MULTI CRITERIA DECISION MAKING - APPLICATIONS IN PROJECT MANAGEMENT

1. MULTI CRITERIA DECISION MAKING - APPLICATIONS IN PROJECT MANAGEMENT AN INTRODUCTION TO THE ANALYTIC HIERARCHY PROCESS-AHP Vassilis C. Gerogiannis, PhD Assistant Professor, Department of Project Management Technological Education Institute of Larissa gerogian@teilar.gr

2. DO YOUR DECISION CONFERENCES TURN OUT LIKE THIS ? TOO BAD! WE WANT PROJECT B !! WE WANT PROJECT A !! COME ON IN THE WATER IS FINE! SEA OF INDECISION OR DOES THIS HAPPEN?

3. DO YOUR RECOMMENDATIONS TURN OUT LIKE THIS? BUT BOSS... THAT WAS MY BEST GUESS! GUESS AGAIN MAYBE YOU NEED A NEW APPROACH

4. Decision Making • To make an effective decision making, one has to consider • Details about problem for which the decision is required • The people or stakeholders involved • Their objectives and policies • The influences affecting outcomes • The time horizons, scenarios, and constraints

5. Analytic Hierarchy Process - AHP • Introduced by Thomas Saaty in late 70’s. • AHP, McGraw-Hill, 1980. • A Multi Criteria Decision Making (MCDM) Technique. • It structures any complex, multi-criterion, multi-person problem hierarchically. • Identifies the strength with which one alternative dominates another with respect to a given criteria.

6. Advantages of AHP • Multi-criterion, Multi-person. • Can handle qualitative input. • Decision making in presence of environmental, social and other influences. • Can handle subjective judgements of individuals.

7. I THINK I ‘LL TRY THE ANALYTIC HIERARCHY PROCESS (AHP) !!!

8. AHP - Steps • Define the problem and specify the objective. • Structure the hierarchy from overall managerial perspective. • Construct a pairwise comparison matrix of the relative contribution on each criteria. • Obtain overall ranking of each decision alternative. • Evaluation of consistency.

9. AHP - Inputs • Relative importance of criteria. • Preference on each criterion for each decision alternative. • Construction of pairwise comparison matrix using the above two inputs.

10. AHP Output • Prioritised ranking indicating the overall preference for each decision alternative.

11. AHP - Measurement Methodology • Objective of measurement methodology is to establish priorities among alternatives within each stratum of hierarchy. • This is accomplished through by asking participating stakeholders (e.g., managers) to evaluate each set of elements in a pairwise. • This data constitutes the core element of AHP.

12. Pairwise Comparison Matrix • A pairwise comparison matrix is constructed for each criteria based on the data collected. • Pairwise comparison matrix for a criteria with 4 decision alternatives is given by:

13. 9-Point Scale for Construction of Pairwise Comparison Matrix

14. Calculating Priorities • Sum the values in each column of the pairwise comparison matrix. • Divide each element in the pairwise comparison matrix by its column sum; the resulting matrix is called normalized pairwise comparison matrix. • Compute the average of the elements in each row of the normalized matrix. This averages provide relative importance of each alternative.

15. Calculating Priorities Divide entry by column sum 1.83 3.5 6 Column Sum Relative Priority

16. THIS AHP STUFF SOUNDS INTERESTING. HOW ABOUT AN EXAMPLE OF HOW IT WORKS IN PRACTICE. OKAY, HERE’S AN EXAMPLE OF A DECISION PROBLEM

17. I SEE A NEW CAR IN YOUR FUTURE

18. Car Selection Problem • XYZ corporation is planning to buy a new car for its transport section. The following four criteria has been identified for the selection of the car: • Price • Mileage per litre (MPL) • Comfort • Style Use AHP to select the best of three cars named A, B and C from the market.

