OU SCM 3523 - Chapter 5S (29 pages)

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Chapter 5S



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Chapter 5S

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Pages:
29
School:
The University of Oklahoma
Course:
Scm 3523 - Production/Operations Management
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DECISION THEORY CHAPTER 5 SUPPLEMENT SUPPLEMENT 5 LEARNING OBJECTIVES You should be able to LO 5s 1 Outline the steps in the decision process LO 5s 2 Name some causes of poor decisions LO 5s 3 Describe and use techniques that apply to decision making under uncertainty LO 5s 4 Describe and use the expected value approach LO 5s 5 Construct a decision tree and use it to analyze a problem LO 5s 6 Compute the expected value of perfect information LO 5s 7 Conduct sensitivity analysis on a simple decision problem DECISION THEORY Decision Theory a general approach to decision making Decision Theory is suitable to a wide range of operations management decisions Examples Capacity planning Product and service design Equipment selection Location planning CHARACTERISTICS OF SUITABLE PROBLEMS Characteristics of decisions that are suitable for using decision theory 1 A set of possible future conditions that will have a bearing on the results of the decision 2 A list of alternatives from which to choose 3 A known payoff for each alternative under each possible future condition PROCESS FOR USING DECISION THEORY APPROACH 1 Identify the possible future states of nature 2 Develop a list of possible alternatives 3 Estimate the payof for each alternative for each possible future state of nature 4 If possible estimate the likelihood of each possible future state of nature 5 Evaluate alternatives according to some decision criterion and select the best alternative PROCESS FOR USING DECISION THEORY APPROACH Payoff Table A table showing the expected payoffs for each alternative in every possible state of nature Possible Future Demand Alternatives Low Moderat e High Small facility 10 10 10 7 12 12 4 2 16 Medium facility Large Facility A decision is being made concerning which size facility should be constructed The present value in millions for each alternative under each state of nature is expressed in the body of the above payoff table DECISION PROCESS Steps in the Decision Process 1 Identify the problem 2 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 CAUSES OF POOR DECISIONS Decisions occasionally turn out poorly due to unforeseeable circumstances not the norm More frequently poor decisions are the result of a combination of Mistakes in the decision process Bounded rationality Suboptimization CAUSES OF POOR DECISIONS Errors or Mistakes in the Decision Process Failure to recognize the importance of each step Skipping a step Failure to complete a step before jumping to the next step Failure to admit mistakes Inability to make a decision CAUSES OF POOR DECISIONS Bounded Rationality The limitations on decision making caused by costs human abilities time technology and availability of information Suboptimization The results of different departments each attempting to reach a solution that is optimum for that department DECISION ENVIRONMENTS There are three general environment categories for the degree of uncertainty Certainty Environment in which relevant parameters have known values Risk Environment in which certain future events have probabilistic outcomes Uncertainty Environment in which it is impossible to assess the likelihood of various possible future events DECISION MAKING UNDER CERTAINTY Decisions are sometimes made under complete certainty Know what possible future conditions will occur Decision criteria Straightforward Choose the alternative that has the best payoff under that state of nature DECISION MAKING UNDER CERTAINTY EXAMPLE 5S 1 PAGE 222 223 Determine the best alternative in the payoff table when it is known with certainty that demand will be A Low B Moderate C High Possible Future Demand Alternatives Low Moderat e High Small facility 10 10 10 7 12 12 4 2 16 Medium facility Large Facility DECISION MAKING UNDER UNCERTAINTY Decisions are sometimes made under complete uncertainty No information is available on how likely the various states of nature are Decision criteria Maximin Choose the alternative with the best of the worst possible payoffs Maximax Choose the alternative with the best possible payoff Laplace Choose the alternative with the best average payoff Minimax regret Choose the alternative that has the least of the worst regrets DECISION MAKING UNDER UNCERTAINTY EXAMPLE 5S 2 PAGE 223 224 Possible Future Demand Alternatives Low Moderate High Small facility 10 10 10 7 12 12 4 2 16 Medium facility Large Facility Determine which alternative would be chosen under each strategy A Maximin B Maximax C Laplace EXAMPLE MAXIMIN CRITERION A A Maximin Criterion Choose the best of the worst Possible Future Demand Alternatives Low Moderate High Small Facility 10 10 10 7 12 12 4 2 16 Medium Facility Large Facility EXAMPLE MAXIMAX CRITERION B B Maximax Criterion Choose the best possible payoff Possible Future Demand Alternatives Low Moderate High Small Facility 10 10 10 7 12 12 4 2 16 Medium Facility Large Facility EXAMPLE LAPLACE CRITERION C C Maximax Criterion Choose the alternative with the best average payoff Possible Future Demand Alternatives Low Moderate High Small Facility 10 10 10 7 12 12 4 2 16 Medium Facility Large Facility EXAMPLE MINIMAX REGRET Possible Future Demand Alternatives Low Moderate High Small Facility 10 10 10 7 12 12 4 2 16 Medium Facility Large Facility Step 1 Construct a regret or opportunity loss table The difference between a given payoff and the best payoff for a state of nature Regrets Alternatives Low Moderate High Small Facility 10 10 0 12 10 2 16 10 6 10 7 3 12 12 0 16 12 4 Medium Facility EXAMPLE MINIMAX REGRET CONT Step 2 Identify the worst regret for each alternative Regrets Alternatives Low Moderate High Small Facility 0 2 6 3 0 4 14 10 0 Medium Facility Large Facility DECISION MAKING UNDER RISK Decisions are some times made under risk the probability of occurrence for each state of nature can be estimated A widely applied criterion is expected monetary value EMV EMV Determine the expected payoff of each alternative Choose the alternative that has the best expected payoff This approach is most appropriate when the decision maker is neither risk averse nor risk seeking DECISION MAKING UNDER RISK EXAMPLE 5S 4 PAGE 225 Using EMV identify the best alternative with these probabilities Low 0 30 Possible Future Demand Moderate 0 50 Alternatives High 0 20 Small Facility Medium Facility Large


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