EM 6113 Engineering Management Techniques

Decision Making
Prof. Engr. Dr. Mohammad Javed Hyder
Professor/ Director Research of Department,
Secretary ICAME ​
Head of Renewable Energy Research Group
In-charge Graduate Program
Department of Mechanical Engineering, CUST
1
 Preview
• Decision making is an essential part of planning.
• Decision making and problem solving are used in all management functions,
• Although we are considering as a part of the planning phase.
• We present information on decision making and how it relates to the first
management function of planning.
• Different types of decisions are examined.
• They are classified under conditions of certainty,
• using linear programming;
• risk, using expected value and decision trees; or
• uncertainty, depending on the degree with which the future environment
determining the outcomes of these decisions is known.
2
 Learning Objectives
• By the end of this lecture you should be able to do the following:
• Discuss how decision making relates to planning.
• Explain the process of engineering problem solving.
• Solve problems using three types of decision-making tools.
• Discuss the differences between decision making under
• certainty,
• risk, and
• uncertainty.
• Describe the basics of other decision-making techniques.

3
 Nature of Decision Making
• Relation to Planning
• Managerial decision making is
• the process of making a conscious choice between two or more rational
alternatives
• in order to select the one that will produce
• the most desirable consequences (benefits)
• relative to unwanted consequences (costs).
• If there is only one alternative, there is nothing to decide.
• We consider
• the process of developing and
• evaluating alternatives and
• selecting from among them the best alternative,
4
 Nature of Decision Making
• Relation to Planning
• Planning is deciding in advance
what to do,
how to do it,
when to do it, and
who is to do it
then decision making is an essential part of planning.
• Decision making is also required in
• designing and staffing an organization,
• developing methods of motivating subordinates, and
• identifying corrective actions in the control process.
5
 Occasions for Decision
• Chester Barnard: classic book The Functions of the Executive
• Based on his experience as president of the
• New Jersey Bell Telephone Company and
• Rockefeller Foundation,
• Concluded that the occasions for decision originate in three distinct fields:
(a) from authoritative communications from superiors;
(b) from cases referred for decision by subordinates; and
(c) from cases originating in the initiative of the executive concerned.

6
 Occasions for Decision
• Barnard explains that “the test of executive action is to make these decisions
• when they are important, or
• when they cannot be delegated reasonably, and
• to decline the others.”
• Barnard concludes that “occasions of decision arising from the initiative of
the executive are the most important test of the executive.”
• These are occasions where no one has asked for a decision, and the executive
usually cannot be criticized for not making one.
• The effective executive takes the initiative
• to think through the problems and opportunities facing the organization,
• conceives programs to make the necessary changes, and
• implements them.
• Only in this way does the executive fulfill the obligation to make a difference
because he or she is in that chair rather than someone else.
7
 Types of Decisions
• Two types of Decisions
• Routine Decisions
• Nonroutine Decisions.
• Pringle et al. classify decisions on a continuum ranging from routine to
nonroutine, depending on the extent to which they are structured.
• Routine decisions focused on
• well-structured situations that recur frequently,
• involve standard decision procedures, and
• entail a minimum of uncertainty.
• Common examples include
• payroll processing,
• reordering standard inventory items,
• paying suppliers, and so on. 8
 Types of Decisions
• Routine and Nonroutine Decisions.
• The decision maker can usually rely on
• policies,
• rules,
• past precedents,
• standardized methods of processing, or
• computational techniques.
• Probably 90 percent of management decisions are largely routine.
• Routine decisions usually
• can be delegated to lower levels
• to be made within established policy limits, and
• increasingly they can be programmed for computer decision if they can be
9
structured simply enough.
 Types of Decisions
• Nonroutine decisions deal with unstructured situations
• of a novel,
• nonrecurring nature,
• often involving incomplete knowledge,
• high uncertainty, and
• the use of personal judgment or even intuition,
• where no alternative can be proved to be the best possible solution to the particular
problem.
• Such decisions become more and more common the higher one goes in management
and the longer the future period influenced by the decision.
• Unfortunately, almost the entire educational process of the engineer is based on the
solution of highly structured problems for which there is a single textbook solution.
• Engineers often find themselves unable to rise in management unless they can
develop the tolerance for ambiguity that is needed to tackle unstructured
problems. 10
 Objective versus Bounded Rationality
• Rational decisions are of two types
• Objectively Rational Decision
• Bounded Rational Decision
• Simon defines a decision as being objectively rational decision
• if in fact it is the correct behavior
• for maximizing given values in a given situation.
• objectively rational decisions are made
(a) by viewing the behavior alternatives prior to decision in panoramic [bird's-eye]
fashion,
(b) by considering the whole complex of consequences that would follow on each
choice, and
(c) with the system of values as criterion singling out one from the whole set of
alternatives.
• Rational decision making, therefore, consists of optimizing, or maximizing, the
outcome by choosing the single best alternative from among all possible ones.
11
 Objective versus Bounded Rationality
• Simon believes that
actual behavior falls short of objective rationality in at least 3 ways.
1. Rationality requires a complete knowledge and anticipation of the
consequences that will follow on each choice.
In fact, knowledge of consequences is always fragmentary (incomplete).
2. Since these consequences lie in the future, imagination must supply the lack
of experienced feeling in attaching value to them.
But values can be only imperfectly anticipated.
3. Rationality requires a choice among all possible alternative behaviors.
In actual behavior, only a few of these possible alternatives ever come to
mind.

