High demand [0.6] 1 2 3 $270

58. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Decision Trees ($160) Low demand [0.4] $270 $160 Small facility Large facility Low demand [0.4] Don’t expand Expand Do nothing Advertise $200 $223 $270 $40 $800 Modest response [0.3] Sizable response [0.7] $20 $220 High demand [0.6] 1 2 3 0.4(200) + 0.6(270) 0.4(160) + 0.6(800)

59. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Decision Trees ($160) Low demand [0.4] $270 $160 Small facility Large facility $242 $544 Low demand [0.4] Don’t expand Expand Do nothing Advertise $200 $223 $270 $40 $800 Modest response [0.3] Sizable response [0.7] $20 $220 High demand [0.6] 1 2 3 0.4(200) + 0.6(270) 0.4(160) + 0.6(800)

60. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Decision Trees $160 Low demand [0.4] $270 $160 Small facility Large facility $544 $242 $544 Low demand [0.4] Don’t expand Expand Do nothing Advertise $200 $223 $270 $40 $800 Modest response [0.3] Sizable response [0.7] $20 $220 High demand [0.6] 1 2 3

61. To Accompany Ritzman & Krajewski Foundations of Operations Management, © 2003 Prentice Hall, Inc. All rights reserved. Decision Trees $160 Low demand [0.4] $270 $160 Small facility Large facility $544 $242 $544 Low demand [0.4] Don’t expand Expand Do nothing Advertise $200 $223 $270 $40 $800 Modest response [0.3] Sizable response [0.7] $20 $220 High demand [0.6] 1 2 3