Transcript Slide 1

Chapter 2 – Influence Diagrams
Learn by example
Learn vocabulary and grammar
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Two key elements of decision framingoften not considered
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Multiple Objectives  Tradeoffs
 If NOT upfront then when?
 Multiple stretch goals  tradeoffs too late
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Uncertainty  Risk
 If you do NOT ADMIT the existence of uncertainty,
you cannot manage it
 If you do not QUANTIFY uncertainty, you cannot
decide how much to invest to address its impact
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Elements of a Decision Frame
Decision(s): Single, Multiple (Simultaneous or Sequential)
 Alternatives within each decision
 Uncertainty
 Criteria--Goals--Values--Objectives = Context Specific
 Scope – Time horizon and organizational breadth
 Decision Makers & Stakeholders
 Constraints
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 Implicit - restrict range of alternatives
 Explicit – mathematical representation (not included here)
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Influence Diagram - Communication
Explicitly note the existence of randomness
and uncertainty
 Clarify the “main” values or objectives of
decision
 Emphasize the influence of uncertainty on
values
 Specify the sequence of decisions
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Categories of common objectives.
Table 2.1
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Min-Costs (variable and investment)
Min-Time to complete
Max-Profit—NPV, TARR, ROI
Min- Risk of not meeting targets
Min- Human resources required
Min (Max) -Management issues
Max-Long-term value
Min-Operational issues
Max-Performance Sales and/or market share
Min-Training requirements
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Common uncertainties. Table 2.2
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Time needed to complete task or reach goal
Performance to specifications
Warranty claims and quality control
Resources required
Competitive actions
Cost
Is task doable?
Market demand
Revenue
Throughput–productivity
Will some specific event occur
 who will be elected president
 pandemic occurs
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Framing decision with randomness
influence diagrams:Vocabulary
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Decisions
=
Rectangles/Boxes
Random Events
=
Circles/Ovals
Values/Goals
Calculation
=
Rounded rectangle
Ultimate goal
=
Diamond
Input/Data
=
Text box with list
Influence
=
Arrow
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Automation Investment Boss Controls
 Manufacture an option to be made
 Available to one million purchasers of cars
 Uncertain take-rate (percent who buy option)
 Deliver the option to (OEMs) at a price of $60.
 Two alternatives: differ significantly in investment
level automation and variable cost of production
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Automation Investment
Take rate
Automation Investment
Profits
Volume
Variable Cost
Investment
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Automation Investment: Expanded
Volumes
Take rate
Automation Investment
Profits
Variable Cost
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Investment
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Figure 2.5: Theater Party Invitations
Percent
No Shows
Attendees
Number Sent
Invitations
% Yes
Responses
Maximize
Goodwill
Invitees
Not Attending
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Figure 2.6: Divide and delay decision Theater party invitations
Percent of
No Shows
Attendees
% Round
1 Yes
% Round
2 Yes
Round 1
Invitations
Round 2
Invitations
Maximize
Goodwill
Invitees
Not Attending
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Influence Diagram Symbols
Microsoft PowerPoint
 Pick appropriate shape: rectangle, oval, rounded
rectangle, and diamond.
 You may want to have specific fill color for each type of box
 Right click on shape: “Add text” Can specify size
of text and place on more than one line.
 Move shapes to appropriate location.
 Connect shapes with arrows
 Be sure to link to a red dot on each shape 
enables redesign
 Shapes can be copied and text modified.
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Influence Diagram Construction
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Specify primary decision
Define values and ultimate goal
Identify relevant random variables or events
Specify downstream decisions that need to be
analyzed to make primary decision
Add arrows to define relationships
Review layout
List data inputs
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Influence Diagram
Arrows from Random Events: Connectors in PowerPoint
Example : Late to Market with New Product
Case: A company is considering developing a product that will be ready
3 months after its competitor introduces a similar product.
Random Event to Random Event – Conditional probability
Competitive Action
Sales Volumes
Random Event to Value – Random event directly influences the VALUE. The
value will be uncertain.