12
 Objective versus Bounded Rationality
• Managers, under pressure to reach a decision, have neither the time nor other
resources to consider
• all alternatives or
• all the facts about any alternative.
• A manager “must operate under conditions of bounded rationality,
• taking into account only those few factors of which he or she is
• aware,
• understands, and
• regards as relevant.”
• Administrators must satisfice by accepting a course of action that is
• satisfactory or “good enough,” and
• get on with the job
• rather than searching forever for the “one best way.”
13
 Objective versus Bounded Rationality

• Managers of engineers and scientists, in particular,

• must learn to insist that their subordinates go on to other problems
• when they reach a solution that satisfices,
• Rather than pursuing their research or design beyond the point
• at which incremental benefits no longer match the costs to achieve them.

14
 Level of Certainty
• Decisions may also be classified as being made under conditions of
• certainty,
• risk, or
• uncertainty,
depending on the degree with which the future environment determining the
outcome of these decisions is known.

15
 Tools for Decision Making
• Categories of Decision Making
• Decision making can be discussed conveniently in three categories:
• decision making under
• certainty,
• under risk, and
• under uncertainty.

• The payoff table, or decision matrix, shown in Table1 will help in this discussion.

16
 Tools for Decision Making
• Payoff table, or decision matrix is shown.
• Decision is made among m alternatives => identified as A1, A2, …, Am.
• There may be more than one future “state of nature” N.
(Model allows for n different futures.)
• These future states of nature may not be equally likely,
• But each state Nj will have some (known/ unknown) probability of occurrence pj.
• Since the future must take on one of the n values of Nj,
• The sum of the n values of pj must be 1.0.
• The outcome (or payoff, or benefit gained) will depend on both
• the alternative chosen and
• the future state of nature that occurs.
17
 Tools for Decision Making
For example,
• if you choose alternative Ai
and
• state of nature Nj takes place
(as it will with probability pj),
• the payoff will be outcome
Oij.
• A full payoff table will
contain m times n possible
outcomes.
• Let us consider what this model implies and
• the analytical tools we might choose
• to use under each of our three classes of decision making (certainty level).
18
 Decision Making Under Certainty
• Decision making under certainty implies that we are certain of the future
state of nature
• In our model, this means that the probability p1 of future N1 is 1.0,
• All other futures have zero probability.
• The solution, naturally, is to choose the alternative Ai, which gives us the
most favorable outcome Oij.
• Although this may seem like a trivial exercise,
• there are problems that are so complex
• that sophisticated mathematical techniques
• are needed to find the best solution.

