INTRODUCTION TO

DECISION ANALYSIS
Safriyana
[email protected]
▪ Help us make a better business decision that
makes companies stay competitive in a
dynamically-changing environment

▪ Decision makers usually face situation which

have characteristics: unique, uncertain,
complex, variable terms (long, medium, short),
and multi-level structures.
 Decision Structure
Management Function Hierarchy Characteristics
• Planning
Top • Directive
• “Staffing” Level
• Strategic
• Organizing Up Medium
Low • Tactical
• Actuating
• Operational
• Monitoring Lower
• Evaluation

➢ Methods
1. Intuitive decision
2. Normative decision (Decision Analysis)
 Normative Decision Analysis
Environment
Intelligence • Alternatives
• Uncertain
• Choice
• Complex • Possibilities
Preference • Model structure
• Dynamic • Infor.
• Evaluation Logical Decision Result
• Competition
Philosophic• Preference • Time preference
• Limited
• Risk preference

Information
Sensitivity

Wonder Thinking Un- Inner Action Prize Happy

comfort looking Blame Sad

REACTION

Fig. Flow of rational decision making

Series of Decision-Making Structure

Objective to be Achieved
Problems to be solved

Performance Decision
Criteria Maker

Alternatives
Tools/Plan/…
Decision Components

➢ Alternative

➢ Criteria/Factors

➢ Evaluation Model

➢ Computational Model

➢ Decision Makers Types

 Decision Alternative
A set of option which we either wish to prioritize
and/or from which you wish to choose a best one with
respect to a specified set of criteria.

Examples:

. Choosing best product: Apple, Samsung, Oppo

. Choosing best supplier: Supplier A, Sup. B, Sup. C

. Choosing best industrial location: Bogor, Solo, Aceh

 Decision Criteria
Factors on which we base our decision– what we think is
important to consider when making an informed choice.

Examples:

. Criteria for choosing product: price, quality, …..

. Criteria for choosing supplier: accuracy, punctuality, …

. Criteria for choosing industrial location: reachability,

….
▪ In this scenario, the person in charge of making the
decision knows for sure the consequence of each
alternative, strategy or course of action to be taken
▪ In these circumstances, it is possible to foresee (if not
control) the facts and the results
▪ The decision-making process will be relatively
simple: the one that maximizes utility and responds
better to the objectives set will be chosen.
▪ The most common application
▪ Allocating limited resources among competing activities
in a best possible (i.e.optimal) way
▪ Uses a mathematical model to describe the levels
of concern
▪ Linear means mathematical functions in the model
are required to be linear functions
▪ Programming as a synonym for planning
▪ LP involves the planning of activities to obtain an
optimal result i.e. a result that teaches the
specified goal best among all feasible alternatives
 Objective
Function
Maximize (or minimize) Z = c1 X1 + c2 X2 + ….+ cn Xn

Subject to: Constraints

a11 X1 + a12 X2 + ...+ a1n Xn ≤ b1
a21 X1 + a22 X2 + …+ a2n Xn ≤ b2
. Functional
constraints
.
.
am1 X1 + am2 X2 + …+ amn Xn ≤ bm

Non-negativity
X1 ≥ 0, X2 ≥ 0, … , Xn ≥ 0 constraints
▪ Z = value of overall measure of performance
▪ xj = level of activity j (for j = 1, 2, …., n)
▪ cj = increase in Z that would result from each unit increase in
level of activity j
▪ bi= amount of resource i that is available for allocation of
activities (for i = 1, 2, …., m)
▪ aij = amount of resource i consumed by each unit of activity j

▪ x1, x2,…………. xn → decision variables

▪ cj, bj, aj → input constants for the model, parameters of the model
▪ The WYNDOR GLASS Co. produces high-quality glass products,
including windows and door
▪ It has three plants
▪ Plant 1 makes aluminum frames and hardware
▪ Plant 2 makes wood frames
▪ Plant 3 produces the glass and assembles the products

▪ Product 1: an 8-foot glass door with aluminum framing

▪ Requires production capacity in plants 1 and 3

▪ Product 2: a 4 x 6 foot double-hung wood-framed window

▪ Requires plants 2 and plants 3

▪ Problems are having profitable mix of products that compete for

the same resources
▪ Problem:
▪ Determine that the production rates should be for the two products
in order to maximize their total profit, subject to the restrictions
imposed by the limited production capacities available in the three
plants.
▪ Each product will be produced in batches of 20, so the production
rate is defined as the number of batches produced per week)
▪ Any combination of production rates that satisfies these restrictions
is permitted, including producing none of one product and as much
as possible of the other
▪ Data that are needed:
▪ Number of hours of production time available per week in each
plant for these new products
▪ Number of hours of production time used in each plant for each
batch produced of each new product
▪ Profit per batch produced of each new product
 Production time per Batch,
Hours
Production Time
Plant Product 1 Product 2
Available per week, hours
1 1 0 4
2 0 2 12
3 3 2 18
Profit per batch $3,000 $5,000

