Transcript PRODUCTIONS/OPERATIONS MANAGEMENT

PART 1
DECISION MAKING
Decision Process
•Identify the Problem
•Specify objectives and the
criteria for choosing a
solution
•Develop alternatives
• Select the best
alternative
• Implement the
chosen alternative
• Monitor the results
•Analyze and compare
alternatives
5S-1
PART 1
DECISION MAKING
Causes of Poor Decisions
Bounded Rationality
Suboptimization
The limitations on decision
making caused by costs,
human abilities, time,
technology, and availability of
information.
The result of different
departments each attempting
to reach a solution that is
optimum for that department.
5S-2
PART 1
DECISION MAKING
Decision Theory
Decision Theory represents a general
approach to decision making which is
suitable for a wide range of operations
management decisions, including:
capacity
planning
product and
service design
location
planning
equipment
selection
5S-3
PART 1
DECISION MAKING
Decision Theory Elements
• A set of possible future conditions exists
that will have a bearing on the results of
the decision
• A list of alternatives for the manager to
choose from
• A known payoff for each alternative under
each possible future condition
5S-4
PART 1
DECISION MAKING
Payoff Table
Possible future demand*
Alternatives Low Moderate High
Small facility
$10
$10
$10
Medium facility
7
12
12
Large facility
(4)
2
16
*Present value in $ millions
5S-5
PART 1
DECISION MAKING
Decision Making Environments
• Certainty - Environment in which relevant
parameters have known values
• Risk - Environment in which certain future
events have probable outcomes
• Uncertainty - Environment in which it is
impossible to assess the likelihood of
various future events
5S-6
PART 1
DECISION MAKING
Decision Making under Certainty
Possible future demand*
Alternatives Low Moderate High
Small facility
$10
$10
$10
Medium facility
7
12
12
Large facility
(4)
2
16
*Present value in $ millions
5S-7
PART 1
DECISION MAKING
Decision Making under Risk
Possible future demand*
Alternatives Low Moderate High
Small facility
$10
$10
$10
Medium facility
7
12
12
Large facility
(4)
2
16
*Present value in $ millions
5S-8
PART 1
DECISION MAKING
Decision Making under Uncertainty
Maximin (pessimistic) - Choose the alternative with
the best of the worst possible payoffs
Maximax (optimistic) - Choose the alternative with
the best possible payoff
Laplace - Choose the alternative with the best
average payoff of any of the alternatives
Minimax Regret - Choose the alternative that has the
least of the worst regrets
5S-9
PART 1
DECISION MAKING
Decision Making under Uncertainty:
Maximin (Pessimistic)
Possible future demand*
Alternatives Low Moderate High
Small facility
$10
$10
$10
Medium facility
7
12
12
Large facility
(4)
2
16
*Present value in $ millions
5S-10
PART 1
DECISION MAKING
Decision Making under Uncertainty:
Maximax (Optimistic)
Possible future demand*
Alternatives Low Moderate High
Small facility
$10
$10
$10
Medium facility
7
12
12
Large facility
(4)
2
16
*Present value in $ millions
5S-11
PART 1
DECISION MAKING
Decision Making under Uncertainty:
Laplace
Possible future demand*
Alternatives Low Moderate High
Small facility
$10
$10
$10
Medium facility
7
12
12
Large facility
(4)
2
16
*Present value in $ millions
5S-12
PART 1
DECISION MAKING
Decision Making under Uncertainty:
Minimax Regret
Possible future demand*
Alternatives Low Moderate High
Small facility
$10 0
$10 2
$106
Medium facility
73
12 0
124
Large facility
(4) 14
2 10
160
*Present value in $ millions
5S-13
PART 1
DECISION MAKING
Format of a Decision Tree
Decision Point
Chance Event
Payoff 1
Payoff 2
2
Payoff 3
1
B
Payoff 4
2
Payoff 5
Payoff 6
5S-14
PART 1
DECISION MAKING
Decision Tree Example
Low demand, 0.4
$40
Do nothing, $40
Build small
x
x
High demand, 0.6
Overtime, $50
Expand, $55
Low demand, 0.4
x
Build large
Do nothing, ($10)
Reduce prices, $50
High demand, 0.6
Decision Point
$70
Chance Event
5S-15
PART 1
DECISION MAKING
Expected Value of Perfect Information
Expected value of perfect information
the difference between the expected payoff
under certainty and the expected payoff under
risk
Expected value of
=
perfect information
Expected payoff
under certainty
_
Expected payoff
under risk
5S-16
PART 1
DECISION MAKING
Expected Value of Perfect Information Example
Possible future demand*
Alternatives Low Moderate High
Small facility
$10
$10
$10
Medium facility
7
12
12
Large facility
(4)
2
16
*Present value in $ millions
5S-17
PART 1
DECISION MAKING
Sensitivity Analysis Payoff Table
Alternative
States of Nature
State 1
State 2
Probability
P1
P2
A
4
12
B
16
2
C
12
8
5S-18
PART 1
DECISION MAKING
Sensitivity Analysis
#1 Payoff
16
14
12
10
8
6
4
2
0
#2 Payoff
B
16
14
A
12
C
10
8
6
4
2
B best
C best
A best
0
Sensitivity analysis: determine the range of probability
for which an alternative has the best expected payoff
5S-19