19
 Decision Making Under Certainty
• Linear Programming:
• One common technique for decision making under certainty.
• In this method, a desired benefit (such as profit) can be expressed as a
mathematical function (the value model or objective function) of several variables.
• The solution is
• the set of values for the independent variables (decision variables)
• that serves to maximize the benefit (or, in many problems, to minimize the cost),
• subject to certain limits (constraints).
• Steps include:
• State the problem.
• What are the decision variables?
• Objective function
• Constraints
20
Linear Programming: Decision Making Under Certainty

120 = 40 hrs / machinist x 3 machinists

80 = 40 hrs / assembler x 2 assembler
21
Linear Programming: Decision Making Under Certainty

22
 Linear Programming: Decision Making Under Certainty

• Figure 1 Linear program example: • Figure 2 Linear program example:

isoprofit lines. constraints and solution.
23
 Linear Programming: Computer Solution.
• About 50 years ago, George Danzig of Stanford University developed the simplex
method,
• which expresses the foregoing technique in a mathematical algorithm
• that permits computer solution of linear programming problems
• with many variables (dimensions), not just 2 (assembly and machining: previous example.)
• Now, linear programs in a few thousand variables and constraints are viewed as
small.
• Problems having tens or hundreds of thousands of continuous variables are
regularly solved;

• Today there are many linear programming software packages available.

24
 Linear Programming: Computer Solution.
• Another classic linear programming application is the oil refinery problem,
• where profit is maximized over a set of available crude oils,
• process equipment limitations,
• products with different unit profits,
• and other constraints.
• Other applications include assignment of employees with differing aptitudes
to the jobs that need to be done to maximize the overall use of skills;
• Selecting the quantities of items to be shipped from a number of warehouses
to a variety of customers while minimizing transportation cost;
• and many more.
• In each case there is one best answer, and
• the challenge is to express the problem properly
• so that it fits a known method of solution.
25
 Decision Making under Risk
• Nature of Risk.
• In decision making under risk
one assumes that there exist a number of
possible future states of nature Nj, (Table 1).
• Each Nj has a known (or assumed) probability pj and
• there may not be one future state
• that results in the best outcome for all alternatives Ai.
• Examples of future states and their probabilities are as follows:
• Alternative weather (N1 = rain; N2 = good weather)
will affect the profitability of alternative construction schedules;
here, the probabilities p1 of rain and p2 of good weather can be estimated from historical
data.
• Alternative economic futures (boom or bust) determine
he relative profitability of conservative versus high-risk investment strategy;
here, the assumed probabilities of different economic futures might be based on the
judgment of a panel of economists.
26
Decision Making under Risk
• Expected Value.
• Given future states of nature and
• their probabilities,
• the solution in decision making under risk is
• the alternative Ai that provides
• the highest expected value Ei,
• which is defined as sum of
• products of each outcome Oij times the probability pj
• that the associated state of nature Nj occurs:

27
28
29
 Last Lecture Ended

Notice
Presentations on 18 & 25 Jan 2022

Quiz IV on 11 or 18 Jan 2022

Decision Making & Organizing

Assignment IV due on 25 Jan 2022 30

31
32
 Decision trees
• Decision trees provide another technique for finding expected value.
• They begin with a single decision node (represented by square or rectangle),
• from which a number of decision alternatives radiate.
• Each alternative ends in a chance node, (represented by a circle).
• From each chance node radiate several possible futures,
• each with a probability of occurring and an outcome value.
• The expected value for each alternative is
• the sum of the products of outcomes and
• related probabilities,
• just as calculated previously.

33
34
35
 Simulation
• Situations where real-world system being studied is
• too complex
• to express in simple equations to solve by hand or
• approximated in a reasonable time.
• In situations, safety or cost of prototyping requires other approaches to be considered.
• In such cases we may use a computer program that
• simulates certain aspects of operation of real system
• by mathematically describing the behavior of individual parts
• and the interactions between parts.
• The computer model is an approximation of the real system.
• Computer model is executed repeatedly at various conditions to study behavior of real
system.
• In many cases, stochastic activities can be inserted in the model in the form of probability
distributions.
• A stochastic simulation is a simulation of a system that has variables that can change
stochastically (randomly) with individual probabilities.
• Stochastic ‫ ﻗﯾﺎﺳﯽ‬: having a random probability distribution or pattern that may be analysed
statistically but may not be predicted precisely
36
 Simulation
• There are three categories of computer simulations—
• live,
• virtual, and
• constructive.
• Live simulations have real people and real equipment operating in a simulated
environment.
• An example is live training exercises conducted by the military.
• Virtual simulations have real people using simulated equipment.
• An example would be a driving simulator or computer games, such as a flight simulator.
• Constructive simulations have simulated people and equipment,
• such as what might be found in a model of a factory production layout or airport
screening operation.
• Live and virtual simulations are typically used where safety is an important consideration.
• Constructive simulations are typically used where cost, decision making, and prototyping
limit implementing the real system.
37
 Decision Making Under Uncertainty
• At times, a decision maker cannot assess the probability of occurrence for the
various states of nature.
• Uncertainty occurs when
• there exist several (i.e., more than one) future states of nature Nj,
• but the probabilities pj of each of these states occurring are not known.
• In such situations the decision maker can choose among several possible
approaches for making the decision.
• A different kind of logic is used here, based on attitudes toward risk.

