MGMT250 Notes September 7, 20041. Initial StuffA. Schedule1. Collect H.W. and briefly go over it (any volunteers to put their work on board?).2. We will finish up Operations Strategy.3. We will begin Decision Theory and how it helps to make decisions.3. Case Analysis due week from Thursday.4. Problems for Chapter 5S may be due next class (depending on how far we get today).5. For next week read quality assignments. Will try to start Quality next time, if time allows.2. Levels of operations/manufacturing strategy1. Internally Neutral (Very Reactive, don't mess anything up).2. Externally Neutral (Keep up the industry status quo, externally reactive).3. Internally Supportive (Closely link to business strategy, internally proactive).4. Externally Supportive (Closely link to other functions and keep an external proactive eye).Developing a Strategy see graphics. Essentially looking at the market and determining what operations are needed to fulfill market requirements. Good structural procedure. How do you position a company on the product/process matrix? Let’s talk about Trek/Huffy again.New Strategies include:Quality, Time. Time based Strategies occur throughout the “Product Development Life Cycle”Chapter ends with discussion of integration of Craft and Mass for “Lean Production”.Flexibility-Quality Dependability-CostContinuousFlowAssemblyLineBatchJobShopLowVolumeOne of aKindMultipleProducts,LowVolumeFewMajorProducts,HigherVolumeHighVolume,HighStandard-izationCommercialPrinterHeavyEquipmentAutomobileAssemblySugarRefineryFlexibility-QualityDependabilityCostProduct-Process Lifecycle MatrixVariety, Flexibility, & VolumeProductVarietyHighModerateLowVery LowEquipmentflexibilityHighModerateLowVery LowLowVolumeModerateVolumeHighVolumeVery highVolumeJobShopBatchRepetitiveassemblyContinuousFlow3. Decision Theory A. Management means making decisions. There can be 7 steps to a typical decision process:1. Identify the problem2. Specify Objectives and the criteria for choosing a solution.3. Develop alternatives.4. Analyze and compare.5. Select the best alternative.6. Implement the chosen alternative.7. Monitor the results and feedback.In this class steps 1-5 is focus. In reality all steps are important.B. The manager faces three types of decision environments.1. Certainty. Deterministic and known values for all parameters.2. Risk - have some information...statistical usually.3. Uncertainty - no information on probabilities of occurrences of future events.C. Decision Theory can be used for a number of operations decisions.Works well for strategic..but tactical and operational decisions could be answered: Location, capacity planning, equipment…etc.D. You need to have three major pieces of information to apply decision theory process.1. Future Conditions (states of nature).2. Alternatives to choose from.3. Payoffs for each alternative for a given conditions.This information may be supplemented with finding probabilities of occurrences.Then use decision criteria to evaluate alternatives. These first steps help form a “payoff table” (later we shall see these applied to a “decision tree.”) To complete the payoff table we also:4. Determine likelihood of states of nature5. Evaluate alternatives based on some “criteria”, (e.g. maximize profit) and make selection.Let us assume that we have a company a custom clothing store, is looking to its future. Business for this company has been good and it’s looking to build another store in another town. There are a number of alternatives available to them, they could build a facility with 2000 sq. ft, a facility with 10,000 sq. ft. or a 20,000 sq. ft. facility. They decided to have some estimation done and came up withthe following preliminary numbers. If they built the 2000 sq. ft. facility and demand was low (100 suits a day), then they could expect a net present value on the facility (over the life of the facility) of $5 million. Actually, this is true if demand is at 400 or 1000 suits per day (the other demand estimates). If they built the 10,000 sq. ft. facility they would make $3 million with the 100 suit/day demand, $10 million with the 400 suit/day demand and $16 million, for the 1000 suit/day demand. Yet, if they built the 20,000 sq. ft. facility, they could expect to lose $4 million over the life of the store if demand was 100 suit/day. If demand were 400 or 1000 suits/day his returns would be $2 million and $16 million respectively.How would you set up this problem? How do we read the payoff table?Let us use this table for evaluation in the three different environments.1. CertaintyWe know for sure that next period’s demand is going to be high, which alternative do we select?Rather straight forward. If we have estimates available.2. UncertaintyWe have 4 possible analysis criteria (methods) which we can use.Let us put table on board.1. Maximin - choose the alternative with the best of the worst possible payoffs.2. Maximax - Choose the alternative with the best possible payoffs3. Laplace - choose the alternative with the best average payoff.4. Minimax regret - choose the alternative that has the least of the worst regrets.Which alternatives are selected for each criteria?Which technique to use?B. Decision Making Under RiskSometimes information may be given to you, but only as possible occurrences, e.g. stochastic environment.i. you can use expected monetary value (EMV) or expected value as criterion in this case. The environment here assumes that each state of nature has some probability that it will occur. Thesummation of the probabilities is 1 with each state of nature falling between 0 and 1.Let’s go back to clothing store. Assume the manager hired a marketing consultant to do some initial research, this consultant found that the probability for demand being 100 suit/day is 0.3, while the 400or 1000 suit/day demand had 20% and 50% chance of occurring, respectively.Equation to determine this is: njijjiVPEV1Where EVi is the total expected monetary value for alternative i, Pj is the probability of outcome (state of nature) j occurring and Vij is the payoff associated with alternative i under outcome j. n is the number of outcomes.What are the expected payoffs for each of the three alternatives? Which one would you select?b. Decision Trees are a graphical representation of the decision process. Trees have three elements, chance nodes, decision nodes and branches. Branches that