19. The Problem “Hierarchy”

20. Pairwise Comparison Matrix for Comfort

21. Priorities of cars with respect to Comfort Pairwise Comparison Matrix Normalized Matrix Relative Priority

22. Pairwise Comparison for Other Criteria

23. Priority Vectors for Price, MPG and Style

24. Pairwise Comparison Matrix for the Criteria

25. Priorities for Four Criteria • Price 0.398  • MPG 0.085 • Comfort 0.218 • Style 0.299

26. Using AHP to Develop an Overall Priority Ranking • The procedure used to compute the overall priorities for each decision alternative by using the priority for each criterion as a weight that reflects its importance. • The overall priority for each decision alternative is obtained by summing the products of the criterion priority times the priority of its decision alternative. • For example overall car A priority = .398 (.123) + .085 (.087) + 0.218 (.593) + .299 (.265)

27. Overall Priority Matrix for Car Alternative Priority Car A 0.265 Car B 0.421 Car C 0.314

28. Estimating the Consistency Step – 1. Multiply each value in the first column of the pairwise comparison matrix by corresponding relative priority matrix. Step – 2. Repeat Step – 1 for remaining columns. Step – 3. Add the vectors resulted from step-1 and 2. Step – 4. Divide each elements of the vector of weighed sums obtained in step 1-3 by the corresponding priority value. Step – 5. Compute the average of the values found in step –4. Let  be the average. Step – 6. Compute the consistency index (CI), which is defined as ( - n) / (n-1).

29. Estimating Consistency • Compute the random index, RI, using ratio: RI = 1.98 (n-2)/n • Accept the matrix if consistency ratio, CR, is less than 0.10, where CR is CR = CI / RI

30. Consistency of Comfort Matrix

31. Applications of AHP • Marketing • Make Versus Buy Decision • Resource Allocation • New Product Development • Consumer Behaviour • Project Management (Project Selection, Contractor Prequalification)

32. APPICATIONS OF AHP IN PROJECT MANAGEMENT

33. Project Selection Problem Screening models help managers pick winners from a pool of projects. Screening models are numericor nonnumeric and should have: Realism Capability Flexibility Ease of use Cost effectiveness Comparability

34. Screening & Selection Issues • Risk – unpredictability to the firm • Commercial – market potential • Internal operating – changes in firm operations • Additional – image, patent, fit, etc. All models only partially reflect reality and have both objective and subjective factors imbedded

35. Approaches to Project Screening • Checklist model • Simplified scoring models • Analytic hierarchy process • Profile models • Financial models

36. Checklist Model A checklist is a list of criteria applied to possible projects. • Requires agreement on criteria • Assumes all criteria are equally important Checklists are valuable for recording opinions and encouraging discussion

37. Simplified Scoring Models Each project receives a score that is the weighted sum of its grade on a list of criteria. Scoring models require: • agreement on criteria • agreement on weightsfor criteria • a score assigned for each criteria Relative scores can be misleading!

38. Analytic Hierarchy Process A four step process: • Construct a hierarchy of criteria and subcriteria • Allocate weightsto criteria • Assign numerical valuesto evaluation dimensions • Scores determinedby summing the products of numeric evaluations and weights Unlike the simple scoring model, these scores can be compared!

39. Step 1& 2

40. Step 3 & 4

41. Contractor (Pre-)Qualification in a Project Bid ProcessExample taken from the article:“Application of the AHP in project management “by Kamal M. Al-Subhi Al-Harbi,International Journal of Project ManagementVolume 19, Issue 1, January 2001, Pages 19-27

43. The Problem Hierarchy

44. 15 QUESTIONS - PAIRWISE COMPARISONS

45. EXAMPLE ANSWERS 15 QUESTIONS - PAIRWISE COMPARISONS

47. 10 QUESTIONS - PAIRWISE COMPARISONS PER EACH CRITERION

48. 10 QUESTIONS - PAIRWISE COMPARISONS PER EACH CRITERION EXAMPLE ANSWERS

50. In total: 15 + 10x6 = 75 pair wise comparisons are required