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Effective Decision Making: A Comprehensive Guide

This guide covers the decision-making process, including problem identification, objective setting, alternative development, analysis, and selection. Explore causes of poor decisions, decision theory, and decision-making under uncertainty. Learn about decision environments and elements, as well as decision theory processes and techniques like Maximin and Minimax. To enhance your skills, delve into sensitivity analysis, decision trees, and the expected value of perfect information. This resource is suitable for operations management decisions, capacity planning, and equipment selection.

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Effective Decision Making: A Comprehensive Guide

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  1. Chapter 2 Supplement Decision Making

  2. The Decision Process • Identify the Problem • Specify objectives and the criteria for choosing a solution • Develop alternatives • Analyze and compare alternatives

  3. The Decision Process (Cont’d) • Select the bestalternative • Implement the chosen alternative • Monitor the results

  4. Causes of Poor Decisions Bounded Rationality The limitations on decision making caused by costs, human abilities, time, technology, and availability of information

  5. Causes of Poor Decisions (Cont’d) Suboptimization The result of different departments each attempting to reach a solution that is optimum for that department

  6. Decision 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

  7. capacity planning equipment selection Decision Theory Decision Theoryrepresents a general approach to decision making which is suitable for a wide range of operations management decisions, including: product andservice design location planning

  8. 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

  9. Decision Theory Process • Identify possible future conditions called states of nature • Develop a list of possible alternatives,one of which may be to do nothing • Determine the payoffassociated with each alternative for every future condition

  10. Decision Theory Process (Cont’d) • If possible, determine the likelihood of each possible future condition • Evaluate alternatives according to some decision criterionand select the best alternative

  11. Payoff Table Possible future demand* • Present value in $ millions

  12. Decision Making under Uncertainty Maximin - Choose the alternative with the best of the worst possible payoffs Maximax - 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

  13. Payoff 1 State of nature 1 Payoff 2 Choose A’1 State of nature 2 2 Choose A’ Payoff 3 Choose A’2 B 1 Payoff 4 Choose A’3 State of nature 1 2 Choose A’2 Payoff 5 Choose A’4 Payoff 6 State of nature 2 Decision Point Chance Event Format of a Decision Tree

  14. Expected Value of Perfect Information Expected value of perfect informationthe difference between the expected payoff under certainty and the expected payoff under riskExpected value of Expected payoff Expected payoffperfect information under certaintyunder risk _ =

  15. Sensitivity Analysis Example 8 #1 Payoff #2 Payoff 16 14 12 10 8 6 4 2 0 B 16 14 12 10 8 6 4 2 0 A C B best C best A best Sensitivity analysis: determine the range of probability for which an alternative has the best expected payoff

  16. Solved Problem 5 T2-2

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