38
 Decision Making Under Uncertainty
• Different approaches to decision making under uncertainty include the
following:
• The optimistic decision maker may choose the alternative that offers
the highest possible outcome (the “maximax” solution);
• The pessimist decision maker may choose the alternative
whose worst outcome is “least bad” (the “maximin” solution);
• The third decision maker may choose a position somewhere between
optimism and pessimism (“Hurwicz” approach);
• Another decision maker may simply assume that all states of nature are
equally likely (the so-called “principle of insufficient reason”), set all pj
values equal to 1.0/n, and maximize expected value based on that
assumption.
39
 Decision Making Under Uncertainty
• The fifth decision maker may choose the alternative that has the smallest
difference between the best and worst outcomes (the “minimax regret”
solution).
Regret here is understood as proportional to the difference between what we
actually get, and the better position that we could have received if a different
course of action had been chosen.
Regret is sometimes also called “opportunity loss.”
The minimax regret rule captures the behavior of individuals who spend their
post-decision time regretting their choices.

40
 Decision Making Under Uncertainty
• If, on the other hand, they believe that some futures are more likely than others, they
should be invited to express their best estimates as pj values and solve the problem as
a decision under risk.
• The final approach to decision making under uncertainty involves creating a second
matrix, not of outcomes, but of regret matrix.
• Regret is quantified to show how much better the outcome might have been if you
had known what the future was going to be.
• Different decision makers will have different approaches to decision making under
uncertainty.
• None of the approaches can be described as the “best” approach, for there is no one
best approach.
• Obtaining a solution is not always the end of the decision making process.
• Decision maker might still look for other arrangements to achieve even better results.
• Different people have different ways of looking at a problem.
41
 Management Information/Decision Support Systems
• Traditionally, top managers have relied primarily on
• oral and visual sources of information:
• scheduled committee meetings,
• telephone calls,
• business luncheons, and
• strolls through the workplace,
• supplemented by the often condensed and delayed information in written
reports and periodicals.
• Quite recently, the existence of computer networks, centralized databases, and
user-friendly software has provided a new source of prompt, accurate data to
the manager.
• A recent survey showed that 93 percent of senior executives used a personal
computer, 60 percent of them for planning and decision support.
42
Management Information/Decision Support Systems
• Modern authors distinguish two classes of application of computer-based
management systems:
• Management Information Systems (MIS) focus on generating better
solutions for structured problems, as well as improving efficiency in
dealing with structured tasks.
• Decision Support System (DSS) is interactive and provides the user with
easy access to decision models and data in order to support semistructured
and unstructured decision-making tasks. It improves effectiveness in
making decisions where a manager’s judgment is still essential.

43
 Management Information/Decision Support Systems
• As one rises from front-line supervisor through middle management to top
management, the nature of decisions and the information needed to make them
changes (see Table 8).
• The higher the management level is, the fewer decisions may be in number, but
the greater is the cost of error.
• A carefully constructed master database should be capable of providing the
detailed current data needed for operational decisions as well as the longer-range
strategic data for top management decisions.

44
 Implementation
• Decisions,
• no matter how well conceived,
• are of little value
• until they are put to use—that is, until they are implemented.
• Koestenbaum puts it well:
• Leadership is to know that decisions are merely the start, not the end.
• Next comes the higher level decision to sustain and to implement the
original decision, and that requires courage.
• Courage is the willingness to involve oneself in the loneliness, the anxiety, and
the guilt of a decision maker.
• Courage is the decision, and a decision is, to have faith in the crisis of the
feeling that comes with every significant decision.
• The faith is that one finds in oneself character and the high spirits of having
become a strong, centered, and grounded human being.
45
END

46