• Plant 1: X1 ≤ 4
• Plant 2: 2X2 ≤ 12
• Plant 3: 3X1 + 2X2≤ 18
• X1 ≥ 0, X2 ≥ 0
▪ X1= number of batches of product 1 produced per week
▪ X2 = number of batches of product 2 produced per week
▪ Z = total profit per week (in thousands of dollars) from producing these two
products

Thus, X1 dan X2 are the decision variables for the model.

Z = 3 X1 + 5 X2

Maximize Z = 3 X1 + 5 X2
Subject to:
▪ X1 ≤ 4
▪ 2X2 ≤ 12
▪ 3X1 + 2X2 ≤ 18
and
▪ X1 ≥ 0, X2 ≥ 0
Maximize Z = 3 X1 + 5 X2
Subject to:
X1 ≤ 4
2X2 ≤ 12
3X1 + 2X2 ≤ 18
and
X1 ≥ 0, X2 ≥ 0
Maximize Z = 3 X1 + 5 X2
Subject to:
X1 ≤ 4
2X2 ≤ 12
3X1 + 2X2 ≤ 18
and
X1 ≥ 0, X2 ≥ 0
Maximize Z = 3 X1 + 5 X2
Subject to:
X1 ≤ 4
2X2 ≤ 12
3X1 + 2X2 ≤ 18
and
X1 ≥ 0, X2 ≥ 0
▪ The optimal solution is
▪ X1 = 2, and X2 = 6, with Z = 36

▪ This indicates that Wyndor Glass Co should produce

▪ Product 1 at the rate of 2 batches per week
▪ Product 2 at the rate of 6 batches per week
▪ With a resulting total profit of $ 36,000 per week
▪ According to this model, no other mix of the two products would be
so profitable
▪ In this case, each course of action has several
possible consequences and the person in
charge of making the decision does not know
the probability of each of them
▪ It is therefore a scenario poor in information,
as opposed to the previous case
▪ The decision is complicated because past
experiences do not make it possible to predict
the future and there are many uncontrollable
variables.
Example: deciding where to eat dinner

▪ Basic setup:
▪ Trees run left to right
Japanese
chronologically.
North Side ▪ Decision nodes are
represented as squares.
Greek
▪ Possible choices are
represented as lines (also
Vietnam called branches).
South Side ▪ The value associated with
each choice is at the end of
Thai the branch.
Example: deciding where to eat dinner

Speed
Japanese
1
North Side
Value =2
Greek
2
Value =4
Vietnam
4
South Side
Value =4
Thai
3
 n
E V ( x ) =  p ( x i) x i
i= 1
w h e re
x i = o u tc o m e i
p ( x i) = p r o b a b ilit y o f o u t c o m e i
 States Of Nature
Good Foreign Poor Foreign
Decision Competitive Condition Competitive Condition

Expand $ 800,000 $ 500,000

Maintain status quo 1,300,000 -150,000
Sell now 320,000 320,000
 70% probability of good foreign competition
30% probability of poor foreign competition

EV(expand) $ 800,000 (0.70) + 500,000 (0.30)

= $710,000
EV(status quo) $1,300,000 (0.70) - 150,000 (0.30)
= 865,000 Maximum
EV(sell) $ 320,000 (0.70) + 320,000 (0.30)
= 320,000

Decision: Maintain status quo

 Served Customers

Queueing System

Queue
C S
Customers CCCCCCC C S Service
C S facility
C S

Served Customers
L = Expected number of customers in the system, including
those being served (the symbol L comes from Line Length).
Lq = Expected number of customers in the queue, which
excludes customers being served.
W = Expected waiting time in the system (including service
time) for an individual customer (the symbol W comes from
Waiting time).
Wq = Expected waiting time in the queue (excludes service
time) for an individual customer.
▪ Key problems in business, engineering and
sciences can be formulated in terms of:

1. A set of known alternatives and

2. A set of known criteria
 Weight
Criteria A1 A2 → Aj
(%)
C1 w1 a11 a12 a1j
C2 w2 a21 a22 a2j

Ci wi ai1 ai2 aij

w1a1j +
wa + w1a12 + w2a22
Total weighted- 1 11 w2a2j + …..
w a + ….. + ….. + wiai2
score 2 21 + wiaij
+ wiai1

Select the alternative with the highest total weighted-score