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Decision Making

Decision Making. Advanced Organizer. Chapter Objectives. Explain the process of management science Be able to solve problems using three types of decision making tools. Relation to Planning.

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Decision Making

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  1. Decision Making

  2. Advanced Organizer

  3. Chapter Objectives • Explain the process of management science • Be able to solve problems using three types of decision making tools

  4. Relation to Planning • Managerial decision making is the process of making a conscious choice between two or more rational alternatives

  5. Types of Decisions • Routine and Non-Routine Decisions • Objective vs. Bounded Rationality • Level of Certainty

  6. Management ScienceCharacteristics • Systems view of the problem • Team approach • Emphasis on use of formal mathematical models and statistical and quantitative techniques

  7. Models & Analysis • Formulate the problem • Construct a mathematical model • Test the model’s ability • Derive a solution from the model • Apply model’s solution to real system

  8. Categories of Decision Making • Decision Making under Certainty (Only one state of nature exists.) • Decision Making under Risk (Probabilities for states of natures are known.) • Decision Making under Uncertainty (Probabilities for states of natures are unknown.)

  9. Payoff Table

  10. Tools for Decision Making under Certainty • Linear programming • Graphical solution • Simplex method • Computer software • Non-linear programming • Engineering Economic Analysis

  11. Linear programming Graphical solution

  12. BV Coefficient of RS Ratio P X Y S1 S2 P 1 -10 -14 0 0 0 S1 0 3 2 1 0 120 60 S2 0 1 2 0 1 80 40 P 1 -3 0 0 7 560 S1 0 2 0 1 -1 40 20 Y 0 1/2 1 0 1/2 40 80 P 1 0 0 3/2 11/2 620 X 0 1 0 1/2 -1/2 20 Y 0 0 1 -1/4 3/4 30 Linear programmingSimplex method

  13. Linear programmingComputer Software • Excel: Solver • LINDO: www.lindo.com max 10x + 14 y subject to M) 3x + 2y <= 120 A) x + 2y <= 80 end

  14. Engineering Economic Analysis • Time Value of Money • Minimum Acceptable Rate of Return • Decision Criteria • Net Present Worth • Equivalent Annual Worth • Internal Rate of Return • Benefit / Cost Ratio

  15. Tools for Decision Making under Risk • Expected value • Decision trees Decision Node Chance Node http://www.mindtools.com/dectree.html • Queuing theory • Simulation

  16. Tools for Decision Making under Uncertainty • Laplace criteria (Equally likely) • Maximax criteria • Maximin criteria • Hurwicz criteria • Minimax regret crteria

  17. Laplace criteria (Equally likely)

  18. Maximax criteria

  19. Maximin criteria

  20. Hurwicz criteria

  21. Minimax regret crteria First convert payoff table to regret table

  22. Computer-Based Information Systems • Decision Support Systems (DSS) A System under the control of 1 or more decision makers, that assists in the activity of decision making by providing an organized set of tools intended to impart structure to portions of the decision-making situation and to improve the ultimate effectiveness of the decision outcome.

  23. DSS Components • Data Management System • Model Management System • Knowledge Engine • User Interface • DSS User

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