Prepared by Mrs. Belen Apostol DECISION-MAKING

Decision- Making as a Management Responsibility Decisions invariably involve organizational change and the commitment of scarce resources. The overall quality of these decisions strongly affect the organization's success or failure.

Decision- Making A decision is a choice made from two or more alternatives Decision making is a process of identifying problems and opportunities and resolving them.

The Decision –Making Process The decision-making process is defined as a set of eight steps that include 1.Identifying a problem and 2.Identifying decision criteria 3.Allocating weights to the criteria 4.Developing Alternatives 5.Analyzing Alternatives 6.Selecting an alternative that can resolve the problem 7.Implementing the selected alternative 8. Evaluating the decision’s effectiveness.

6–5 Step 1: Identifying the Problem Problem –A discrepancy between an existing and desired state of affairs. Characteristics of Problems –A problem becomes a problem when a manager becomes aware of it. –There is pressure to solve the problem. –The manager must have the authority, information, or resources needed to solve the problem.

Some cautions about problem identification include the following: 1. Make sure it's a problem and not just a symptom of a problem. 2. Problem identification is subjective. 3. Before a problem can be determined, a manager must be aware of any discrepancies. Step 1: Identifying the Problem

4.Discrepancies can be found by comparing current results with some standard. 5.Pressure must be exerted on the manager to correct the discrepancy. 6. Managers aren't likely to characterize some discrepancy as a problem if they perceive that they don't have the authority, money, information, or other resources needed to act on it. Step 1: Identifying the Problem

6–8 Step 2: Identifying Decision Criteria Decision criteria are factors that are important (relevant) to resolving the problem. –Costs that will be incurred (investments required) –Risks likely to be encountered (chance of failure) –Outcomes that are desired (growth of the firm)

Step 3: Allocating Weights to the Criteria Decision criteria are not of equal importance:Decision criteria are not of equal importance:  Assigning a weight to each item places the items in the correct priority order of their importance in the decision making process.

6–10 Criteria and Weights for Computer Replacement Decision Criterion Weight Memory and Storage 10 Battery life 8 Carrying Weight 6 Warranty 4 Display Quality 3

6–11 Step 4: Developing Alternatives Identifying viable alternatives –Alternatives are listed (without evaluation) that can resolve the problem.

Step 5: Analyzing Alternatives Appraising each alternative’s strengths and weaknessesAppraising each alternative’s strengths and weaknesses  An alternative’s appraisal is based on its ability to resolve the issues identified in steps 2 and 3.

6–13 Assessed Values of Laptop Computers Using Decision Criteria

6–14 Step 6: Selecting an Alternative Choosing the best alternative –The alternative with the highest total weight is chosen.

Step 7: Implementing the Alternative Putting the chosen alternative into action.Putting the chosen alternative into action.  Conveying the decision to and gaining commitment from those who will carry out the decision.

6–16 Evaluation of Laptop Alternatives Against Weighted Criteria

6–17 Step 8: Evaluating the Decision’s Effectiveness The soundness of the decision is judged by its outcomes. –How effectively was the problem resolved by outcomes resulting from the chosen alternatives? –If the problem was not resolved, what went wrong?

Approaches in Solving Problems In decision-making the manager is faced with problems which may either be simple or complex. To provide him with some guide, he must be familiar with the following approaches: 1.Qualitative evaluation; and 2.Quantitative evaluation.

Qualitative Evaluation Qualitative evaluation - refers to evaluation of alternatives using intuition and subjective judgment. Managers tend to use the qualitative approach when: The problem is fairly simple. The problem is familiar. The costs involved are not great. Immediate decisions are needed.

Quantitative Evaluation refers to the evaluation of alternatives using any technique in a group classified as rational and analytical. Quantitative Models for Decision-Making The types of quantitative techniques which may be useful in decision-making are as follows: 1.Inventory models 2.Queuing theory 3.Network models 4.Forecasting 5.Regression analysis 6.Simulation 7.Linear programming 8.Sampling theory 9.Statistical decision

Inventory Models Inventory models consists of several types and are all designed to help the manager make decisions regarding inventory. These are as follows: 1.Economic Order Quantity model – used to calculate the number of items that should be ordered at one time to minimize the total yearly cost of placing orders and carrying the items in inventory. 2. Production Order Quantity Model – an economic order quantity technique applied to production orders It is used when inventory is consumed as it is produced.

3. Back order inventory model – In this model, it is assumed that stock outs (and backordering) are allowed. It is assumed that sales will not be lost due to a stock out. A back order of any demand that can not be fulfilled. 4. Quantity discount model – an inventory model used to minimize the total cost when quantity discounts are offered by suppliers Inventory Models

Queuing Theory The queuing theory is one that describes how to determine the number of service units that will minimize both customer waiting time and cost of service. The queuing theory is applicable to companies where waiting line are a common situation. Examples are cars waiting for service at a car service center, ships and barges waiting at the harbor for loading and unloading by dockworkers, programs to be run in a computer system that processes jobs, and others.

Network Models These are models where large complex tasks are broken into smaller segments that can be managed independently. The two most prominent network models are: 1.Program Evaluation Review Technique (PERT). This is a technique which enables managers to schedule, monitor, and control large and complex projects by employing three time estimates for each activity. 2.Critical Path Method (CPM). This is a network technique using only one time factor per activity that enables managers to schedule, monitor, and control large and complex projects.

Forecasting These are instances when managers make decisions that will have implications in the future. A manufacturing firm, for example must put up a capacity which is sufficient to produce the demand requirements of customers within the next 12 months. As such, manpower and facilities must be procured before the start of operations. To make decisions on capacity more effective, the manager must be provided with data on demand requirements for the next 12 months. This type of information may be derived through forecasting. Forecasting is actually collecting past and current information to make predictions about the future.

Regression analysis The regression model is a forecasting method that examines the association of independent variables present. With one independent variable involved, it is called simple regression; when two or more independent variables are involved, it is called multiple regressions.

Simulation Simulation is a model constructed to represent reality, on which conclusions about real-life problems can be based. It is a highly sophisticated tool by means of which the decision maker develops a mathematical model of the system under consideration. Simulation does not guarantee an optimum solution, but it can evaluate the alternatives fed into the process by the decision maker.

Linear Programming Linear programming is a quantitative technique that is used to produce an optimum solution within the bounds imposed by constraints upon the decision. Linear programming is very useful as a decision-making tool when supply and demand limitations at plants, warehouse, or market areas are constraints upon the system.

Sampling Theory Sampling theory is a quantitative technique where sample of populations are statistically determined to be used for a number of processes, such as quality control and marketing research. When data gathering is expensive, sampling provides an alternative. Sampling, in effect saves time and money.

Statistical Decision Theory Decision theory is the rational way to conceptualize, analyze and solve problems in situations involving limited, or partial, information about the decision environment. A more elaborated explanation of decision theory is the decision- making process presented at the beginning of this chapter. What has not been included in the discussion on the evaluation of alternatives but is very important is subjecting the alternatives to Bayesian analysis. The purpose of Bayesian analysis is to revise and update the initial assessments of the event probabilities generated by the alternative solutions. This is achieved by the use of additional information.

When the decision maker is able to assign probabilities to the various events, the use of probabilistic decision rule, called the Bayes criterion, becomes possible. The Bayes criterion selects the decision alternative having the maximum expected payoff, or the minimum expected loss if he is working with a loss table. Statistical Decision Theory