1. GEOP 4355 Supply Networks: Decision Models
Outline
Supplier decision models
Supply decision models
Sources/references used in the preparation of this presentation are listed in the Introduction presentation

2. Supplier decision models
Decision Analysis Theory models
Based on the concept of relating multiple alternatives to multiple possible futures.
DA = Decision alternatives
SN = states of nature = possible futures.
Each relation is called a payoff.
Assumptions
All alternatives are considered
All futures are considered

3. Supplier decision models
Alternatives:
Supplier A = high quality but low capacity
Supplier B = high technology and expensive
Supplier C = high capacity and moderate costs
Future (SN = States of Nature)
Two elements: Competition focus and market trend
Market trend: up, down (Up, Down)
Competition: focuses on new technology (T) or focuses on efficiency (E)
Four SNs: Up/T; Up/E; Down/T; Down/E
Market
Competition Up T E
Down
Probability
35%
30%
25%
10%

4. Supplier decision models
The table presents the effect on Market Share given each supplier and state of nature combination. We want the highest market share possible.
States of Nature (SNs)
Market
Competition Up T E
Down
Supplier A 5%
12%
-3%
-9%
Supplier B
11% 4% 6%
Supplier C 1% 3%
Alternatives
For example. If we select supplier B and the Market is Up, and the competition
focuses on Technology our market share will increase by 11%

5. Supplier decision models
What supplier should be selected?
Four decision models (called decision theory models).
Optimistic
Conservative
Minimize Maximum Regret (Regret = Error)
Expected value

6. Supplier decision models
Optimistic. Select alternative provides the best result across all possible futures.
Market
Competition Up T E
Down
Supplier A 5%
12%
-3%
-9%
Supplier B
11% 4% 6%
Supplier C 1% 3%
The optimistic decision is to select Supplier A

7. Supplier decision models
The conservative decision aims to minimize risk. Selects the best of the worst. Add a column with the worst for each alternative.
Market
Competition Up T E
Down
Worst
Supplier A 5%
12%
-3%
-9%
Supplier B
11% 4% 6%
Supplier C 1% 3%

8. Supplier decision models
The conservative decision aims to minimize risk.
Selects the best of the worst.
Market
Competition Up T E
Down
Worst
Supplier A 5%
12%
-3%
-9%
Supplier B
11% 4% 6%
Supplier C 1% 3%
The conservative decision is to select Supplier C

9. Supplier decision models
The minimize maximum regret (error) method considers the effect of a wrong selection. It minimizes the maximum error. A “middle” of the road recommendation.
Process has 3 steps.

10. Supplier decisions models
Step 1. Add a row with the best payoff for each possible SN
Market
Competition Up T E
Down
Supplier A 5%
12%
-3%
-9%
Supplier B
11% 4% 6%
Supplier C 1% 3%
Best

11. Supplier decision models
Step 2. Create an error (regret) table. Difference between each payoff and the best payoff for that SN.
Market
Competition Up T E
Down
Supplier A 5%
12%
-3%
-9%
Supplier B
11% 4% 6%
Supplier C 1% 3%
Best
6% - - 3% = 9%
11% - 5% = 6%
12% - 12% = 0%
Market
Competition Up T E
Down
Supplier A 6% 0% 9%
15%
Supplier B 8%
Supplier C
10% 2%

12. Supplier decision models
Step 3. Add a column with the maximum value for each alternative (for the error table!).
Market
Competition Up T E
Down
Max
Error
Supplier A 6% 0% 9%
15%
Supplier B 8%
Supplier C
10% 2%

13. Supplier decision models
The min-max regret solution has the smallest maximum error.
Market
Competition Up T E
Down
Max
Error
Supplier A 6% 0% 9%
15%
Supplier B 8%
Supplier C
10% 2%
The min-max regret decision is to select
Supplier B

14. Supplier decision models
Expected value is based on the weighted average of payoffs EV(X) = 𝑦= 𝑎𝑙𝑙 𝑆𝑁 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑦 ×𝑝𝑎𝑦𝑜𝑓𝑓(𝑦,𝑋)
Market
Competition Up T E
Down
Probability
35%
30%
25%
10%
Market
Competition Up T E
Down
Supplier A 5%
12%
-3%
-9%
Supplier B
11% 4% 6%
Supplier C 1% 3%
EV(Supplier A) = 35% × 5% + 30% × 12% + 25% × -3%+ 10% × -9% = 3.7%
EV(Supplier B) = 35% ×11% + 30% × 4% + 25% × 6%+ 10% × -3% = 6.25%
EV(Supplier C) = 35% × 1% + 30% × 3% + 25% × 4%+ 10% × 6% = 2.85%
The EV decision is to select Supplier B

15. Supplier decision models
Thus different models have different recommendations.
Optimistic: Supplier A
Conservative: Supplier C
Min-max regret: Supplier B
EV: Supplier B
Which model to use depends on the decision maker’s attitude towards risk, and the confidence on any probability estimates available.

16. Supply decision models
A purchasing manager must determine the amount of a key raw material to buy for a new product.
This is a made to order raw material with a long lead time, thus additional material cannot be procured in this cycle.
They must buy the raw material in lots of 400 and each lot costs $10,000.
Raw material not used is lost due to a fast deterioration.
Cost to produce and deliver the final product is $10/unit and will be based only on the demand.

17. Supply decision models
Demand for the new product is not known. However the sales department has provided three estimates of how much they will sell and the price customers will be willing to pay for it.
Low demand, low prices: Market for about 1,220 at an average of $45/each. P = 60%
Medium demand/ medium prices: Market for about 1,530 at an average of $55/each. P = 20%
High demand/ high prices: Market for about 2,250 at an average of $60/each. P = 20%
States of nature: the demand and prices
Decision alternatives: how much raw material to order from the supplier ahead of the production cycle.