04 Decision Making - Lesson 04 Decision Making The...

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04 - 1 Lesson 04 Decision Making The operations manager is a planner and a decision maker in environments of risk, uncertainty and certainty.
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04 - 2 Analyze and compare alternatives Select “ best ” alternative (“ best depends on whether we are considering costs or profits ) Implement chosen alternative Monitor to ensure desired results are achieved Identify the Problem Specify objectives and the criteria for choosing a solution Develop alternatives The Decision Process
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04 - 3 There are many reasons for making poor decisions . Mistakes - in the decision process (either logic in formulating the problem, solution, or calculation errors) . Bounded rationality - limitations from costs, human abilities, time, technology and availability of information . Sub-optimization - optimum solutions at the departmental level may not be in the best interest of the department rather than in the best interest of the whole organization Causes for Poor Decisions
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04 - 4 There are 3 environments under which decisions are made Certainty - Environment in which relevant parameters have known values (eg – Profit = $5/unit, demand = 200 units. How much profit will you make?) Risk - Environment in which probability estimates of possible future conditions are evaluated (eg – Profit = $5/unit, demand has a probability of 50% for 100 units and 50% for 200 units, How much profit will you make?) Uncertainty - Environment in which it is impossible to assess the likelihood of various future events (eg – Profit = $5/unit, demand is unknown. How much profit will you make?) Decision Environments
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04 - 5 Decision Theory represents a general quantitative approach to decision making which is suitable for a wide range of operations management decisions. Decisions are based on . States of Nature - A set of possible future conditions that will have a bearing on the results of the decision . Alternatives – a list of considerations . Payoff - A known result ( could be good or bad ) for each alternative under each condition (state of nature) . Likelihood – estimated probability of each future condition Decision Theory
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04 - 6 Payoff Possible Future Demand Alternative Low Moderate High Small Facility 10 10 10 Medium Facility 7 12 12 Large Facility -4 2 16 Payoff - A known result ( could be good or bad ) for each alternative under each possible future condition. Good results are usually shown as positive numbers. Bad results (costs or losses) are usually shown as negative numbers. Payoff Table
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04 - 7 Regret Possible Future Demand Alternative Low Moderate High Small Facility 0 2 6 Medium Facility 3 0 4 Large Facility 14 10 0 Regret (Opportunity Loss) Table Regret (Opportunity Loss) is based on the payoff table. The regret or lost opportunity is the difference between the best alternative payoff and each alternative payoff for each possible future demand.
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04 Decision Making - Lesson 04 Decision Making The...

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