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Operations Management: Supplement
Operations Management: Supplement
Supplement:
CHAPTER 5
Decision
Decision Making
Making Tools
Tools pg658
pg658
The Decision Process in
Operations
1. Clearly define the problems and the
factors that influence it
2. Develop specific and measurable
objectives
3. Develop a model
4. Evaluate each alternative solution
5. Select the best alternative
6. Implement the decision and set a
timetable for completion
Fundamentals of
Decision Making
1. Terms:
a. Alternative—a course of action or
strategy that may be chosen by the
decision maker
b. State of nature—an occurrence or a
situation over which the decision
maker has little or no control
Simplest Decision Making Tools:
Decision Table Example
State of Nature
Alternatives Favorable Market Unfavorable Market
Construct large plant $200,000 –$180,000
Construct small plant $100,000 –$ 20,000
Do nothing $ 0 $ 0
Table A.1
Decision Trees
ct
u Unfavorable market
n str lant
Co ge p
lar Favorable market
Construct
small plant
Do Unfavorable market
no
thi
ng
Figure A.1
Application of Decision Trees
to Product Design
Particularly useful when there are a
series of decisions and outcomes
which lead to other decisions and
outcomes
Application of Decision Trees
to Product Design
Procedures
Include all possible alternatives and
states of nature - including “doing
nothing”
Enter payoffs at end of branch
Determine the expected value of each
branch and “prune” the tree to find
the alternative with the best expected
value
Decision Tree Example
(.4)
Purchase CAD
High sales
(.4)
High sales
(.6)
Low sales
Do nothing
Figure 5.14
Decision Tree Example
$2,500,000 Revenue
(.4) - 1,000,000 Mfg cost ($40 x 25,000)
Purchase CAD - 500,000 CAD cost
High sales
$1,000,000 Net
$800,000 Revenue
(.6) Low sales - 320,000 Mfg cost ($40 x 8,000)
- 500,000 CAD cost
Hire and train engineers - $20,000 Net loss
(.4)
High sales
EMV (purchase CAD system) = (.4)($1,000,000) + (.6)(- $20,000)
(.6)
Low sales
Do nothing
Figure 5.14
Decision Tree Example
$2,500,000 Revenue
(.4) - 1,000,000 Mfg cost ($40 x 25,000)
Purchase CAD - 500,000 CAD cost
$388,000 High sales
$1,000,000 Net
$800,000 Revenue
(.6) Low sales - 320,000 Mfg cost ($40 x 8,000)
- 500,000 CAD cost
Hire and train engineers - $20,000 Net loss
(.4)
High sales
EMV (purchase CAD system) = (.4)($1,000,000) + (.6)(- $20,000)
= $388,000
(.6)
Low sales
Do nothing
Figure 5.14
Decision Tree Example
$2,500,000 Revenue
(.4) - 1,000,000 Mfg cost ($40 x 25,000)
Purchase CAD - 500,000 CAD cost
$388,000 High sales
$1,000,000 Net
$800,000 Revenue
(.6) Low sales - 320,000 Mfg cost ($40 x 8,000)
- 500,000 CAD cost
Hire and train engineers - $20,000 Net loss
$365,000
$2,500,000 Revenue
(.4) - 1,250,000 Mfg cost ($50 x 25,000)
- 375,000 CAD cost
High sales
$875,000 Net
$800,000 Revenue
(.6) - 400,000 Mfg cost ($50 x 8,000)
- 375,000 CAD cost
Low sales
Do nothing $0 $25,000 Net
1. Maximax
Find the alternative that maximizes
the maximum outcome for every
alternative
Pick the outcome with the maximum
number
Highest possible gain
Uncertainty
2. Maximin
Find the alternative that maximizes
the minimum outcome for every
alternative
Pick the outcome with the minimum
number
Least possible loss
Uncertainty
3. Equally likely
Find the alternative with the highest
average outcome
Pick the outcome with the maximum
number
Assumes each state of nature is
equally likely to occur
Risk
Payoffs
Favorable market (.5)
$200,000
t 1
pl an Unfavorable market (.5)
ge -$180,000
t l ar
c
s t ru Favorable market (.5)
n $100,000
Co
Construct
small plant
2
Unfavorable market (.5)
Do -$20,000
no
th
in EMV for node 2
g
= $40,000 = (.5)($100,000) + (.5)(-$20,000)
Figure A.2
$0
Decision Trees in Ethical
Decision Making
Expected value
under certainty = ($200,000)(.50) + ($0)(.50) = $100,000
EVPI Example