How do we like it
Outcome/Objective
How chance affects model
Random variables
SCM 421 Lecture 04
26

Tips
1.
Start at outcome (work right to lef)
2.
Decompose outcome to variables that determine it
directly
3.
Influence variables should be independent
4.
Ask “What do I need to know to determine ____?”
5.
Each variable appears once
6.
Don’t draw an arrow from the outcome back to decisions
7.
Squares and Triangles should have no arrows coming in.
8.
Every circle should have at least one arrow coming in.
SCM 421 Lecture 04
27

Price Setting Example
What price do I set to maximize profit?
SCM 421 Lecture 04
Profit
Revenue
s
Costs
Fixed
Cost
Variable
Cost
Unit
Cost
Elasticity
Pric
e
QTY
Sold
QTY Sold
28

Price Setting Example
What price to I set to maximize profit?
SCM 421 Lecture 04
Profit
Revenue
s
Costs
Fixed
Cost
Variable
Cost
Unit
Cost
Elasticity
Pric
e
QTY
Sold
QTY Sold
Inputs: what’s
the situation
29

Price Setting Example
What price to I set to maximize profit?
SCM 421 Lecture 04
Profit
Revenue
s
Costs
Fixed
Cost
Variable
Cost
Unit
Cost
Elasticity
Pric
e
QTY
Sold
QTY Sold
Decision: what
you have
control over
30

Price Setting Example
What price to I set to maximize profit?
SCM 421 Lecture 04
Profit
Revenue
s
Costs
Fixed
Cost
Variable
Cost
Unit
Cost
Elasticity
Pric
e
QTY
Sold
QTY Sold
Intermediate
outcomes:
calculations
31

Price Setting Example
What price to I set to maximize profit?
SCM 421 Lecture 04
Profit
Revenue
s
Costs
Fixed
Cost
Variable
Cost
Unit
Cost
Elasticity
Pric
e
QTY
Sold
QTY Sold
Outcome: what
you care about
32

Price Setting Example
What price to I set to maximize profit?
SCM 421 Lecture 04
Profit
Revenue
s
Costs
Fixed
Cost
Variable
Cost
Unit
Cost
Elasticity
Pric
e
QTY
Sold
QTY Sold
Double line
means
stochastic:
random or
uncertain
QTY
Sold
33

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- Spring '13
- KATOK,ELENA
- Decision Making