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

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