Sales Volumes
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Total Revenue
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Influence Diagram
Arrows from Random Events
 Example
: Late to Market with New Product
 Random event to decision: Random event’s outcome is
KNOWN before decision is to be made.
Competitor’s Price
Launch Price
 NEVER
use an arrow from a circle to a decision to
represent the fact that the decision is affected by the
random event. This is the most common ERROR.
 The arrow shows that the outcome of the chance node is known
before the decision is made
 Absence of an arrow from the chance node to the decision node
does NOT mean that the uncertainty does not influence
the decision.
 Everything in the diagram affects the decision
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Influence Diagram
Arrows from decisions
Decision to Decision - decision sequence (possibly influence)
Product Features
Price
Decision to Random Event Price influences sales volume
Sales Volume
Price
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Influence Diagram
Arrows from Random Events
Decision to Value – Decision directly influences
value Pricing decision influences total revenue
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Indirectly: by affecting sales volume and
Directly: since price  sales = Total Revenue
Sales Volume
Price
Total Revenue
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Influence Diagram: value to value
Total Revenue
Net profit
Total Cost
If Total Revenue and/or Total Cost are influenced by random
events then the Net Profit will be an uncertain value.
However, once the other two values are known, Net Profit
is no longer uncertain.
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Late to market with new product:
1st lay out elements without arrows
Competitor’s
Price
Sales
Volume
Develop
product
Product
Features
Total
Revenue
Launch
Price
All elements influence the
decisions: to develop the
product, its features & price
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Net
Profit
Total
Cost
Engg. rates
Labor rates
Throughput
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Late to market with new product –
Add arrows
Competitor’s
Price
Sales
Volume
Develop
product
Product
Features
Total
Revenue
Launch
Price
All elements influence the
decisions: to develop the
product, its features & price
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Net
Profit
Total
Cost
Engg. rates
Labor rates
Throughput
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Modified Diagram?
Competitor’s
product performance
Develop
product
Competitor’s features
Engg. rates
Labor rates
Throughput
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Sales
Volume
Competitor’s
Price
Product
Features
Economy
Launch
Price
Total
Revenue
Actual
Price
Net
Profit
PD Costs
Manufacturing
Cost
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Total
Cost
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What New Objectives Might be Added
Maximize Market Share
 Maximize Utilization of plant capacity
 Minimize adding to labor workforce
(Headcount)
 Change overall goal – No longer just net profit
– “value to corporation”
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Influence Diagram: Is not a Flow Diagram!
All elements of an Influence Diagram are
analyzed and influence the decisions even if
there are no nodes connected to the decisions
 Forecasts of downstream uncertainties affect
upstream decisions even without arrows linking
the nodes.
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Limited Influence Diagram
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Mainly uncertainties and only one or two
objectives
 Project management  complete project as planned
(within time and budget)
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Mainly multiple objectives and limited
uncertainty
 New car
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Figure 2.15: Buying a used car – value
focused
Color
Interior
Condition
Aesthetics
Exterior
Condition
Odometer
Mileage
Reliability
Consumer
Reports
Maintenance
Needed
Miles per
Gallon
Choose the
Best Car
Value
Purchase
Price
A/C and
Heater
Total
Cost
Price of
Gasoline
Seating
Capacity
Longevity
Accessories
Sound
System
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Figure 2.16: Used car revised – new
information
Longevity
Total
Cost
Vehicle History
Report
Mechanic’s
Report
Choose the Best
Two Cars
Maintenance
Needed
Reliability
Choose the
Best Car
Value
Other
Objectives
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Figure 2.17: Oglethorpe diagram
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ALL Elements Represented in the Diagram
Influence the Decisions
Probabilistic forecasts of sales and the
competitor’s price will affect forecasts of
revenue and profit.
These will influence the decisions:
 Whether or not to introduce the product?
 With what features?
 And at what price?
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