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741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT

PRELIMS WEEK 4

Lesson 4
For this week, the following shall be your guide for the different lessons prepared for you. Be patient, read them carefully  as learning tasks will be given to you later.

HAVE A FRUITFUL LEARNING EXPERIENCE!!!

After reading this module, you are expected to:

Learning Determine the different criteria in making a

Outcomes: decision;
Determine the favorable payoff using the
  different criteria;
Make a decision using quantitative
techniques.

Before starting, may I invite you to say this prayer silently. . . . as we continue to pray for one another and offer all our prayers to the
LORD. . . .

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LEARNING CONTENT

Introduction:

This is a continuation of Lesson 3. In here, the third decision environment will be discussed which is the Decision Making under UNCERTAINTY.

DECISION MAKING UNDER UNCERTAINTY

In here,  no information is available on how likely the various states of nature are. 

Taking into account again this example:

 
Example:
             A manager is deciding whether to build a small or a large facility. Much depends on the future demand that the facility must serve and demand may be small or large. The manager knows
which certainty the payoffs that will result under each alternative. The payoffs, in thousands (P 000), are the present values of future revenues minus costs for each alternative in each event.
    Possible Future Demand

                                    Alternative                   Low                             High

                                    Small Facility                      200                              270

                                    Medium Facility                  160                              800

                                    Large Facility                0                                  0

4 Decision rules or criteria:

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1. Maximin - It maximizes the minimum payoffs given the various decisions that are possible.
                   -Its rule is a very conservative one that takes a pessimistic view on the various states of nature.

2. Maximax - It maximizes the maximum payoffs for the different decisions starting with the identification of the maximum payoffs of each alternative decision (optimistic view).
3. Laplace – determines the average payoff for each alternative and chooses the alternative with the best average.

4. Minimax Regret – determine the worst regret for each alternative and choose the alternative with the “best worst”

            Example #1 (same problem given in certainty) Profit Payoffs

Required: Determine the best alternative for each decision rule

Solution:

Maximin

1. Select the column with minimum payoff.

2. Choose the highest amount.

Alternative Payoffs                 Worst Payoffs (000)

Small Facility                           P 200

Large Facility                          P 160

Decision: The manager would build a small facility if demand would be low with a payoff of P200,000.

Maximax

1. Select the column with the maximum payoff

2. Identify the largest payoff.

Alternative Payoffs                 Best Payoffs (000)

Small Facility                          P270

Large Facility                          P800

Decision: The manager would build a large facility if demand would be high with a payoff of P800,000.

Laplace
With two events, we just get the average.

Alternative Payoffs                 Weighted Payoffs

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Small Facility                          200 + 270/2 = 235

Large Facility                          160 + 800/2 = 480

Decision: The manager would build a large facility with a payoff of P480,000.

Minimax Regret

  1.
   Determine the largest element in both columns ( in BOLD)
  2.
   Subtract every element from the largest payoff in both columns.
  3.
   Select the largest amount in each row. ( in colored BOLD)
  4.
   Identify the maximum regrets.

Alternative Payoffs                 Low Demand              High Demand              Maximum Demand

Small Facility                          P 200-200=0               P 800-270=530                       P 530

Large Facility                          P 200-160=40             P 800-800=0                           P 40

The column on the right shows the worst regret for each alternative. To minimize the maximum regret, pick a large facility. The biggest regret is associated with having only a small facility and high demand.

Decision: The manager would build a large facility with a minimum regret of P 40,000.

NOTE: In stating your decisions for laplace criterion and minimax regret criterion, only two (2) elements are included in your decision. These are the alternative and payoff.

Example #2 (same problem given in certainty) Cost Payoffs

Required: Determine the best alternative for each decision rule
Solution:
Maximin

  1.
   Select the column with highest payoff.
  2.
   Identify the lowest amount.

Alternative Payoffs                 Worst Payoffs (000)

Small Facility                          P270

Large Facility                          P800

Decision: The manager would build a small facility if demand would be high with a payoff of P270,000.

Minimin 

1. Select the column with the lowest payoffs.

2. Choose the lowest amount.

Alternative Payoffs                 Best Payoffs (000)

Small Facility                          P 200

Large Facility                          P 160

Decision: The manager would build a large facility if demand would be low with a payoff of P160,000.

Laplace 

With two events, we just get the average.

Alternative Payoffs                 Weighted Payoffs (000)

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Small Facility                          P200 + 270 = P235

Large Facility                          P160 + 800 = P480

Decision: The manager would build a small facility with a payoff of P235,000.

Minimax Regret 

  1.
   Determine the lowest element in both columns. (in BOLD)
  2.
   Subtract every element from the lowest payoff in both columns.
  3.
   Select the largest amount in each row.
  4.
   Identify the lowest payoff.

Alternative Payoffs                 Low Demand              High Demand              Maximum Demand

Small Facility                          200-160=40                 270-270=0                   40

Large Facility                          160-160=0                   800-270=530               530 

Decision: The manager would build a small facility with a minimum regret of P40,000.

END of LESSON

WARNING: No part of this E-module/LMS Content can be reproduced, or transported or shared to others without permission from the University. Unauthorized use of the materials, other than personal learning use, will be
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Reference

Stevenson, William J. (2018).  Operations management thirteenth edition. McGraw Hill Education, 2 Penn Plaza, New York, NY 10121.

Chase, Richard,et.al. Production and Operations management: Manufacturing and Services 8th ed. Irwin/McGrwa-Hill. Boston

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