DECISION MAKING – A QUANTITATIVE APPROACH

Quantitative Techniques for Decision MakingM.P. Gupta & R.B. Khanna© PHI Learning

DECISION MAKING – A QUANTITATIVE APPROACH

1CHAPTER


Learning Objectives

• Decision Making Model• Operations Research - Definitions• Characteristics of Operations Research• Models and Operations Research• Operations Research Methodology• Operations Research Techniques• Typical Applications of Operations Research


Decision Making Model

Quantify and Measure against Objectives

Define the problem Establish Cause-Effect relationship

Objective Setting

Decide on Strengths and Weaknesses

Decide on Boundary Conditions

Information Gathering

Gather Data Analyse Data

Generation of Alternatives

Impose Limits

Evaluation of Alternatives

Look at Short Range

Look at long Range

Decide on Feasible Alternatives

Selection of AlternativeApply Quantitative AidsApply Qualitative Aids

Implementation

Translate into ActionDecide Alternative

Monitor and ControlQualitative Approach

Quantitative Approach


The Decision Dilemma

• Apna Gaon, an ethnic resort, wanted a special dish that will be served to all patrons free on Divali.

• They held a competition for amateur cooking teams to decide on the dish. Four teams participated in the competition. The competition was not open to professionals.

• Seven judges were appointed for the competition. Each judge rank ordered the teams according to their performance. The team standing first was awarded 4 points, the second 3, the third 2 and the team standing fourth was awarded 1 point. The points of all judges were totalled up and a score sheet prepared.


JUDGES J1 J2 J3 J4 J5 J6 J7 TOTAL

ARANK 2 1 3 4 2 3 1 1

SCORE 3 4 2 1 3 2 4 19

BRANK 3 2 4 1 3 4 2 4

SCORE 2 3 1 4 2 1 3 16

CRANK 4 3 1 2 4 1 3 3

SCORE 1 2 4 3 1 4 2 17

D

RANK 1 4 2 3 1 2 4 2

SCORE 4 1 3 2 4 3 1 18

• Before result was announced, Team C protested that Team B should be disqualified as it had used a professional. This was true. What would you do as the Chairman of Apna Gaon?


JUDGES J1 J2 J3 J4 J5 J6 J7 TOTAL

ARANK 2 1 3 3 2 3 1 3

SCORE 2 3 1 1 2 1 3 13

BRANK

SCORE

CRANK 3 2 1 1 3 1 2 1

SCORE 1 2 3 3 1 3 2 15

DRANK 1 3 2 2 1 2 3 2

SCORE 3 1 2 2 3 2 1 14

• Disqualify Team B. If scoring is revised as per fresh ranking without altering each judge’s preference; the results alter materially.

• Method of scoring debatable.


History of OR

• Second World War• Blackett’s Circus

– 3 physiologists, 2 mathematical physicists, 1 astrophysicist, 1 army officer, 1 surveyor, 1 general physicist, 2 mathematicians.

• Depth charge settings• Dam busters• AA gun layout


Operations Research - Definitions

• OR is a scientific method of providing executive departments with a quantitative basis for decisions under their control.

Morse & Kimball


• OR is a scientific approach to problem solving for executive management

Wagner



• OR is the art of giving bad answers to problems, which otherwise have worse answers.

T.L. Saaty



• OR is an applied decision theory. It uses scientific, mathematical or logical means to attempt to cope with the problems that confront the executive, when he tries to achieve a thorough-going rationality in dealing with his decision problems.

D. W. Miller & M. K. Starr



• Employment of scientific methods of analysis to provide executives with quantitative basis for making decisions regarding operations under their control.



Characteristics of Operations Research

• Systems Approach

• Analytical Approach

• Interdisciplinary Approach

• Deals with real world problems


Modelling in Operations Research

• Physical or Iconic Model – ‘Look alike’ of what it represents.

• Analogue Models – Substitution of one property for another

• Mathematical or Analytical Models – Symbolic abstract models.

TC = FC + (VC)Q where TC is Total Cost

FC is Fixed Cost VC is Variable Cost Q is number of units produced


Operations Research Methodology

• Problem Identification

• Model Construction

• Experimentation

• Implementation

• Evaluation


• Need Analysis

• Cause and Effect Analysis

Problem Identification


Cause and Effect Diagram

Procure Portable

Light

Design

EnergySource

Control

Efficiency

Effectiveness

PurchaseDate


Procure Portable

Light

Design

Flashing

Regular

Combination

EnergySource

Ni Cd Bty

Dry Cells

Control

On/Off

Lens

LifeEfficiency

Cost

Convenience

EffectivenessBrightness

FieldPurchaseDate



Procure Portable

Light

Design

Flashing

Regular

Combination

EnergySource

Ni Cd Bty

Dry Cells

1

2

4

Control

On/OffRed

WhiteLens

Wide Angle

PointLife

Continuous use

Intermittentuse Efficiency

Cost

Initial

OperatingConvenience

Weight Size

EffectivenessBrightness

Lumens

Watts

Field

Range

AreaPurchase

Date



Model Construction

• Data Collection– Only scarce resources need to be considered. – Only those activities that affect the scarcity of

such resources should be considered.• Model Design• Model Evaluation

– Relational Models – C & E diagrams– Precedence Models – C.P.M. & P.E.R.T.– Mathematical Models – Optimisation models– Stochastic Models - Simulation


Experimentation

• Feasibility Analysis

• Optimality Analysis

• Adaptivity Analysis


Implementation

• Management Approval

• Test Operations

• Full Implementation


Evaluation

• Documentation• Performance Audit• System Updating• Effectiveness of a Decision

– Technically Feasible– Administratively Convenient– Politically Expedient– Economically Viable


Operation Research Techniques

• Allocation Models– Linear Programming– Nonlinear Programming– Transportation Model– Assignment Model– Integer Programming– Goal Programming– Dynamic Programming


Operation Research Techniques

• Inventory Models• Replacement Models• Networks• Queuing Theory• Simulation Models• Sequencing Models• Decision Theory• Game Theory• Markov Models


Models – Cost, Revenue and Profit

• Cost and volume models.

• Revenue and volume models

• Profit and volume models

• Break even analysis


Applications

• Accounting– Cash flow analysis– Credit policy and credit risk– Planning of delinquent accounts strategy

• Marketing– Selection of product mix– Advertising allocations– Strength of sales force– Product introduction timings


Applications

• Purchasing and Procurement– Determination of quantities and timings of

purchases– Replacement problems– Bidding policies– Material transfer from sources to

destinations


Applications

• Production Management– Location of facilities– Number of facilities– Loading and unloading sites and crews– Production scheduling and sequencing– Project scheduling– Allocation of resources– Materials requirement planning


Applications

• Human Resource Management– Manpower planning– Skill balancing– Schedule of training programmes– Recruiting and job assignment

• Research and Development– Project selection– Project scheduling– Reliability and alternative designs– Control of R & D projects

DECISION MAKING – A QUANTITATIVE APPROACH

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