OPERATIONS MANAGEMENT WILLIAM STEVENSON 9e

8/10/2019 OPERATIONS MANAGEMENT WILLIAM STEVENSON 9e

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McGraw-Hill/Irwin Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

5S

Decision Theory


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5S-2

Learning Objectives

Describe the different environments under

which operations decisions are made

Describe and use techniques that applydecision making theory under uncertainty

Describe and use the expected-value

approach


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5S-3

Learning Objectives

Construct a decision tree and use it toanalyze a problem

Compute the expected value of perfect

information Conduct sensitivity analysis on a simple

decision problem


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5S-4

Decision Theoryrepresents a generalapproach to decision making which is suitable for a

wide range of operations management decisions,

including:

Product and

service design

EquipmentselectionLocationplanning

Capacity

planning

Decision Theory


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5S-5

A set of possible future conditions existsthat will have a bearing on the results ofthe decision

A list of alternatives for the manager tochoose from

A known payoff for each alternative

under each possible future condition

Decision Theory Elements


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5S-6

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 futurecondition

Decision Theory Process


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If possible, determine the likelihood of

each possible future condition

Evaluate alternatives according to somedecision criterionand select the best

alternative

Decision Theory Process (Contd)


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Bounded Rationality

The limitations on decision

making caused by costs,

human abilities, time,technology, and availability of

information

Causes of Poor Decisions


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Suboptimization

The result of different

departments eachattempting to reach a

solution that is

optimum for thatdepartment

Causes of Poor Decisions (Contd)


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Decision Process

1. Identify the problem2. Specify objectives and criteria for a solution

3. Develop suitable alternatives

4. Analyze and compare alternatives

5. Select the best alternative

6. Implement the solution

7. Monitor to see that the desired result is

achieved


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Certainty- Environment in whichrelevant parameters haveknown values

Risk - Environment in whichcertain future events haveprobable outcomes

Uncertainty - Environment in

which it is impossible to assessthe likelihood of various futureevents

Decision Environments


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Maximin - Choose the alternative withthe best of the worst possible payoffs

Maximax - Choose the alternative

with the best possible payoff

Laplace - Choose the alternative withthe best average payoff of any of thealternatives

Minimax Regret- Choose the

alternative that has the least of theworst re rets

Decision Making under Uncertainty


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Decision Making Under Risk

Risk: The probability of occurrence for eachstate of nature is known

Risk lies between the extremes of

uncertainty and certainty Expected monetary value (EMV) cri ter ion:

The best expected value among alternatives

Determine the expected payoff of eachalternative, and choose the alternative with the

best expected payoff


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Decision Trees

Decis ion tree: a Schematic representationof the available alternatives and their

possible consequences.

Useful for analyzing situations that involvesequentialdecisions

See Figure 5S.1


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Format of a Decision Tree

B

Payoff 1

Payoff 2

Payoff 3

2

Payoff 6

2

Payoff 4

Payoff 5

1

Decision Point

Chance Event

Figure 5S.1


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Expected Value of Perfect Information

Expected value of perfect information:thedifference between the expected payoff under

certainty and the expected payoff under risk

Expected value of

perfect information

Expected payoff

under certainty

Expected payoff

under risk=-


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Sensitivity Analysis

Sens i t iv i ty Analysis: Determining the rangeof probability for which an alternative has the

best expected payoff

Useful for decision makers to have someindication of how sensitive the choice of an

alternative is to changes in one or more of

these values


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Sensitivity Analysis

16

14

12

108

6

4

20

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12

108

6

4

20

A

B

C

A bestC bestB best

#1 Payoff #2 Payoff

Sensitivity analysis: determine the range ofprobability for which an alternative has the bestexpected payoff

Example S-8


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Solved Problem 5

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OPERATIONS MANAGEMENT WILLIAM STEVENSON 9e