1 - Why DM - Models 11.09

8/9/2019 1 - Why DM - Models 11.09

1/46

G. P. Prastacos, Decision Making, AUEB, 2009

1a. Decision Making

8/9/2019 1 - Why DM - Models 11.09

2/46


WHYdo we need a course onDecision Making ???

8/9/2019 1 - Why DM - Models 11.09

3/46


AWHOLESALER enters a new country and is interestedto sell his products in 4 REGIONS

There are 4 available WAREHOUSES, but he needs toselect only 2 (out of 4) to work with

Annual costs of each W serving each R:

Problem:Problem: How to choose the best 2 Ws among the 4 ?How to choose the best 2 Ws among the 4 ?

WAREHOUSES

REGIONS A B C D

R1 110 640 690 450

R2 585 65 590 115

R3 165 200 125 840

R4 595 580 115 100

Case 1: Distributors Selection

8/9/2019 1 - Why DM - Models 11.09

4/46


ACommon SenseApproachStep 1:Assume all warehouses open

The assignment is obvious:

Assign each Region to the Warehouse with the minimum cost!

WAREHOUSES

REGIONS A B C D

R1 110 640 690 450

R2 585 65 590 115

R3 165 200 125 840

R4 595 580 115 100

Total Cost = 110 + 65 + 125 + 100 = 400

8/9/2019 1 - Why DM - Models 11.09

5/46


If we were to close 1 W, close the ONE that wouldcreate the least additional cost

A cost increase = [450 - 110] = 340

B cost increase = [115 - 65] = 50

C cost increase = [165 - 125] = 40D cost increase = [115 - 100] = 15 !

Close D & assign R4 to C !

WAREHOUSES

REGIONS A B C D

R1 110 640 690 450

R2 585 65 590 115

R3 165 200 125 840

R4 595 580 115 100

W A R E H O U S E S

R E G I O N S A B C

R 1 1 1 0 6 4 0 6 9 0

R 2 5 8 5 6 5 5 9 0

R 3 1 6 5 2 0 0 1 2 5

R 4 5 9 5 5 8 0 1 1 5

NewAssignment

Step 2:Close a Warehouse

8/9/2019 1 - Why DM - Models 11.09

6/46


Step 3:Close a 2nd Warehouse

Since we have to close one more W, proceed similarly:

Among the remaining Ws (A, B, C) eliminate one:

A CostIncrease = [640 - 110] = 530

B CostIncrease = [585 - 65] = 520C CostIncrease = [165 - 120] + [580 - 115] = 505 !

close C !

WAREHOUSES

REGIONS A B C

R1 110 640 690

R2 585 65 590

R3 165 200 125

R4 595 580 115

8/9/2019 1 - Why DM - Models 11.09

7/46


WAREHOUSES

REGIONS A B

R1 110 640

R2 585 65

R3 165 200

R4 595 580

FinalAssignment

Total Cost:

110 + 65 + 165 + 580 = 920

Is this the best? NO!

The best would be to keepA and D, to serveregions R1/R3 and R2/R4 respectively

Total cost = 490 (less than half!)

8/9/2019 1 - Why DM - Models 11.09

8/46


Unit transportation costs along each path Given demands at each outlet, & capacity constraint ofP2

Could include unit production and storage costs, etc

Case 2:Supply Chain Optimization

PLANTS WAREHOUSES DEMAND OUTLETS

P1

P2

W1

W2

D1

D2

D3

0

5

4

2

3

45

21

260.000

50.000

100.000

50.000

8/9/2019 1 - Why DM - Models 11.09

9/46


Question

Who produces what?

Where is it shipped?

What do the warehouses receive?

From whom?

What do the outlets receive?

From whom?

When?

Design the optimal Supply Chainto min total annual cost !

8/9/2019 1 - Why DM - Models 11.09

10/46


Step 1: Find the W/H to best serve each DStep 1: Find the W/H to best serve each D

(select least cost path for each D)

Outlet D1 is best served by Warehouse W2 Outlet D2 is best served by Warehouse W2 Outlet D3 is best served by Warehouse W2

Common Sense Method:Step 1

3

4

5

2

1

2

W1

D1

W2

D2

D3

8/9/2019 1 - Why DM - Models 11.09

11/46


Step 2:Step 2: Compute demands created at each W/HCompute demands created at each W/H

Outflows (units): Cost ()

50,000 units from W2 p D1 100,000

100,000 units from W2 p D2 100,00050,000 units from W2 p D3 100,000

200,000 300,000


Total transport cost for 2nd half of the chain= 300,000

8/9/2019 1 - Why DM - Models 11.09

12/46


Step 3: Determine inflows (200 units to W2) with minDetermine inflows (200 units to W2) with mincost (remember capacity constraint)cost (remember capacity constraint)

Inflows (units): Cost ()

60,000 units from P2 p W2: 120,000

140,000 units from P1 p W2: 700,000820,000


TOTALAnnual Cost: 300,000 + 820,000 = 1,150,000 !

