UNIT 2

DECISION-
MAKING
DECISION-MAKING

Decision Making as a Management Responsibility

What is Decision Making?
The Decision Making Process
Approaches in Solving Problems
Quantitative Models for Decision Making
 DECISION-MAKING AS A
MANAGEMENT RESPONSIBILITY

Decisions must be made at various levels in the workplace. They are also made at the various stages in the
management process. If certain resources must be used, someone must make a decision authorizing certain
persons to appropriate such resources.

Decision-making is a responsibility of the engineer manager. It is

understandable for managers to make wrong decisions at times. The
wise manager will correct them as soon as they are identified. The
bigger issue is the manager who cannot or do not want to make
decisions. Delaney concludes that this type of managers are dangerous
and "should be removed from their position as soon as possible.
Decision-Making in Management
Management must strive to choose a decision option as correctly as possible.
Since they have that power, they are responsible for whatever outcome their decisions bring.
The higher the management level is, the bigger and the more complicated decision-making becomes.

An example may be provided as follows:

The production manager of a certain company has received a written request from a section head regarding
the purchase of an airconditioning unit. Almost simultaneously, another request from another section was
forwarded to him requiring the purchase of a forklift. The production manager was informed by his
superior that he can only buy one of the two requested items due to budgetary constraints.

The production manager must now make a decision. His choice, however, must be based on sound
arguments for he will be held responsible, later on, if he had made the wrong choice.
 WHAT IS DECISION-MAKING?
Decision-making may be defined as "the process of identifying and choosing alternative courses of
action in a manner appropriate to the demands of the situation.

The definition indicates that the engineer manager must adapt a certain procedure designed to
determine the best option available to solve certain problems.

Decisions are made at various management levels (ie, top, middle, and lower levels) and at various
management functions (le., planning, organizing, directing, and controlling). Decision-making,
according to Nickels and others, "is the heart of all the management functions."
THE DECISION-MAKING PROCESS

Rational decision-making, according to David H. Holt, is a

process involving the following steps:
Diagnose problem
Analyze environment
Articulate problem or opportunity
Develop viable alternatives
Evaluate alternatives
Make a choice
Implement decision
Evaluate and adapt decision results
 A problem arises when there's a gap between the current
situation and the desired one. Example: A construction
company has a contract to build a 25-storey building but
hasn't started construction yet. The desired situation is the
finished building, but the actual situation is different,
creating a problem: the construction of the building.
DIAGNOSE PROBLEM
A manager's first step towards making an intelligent
decision: Identify the problem.
Failure to identify the problem greatly hampers success in
subsequent steps.
Expert opinion: "Identification of the problem is
tantamount to having the problem half-solved."
 Identifying the problem is crucial for intelligent decision-
making. It's the disparity between the current and desired
situations that defines a problem. For instance, a
construction company having a contract for a 25-storey
DIAGNOSE PROBLEM building without any construction progress signifies a
problem in achieving the desired outcome.
ANALYZE THE ENVIRONMENT
The objective of environmental analysis is the identification of constraints, which may be spelled out as
either internal or external limitations.

Conponents of the Environment:

INTERNAL environment - refers to organizational activities within a firm that surrounds decision-making."
Shown in Figure 2.1 are the important aspects of the internal environment.

Example of internal limitations are as follows:

1. Limited funds available for the purchase of equipment.

2. Limited training on the part of employees.
3. III-designed facilities.
ANALYZE THE ENVIRONMENT
Figure 2.1 The Engineering Firm and the Internal Environment in Decision-Making

THE ENGINEERING FIRM

INTERNAL ENVIRONMENT
• Organizational Aspects - like
org. structure, policies,
EXTERNAL
procedures, rules, ability of
ENVIRONMENT
management, etc.
• Marketing Aspects - like
product strategy, promotion
strategy, etc.
• Personnel Aspects - like DECISION
recruitment practices, incentive
systems, etc.
• Production Aspects - like plant
facility layout, inventory EXTERNAL
control, etc. ENVIRONMENT
• Financial Aspects - like
liquidity, profitability, etc.
ANALYZE THE ENVIRONMENT
EXTERNAL environment - refers to variables that are outside the organization and not typically within the
short-ran control of top management. Figure 2.2 shows the forces comprising the external environment of
the firm.

Examples of external limitations are as follows:

1. Patents are controlled by other organizations.

2. Avery limited market for the company's products and services exists.
3. Strict enforcement of local zoning regulations.

When decisions are to be made, the internal and external limitations must be considered. It may be costly,
later on, to alter a decision because of a constraint that has not been previously identified.
ANALYZE THE ENVIRONMENT
Figure 2.2 The Engineering Firm and Its External Environment

Engineers Government Labot Unions

Clients ENGINEERING FIRM Suppliers

Competitors Public Banks

ANALYZE THE ENVIRONMENT
An illustration of failure to analyze the environment is as follows:

The president of a new chemical manufacturing company made a decision to locate his factory in a place
adjacent to a thickly populated area. Construction of the building was made with precision and was finished
in a short period. When the clearance for the commencement of operation was sought from local
authorities, this could not be given. It turned out that the residents opposed the operation of the firm and
made sure that no clearance is given.

The president decided to relocate the factory but not after much time and money has been lost. This is a
clear example of the cost associated with management disregarding the environment when decisions are
made. In this case, the president did not consider what the resident would do.
 Oftentimes, problems may be solved by any of the solutions
offered. The best among the alternative solutions must be
considered by management. This is made possible by using a

DEVELOP VIABLE procedure with the following steps:

ALTERNATIVE
1. Prepare a list of alternative solutions.
2. Determine the viability of each solutions.
3. Revise the list by striking out those which are not viable.
 To illustrate:

An engineering firm has a problem of increa sing its output

by 30%. This is the result of a new agreement between the
firm and one of its clients.

