Decision Making

Decision Making & Problem Solving

1. Identify and define the problem

2. Determine the set of alternative solutions

3. Determine the criteria to evaluate alternatives

4. Evaluate the alternatives

5. Choose an alternative

6. Implement the selected alternative

7. Evaluate the results to determine whether a satisfactory solution has been obtained

Decision Making

The first five steps of Problem Solving constitute the Decision Making process: i.e.:

1. Identify and define the problem2. Determine the alternatives3. Determine the criteria4. Evaluate the alternatives5. Choose an alternative

The choice of an alternative is the Decision

Classification of the Stages in the Decision Making Process

Structuring the Problem

Define the Problem

Identify the Alternatives

Determine the Criteria

Analyzing the Problem

Evaluate the Alternatives

Choose an Alternative

Analyzing a Problem Qualitative Analysis

• Dependent on the decision maker, his/her experience, judgment, intuitive feel, relative simplicity of the problem etc.

• More of an art than a science

• The skills in qualitative approach are inherent in the manager and improve with experience

• Subjective

Analyzing a ProblemQuantitative Analysis

• Relatively large/complex problem or when the manager lacks previous experience with similar situation or where the nature of the problem demands quantitative treatment

• The skills in quantitative approach are learnt only by studying the methods of Management Science

• Objective

Qualitative and Quantitative Analyses have their roles in Decision Making

Analyzing the Problem

Make the Decision

Summary and

EvaluationQuantitative

Analysis

Qualitative Analysis

A manager who knows quantitative procedures is in a much better position to compare and evaluate the qualitative and quantitative recommendations and combine them to arrive at the best decision.

Summary of the instances requiring Quantitative Analysis

• The problem is large or complex; the manager cannot develop a good solution without quantitative analysis

• The problem is important; demands a thorough analysis

• The problem is new; no previous experience to rely on

• The problem is repetitive; quantitative methods save time and effort for the decision maker

Stages in Quantitative Analysis• Analysis begins once the

problem has been properly structured.

• Model Development follows; i.e. creating a mathematical representation of the problem

• Model Solution, using appropriate techniques

• Generation of Report for the use of the decision maker giving the recommendations and other pertinent aspects that aid the decision making process

Model Development

Model Solution

Report Generation

Models

• Iconic

• Analog

• Mathematical

The value of a model-based analysis depends on how well the model represents the real situation

Mathematical Models

• Objective function: A mathematical function that describes the problem’s objective

• ConstraintRestrictions that limit the degree to which the objective can be pursued (production capacities, availability of inputs, committed outputs etc.)

• Uncontrollable inputsEnvironmental factors affecting the objective function and the constraints, but beyond the control of the decision maker

• Controllable inputs or decision variable

Deterministic Vs Stochastic

• Deterministic Model: Uncontrollable variables are all known and do not vary. E.g.: tax rates

• Stochastic or Probabilistic Model: One or more of the uncontrollable variables are uncertain and subject to variation. E.g.: demand

Iterative Process

• Often the model development and model solution steps will be iterative

• Simplifications in the model are often justifiable for reasons of cost, speed, ease of developing and understanding, and is often of acceptable accuracy

Techniques for Model Solution

• Breakeven Analysis, Financial Models

• Linear Programming, ILP, Network Models

• Inventory Models, Queueing Models

• Simulation

• Decision Analysis / Decision Trees

• Cause-effect (Ishikawa / fishbone) Diagrams