W1

W2

P1

P22

5

60.000

8/9/2019 1 - Why DM - Models 11.09

13/46


Every demand location is assigned to the warehouse onits least-cost path.

Every warehouse uses its least cost plant (up to the full

available capacity).

Is this the bestsolution?

NOOOOO !

BEST = 740,000 !!!

Looks like a satisfactory solution

Remember: YOU might have to use this method !!!

8/9/2019 1 - Why DM - Models 11.09

14/46


What if we had a larger scale problem?

8/9/2019 1 - Why DM - Models 11.09

15/46


ASupply Chain in India

Srinagar Punjab U. Pradhesh Nepal

Rajastan

Bhopal Hyderabad Patna Gujarat Kerala

Imagine having a similar, but slightly more complexproblem. Your company operates a supply chain thatincludes 5 suppliers of raw materials, 5 manufacturingplants, and 5 cities where your products are sold.

Suppliers

Delhi Mumbai Calcutta Chennai Bangalore

Factories Stores

8/9/2019 1 - Why DM - Models 11.09

16/46


Suppliers

Factories

Stores

ASupplyChain in India

8/9/2019 1 - Why DM - Models 11.09

17/46


Similar problem in Europe

8/9/2019 1 - Why DM - Models 11.09

18/46


ASupply Chain in Spain

Bilbao Oviedo Pamplona Cordoba

Zamora

ACorunia Zaragoza Salamanca Albacete

Imagine having a similar, but slightly more complexproblem, working for a company in Spain, with 5Suppliers, 4 factories, and 4 cities to sell:

Suppliers

Madrid Barcelona Seville

Valencia

Factories Stores

8/9/2019 1 - Why DM - Models 11.09

19/46


What if we had a larger scale problem?

Suppliers

Factories

Stores

-Where do we get ourraw materials from?-Who supplies whom?-Where is it shipped?-What does eachplant produce?-Where is the productshipped?-From where doeseach store receive?-What?-When?

Imagine solving the ZARA problem!

8/9/2019 1 - Why DM - Models 11.09

20/46


A simple problem for a VendingOperator

8/9/2019 1 - Why DM - Models 11.09

21/46

8/9/2019 1 - Why DM - Models 11.09

22/46


Case 3:Introducing new technology

The Board of Trustees of an established Universitypropose to introduce computerized and web-basedprocesses for students to register in the Universityand at the courses they wish to take

This will significantly reduce the work conducted byadministrative personnel, will reduce costs andincrease response and accuracy, and will improvethe level of services offered by the University

However, this initiative presupposes a number ofactions that need to be taken and successfullycompleted

8/9/2019 1 - Why DM - Models 11.09

23/46


What needs to be done

Install a process whereby students will be safely andconfidentially informed of the new process, their passwords,etc

Re-arrange and streamline the curricula of the departments,homogenize the course offerings, course code numbers, etc

Check and possibly revise some inconsistent rules that havebeen developed over time concerning curriculum, etc, so thatthe rules in the new system are robust and do not lead toinconsistencies

Establish monitoring mechanisms to follow up on progress andcatch early mistakes in the design or the implementation

Select a technology to use that will be around for a long timeand will optimize your investment Convince the people in the admin (registrars offices,IT staff)

to follow you, and surpass themselves to achieve the above

8/9/2019 1 - Why DM - Models 11.09

24/46


What are the risks involved

The users passwords etc are leaked and the system is attackedby hackers on the critical D-Monday all your registrars filesare useless

The employees of the admin do not like to do more work thatis required to streamline curricula, homogenize courses etc;they have a public employee attitude

They are also afraid that will technology they might getredundant after a few years, and, anyway, their power inmanaging a system which currently depends on them willgradually be dissolved

The rules that need to be revised are very old and quite

complex; new ones are too difficult to come up with Not sure of which technology to use: should we go with

Microsoft, with best of breed, or with open code solutions?Should we buy contract service right from the beginning, orpay according to need? Will the technology align itself withpreviously existing technology and systems?

8/9/2019 1 - Why DM - Models 11.09

25/46


So, what happens?

Nothing!

The decision maker procrastinates and postpones thedecision

The risks involved are many He prefers the Status Quo

Check the book Decision traps

8/9/2019 1 - Why DM - Models 11.09

26/46


Decision Making today

8/9/2019 1 - Why DM - Models 11.09

27/46


The MEGATRENDS of our times

NetworkEconomy

Penetration of ICT

Technologies

CustomerFocus

CHANGES Permanent crises?

Mergers &Acquisitions

Increase of the

Competition

Globalisationand Deregulation

8/9/2019 1 - Why DM - Models 11.09

28/46


What is the impact to management?

There is a needfor taking FAST

decisions!

Need to takeyour data in

account !

Time isshrinking!

We arecontinuously pressed

fortime!

We areoverflowed with

data(internal, external,

official,unofficial,)

AndweCANNOTignore

them

There isa lot

ofUNCERTAINTY!

Complicatedstructures

complicate thedecisionmakingprocess

8/9/2019 1 - Why DM - Models 11.09

29/46


Factors affecting the Decision Making Process TODAY

What is the impact to Decision Making?

Factors Trend Result

Rate of change in the

Business EnvironmentIncreasing

Need for faster and more effective

decisions

Globalization andCompetition

Increasing Bigger Uncertainty, Competition Intensity,Need for constant market surveillance

Customer Orientation

and FocusIncreasing

Bigger Uncertainty, Smaller Lifecycles of

products, More frequent decisions

Size and Complexity of

OrganizationsIncreasing

Complexity of decisions, Greater

consequences

Technology (IT &

Telecommunications)Increasing

More decision choices, Possibility of

diagnosing problems and opportunities

Flat Organizational

StructuresIncreasing

Increasing number of decisions for

employees, increased complexity

Employee

EmpowermentIncreasing

Increasing number of decisions and of

complexity, need for DSS

8/9/2019 1 - Why DM - Models 11.09

30/46

8/9/2019 1 - Why DM - Models 11.09

31/46

8/9/2019 1 - Why DM - Models 11.09

32/46


Cri i l F rs Key Performance Indicators

Production Cost Production Cycle time

own Time Time-to-Market Cost per transaction Process length, cost, etc Participation in R&D Programs % of sales from new products Proposals for changes Customer Com laints Re eat sales Results of Up- and X-selling

Production Efficiency Measures

Operations Efficiency Measures

Innovation Measures

Customer Satisfaction Measures

Examples of CSFs and KPIs (2)

8/9/2019 1 - Why DM - Models 11.09

33/46


Balanced Scorecard

Financial

The BSC provides aframework to

translate strategy intooperational terms

Internal

Business

Process

Customer

Vision

&

Strategy

Competence,Innovationand

Learning

8/9/2019 1 - Why DM - Models 11.09

34/46


1b.Introduction toManagementScience

8/9/2019 1 - Why DM - Models 11.09

35/46

8/9/2019 1 - Why DM - Models 11.09

36/46

8/9/2019 1 - Why DM - Models 11.09

37/46


Examples of business questions

How should the fleet of delivery trucks beallocated to meet customer needs while makingthe best use of drivers?

What's the best breakdown of the marketingbudget to maximize customer-response rates?

Where should warehouses be located to minimize

transportation costs?

What's the impact of faster machinery on thefactory-production process?

8/9/2019 1 - Why DM - Models 11.09

38/46


Other areas

Production Planning

ProductSelection

Product MixProduction Planning & SchedulingManpower Planning

Maintenance Planning

Marketing

Financial Planning

Capital BudgetingInvestmentAppraisalFinancial PlanningCash flow Planning

Media Mix

Distribution PlanningProductIntroductionSales ManagementLocation Selection

Transportation & NetworkFlow Problems

Energy PlanningStrategic Planning, etc ...

Very Large Range ofApplicationAreas

8/9/2019 1 - Why DM - Models 11.09

39/46


Model - Based Approach What is a model?

Each model has a technique associated

with it! Methodology Based Approach

Gives confidence about the results

Characteristics of all big consultants

BOTHARE VERY IMPORTANT TODAY !

Key Characteristics of MS/OR

8/9/2019 1 - Why DM - Models 11.09

40/46


Mathematical Programming (Linear,Integer, ...)

DecisionAnalysis

Multi-criteria Decision Making Inventory Management

Queuing Theory

Simulation

Major MS/OR models

8/9/2019 1 - Why DM - Models 11.09

41/46


Company with steady rate of demand d = 100 tons/month

Purchase price E = 250 /ton

Delivery costs k = 50 (each time)

Storage (+ insurance, ...) costs F = 4 /ton/month

t

What is wrong with this management ?

InventoryLevel

Time

Example 1:Inventory Management

8/9/2019 1 - Why DM - Models 11.09

42/46


Irrational Ordering (time, quantity) ... why?

Safety stock ... why?

Q

T 2T

t

What is wrong with this management ?

8/9/2019 1 - Why DM - Models 11.09

43/46

8/9/2019 1 - Why DM - Models 11.09

44/46

8/9/2019 1 - Why DM - Models 11.09

45/46


Demand for the product (if initially High)could drop to Low, with probability 15%due to a number of reasons Competitors enter the market

The product goes out of fashion

The technology becomes outdated

After the initial 2 years

8/9/2019 1 - Why DM - Models 11.09

46/46

jAnticipatedAnnual Revenues (in NPV)

DURING THE FIRST 2YEARS:

AFTERWARDS:

INITIAL 2 YRS HIGH LOW

BIG 300K 50K

SMALL 100K 75K

AFTERWARDS HIGH LOW

BIG 300K 50K

EXPANSION 200K 35K

SMALL 60K 75K

Documents

1 - Why DM - Models 11.09