The list of solutions prepared by the engineering manager

DEVELOP VIABLE shows the following alternative courses of action:
ALTERNATIVE 1. improve the capacity of the firm by hiring more workers
and building additional facilities;
2. secure the services of subcontractors;
3. buy the needed additional output from another firm;
4. Stop serving some of the company's customers; and
5. delay servicing some clients.

The list was revised and only the first three were deemed to
be viable. The last two were deleted because of adverse
effecta in the long-run profitability of the firm.
 EVALUATE ALTERNATIVES
After determining the viability of the alternatives and a revised list has been made, an evaluation of the
remaining alternatives is necessary. This is important because the next step involves making a choice.
Proper evaluation makes choosing the right solution less difficult. How the alternatives will be evaluated
will depend
on the nature of the problem, the objectives of the firm, and the nature of alternatives presented.

Souder suggests that “each alternative must be analyzed and evaluated in terms of its value, cost, and risk
characteristics. The value of the alternatives refers to benefits that
can be expected. An example may be described as follows: a net profit of P10 million per year if the
alternative is chosen.
 EVALUATE ALTERNATIVES
Another example of an evaluation of alternatives is shown below:

An engineer manager is faced with a problem of choosing between three applicants to fill up a lone vacancy
for a junior engineer. He will have to set up certain criteria for evaluating the applicants. If the evaluation is
not done by a professional human resources officer, then the engineer manager will be forced to use a
predetermined criteria.
 MAKE A CHOICE
After the alternatives have been evaluated, the decision-maker must now be ready to make a choice.
This is the point where he must be convinced that all the previous steps were correctly undertaken.

IMPLEMENT DECISION

After a decision has been made, implementation follows. This is necessary, or decision-making will be an
exercise in futility. Implementation refers to carrying out the decision so that the objectives sought will be
achieved. To make implementation effective, a plan must be devised.

At this stage, the resources must be made avail able so that the decision may be properly implemented.
Those who will be involved in implementation, accord- ing to Aldag and Stearns, must understand and
accept the solution."
EVALUATE AND ADAPT DECISION RESULTS

In implementing the decision, the results expected may or may not happen. It is, therefore, important for the
manager to use control and feedback mechanisms to ensure results and to provide information for future
decisions.

Feedback refers to the process which requires checking at each stage of the process to assure that the
alternatives generated, the criteria used in evaluation, and the solution selected for implementation are In
keeping with the goals and objectives originally specified.

Control refers to action made to ensure that activities performed match the desired activities or goals, that
have been set.

In this last stage of the decision-making process, the engineer manager will find out whether or not the
desired result is achieved. If the desired result is achieved, one may assume that the decision made was
good. If it was not achieved, Ferrell and Hirt suggest that further analysis is necessary. Figure 2.3 presents
an elaboration of this last step.
 In decision-making, the engineer manager is faced with
problems which may either be simple or complex. To provide
him with some guide, he must be familiar with the following
approaches:

1. Qualitative evaluation, and

2. Quantitative evaluation. Qualitative Evaluation. This term
APPROACHES IN refers to evaluation of alternatives using intuition and
SOLVING PROBLEMS subjective judgment. Stevenson states that managers tend to
use the qualitative approach when:

1. The problem is fairly simple.

2. The problem is familiar.
3. The costs involved are not great.
4. Immediate decisions are needed.
.
 An example of an evaluation using the
qualitative approach is as follows:
A factory operates on three shifts with
the following schedule:

First shift 6:00 A.M. to 2:00P.M.

Second shift- 2:00 PM. To 10:00 P.M.
Third shift 10:00 P.M. to 6:00 A.M.

FEED BACK AS A
Each shift consists of 200 workers
manning 200 machines. On

CONTROL MECHANISM
September 16, 1996, the operations
went smoothly until the factory

IN THE DECISION
manager, an industrial engineer, was
notified at 1:00P.M. that five of the

MAKING-PROCESS
workers assigned to the second shift
could not report for work because of
injuries sustained in a traffic accident
while they were on their way to the
factory.

Because of time constraints, the

manager made an instant decision on
who among the first shift workers
would work overtime to man the five
machines.
QUANTITATIVE MODELS FOR
DECISION MAKING
This type of quantitative technique which
may be useful in decision-making are as
follows:
1. Inventory Models
2. Queuing Theory
3. Network Models
4. Forecasting
5. Regression Analysis
6. Simulation
7. Linear Programming
8. Sampling Theory
9. Statistical Decision Theory
 INVENTORY MODELS
Inventory models consist of several types all designed to help the engineer manager make decisions
regarding inventory. They are as follows:

1. Economic order quantity model – this one is used to calculate the number of items that should be
ordered at one time to minimize the items in inventory.
2. Production order quantity model – this is an economic order quantity technique applied to production
orders.
3. Back order inventory model – this is an inventory model used for planned shortages.
4. Quantity discount model – an inventory model used to minimize the total cost when quantity discounts
are offered by suppliers.
 QUEUING THEORY
The queuing theory is one that describes how to determine the number of service units that will
minimize both customer waiting time and cost of service.
The queuing theory is applicable to companies where waiting lines are common situation. Examples
are cars waiting for service at a car service center, ships and barges waiting at the harbor for loading and
unloading by dock-workers, programs to be run in a computer system that processed jobs, etc.

NETWORK MODELS
These are models where large complex tasks are broken into smaller segments that can be managed
independently.
The two most prominent network models are:
1.The Program Evaluation Review Technique (PERT) – a technique which enables engineer managers to
schedule, monitor, and control large and complex projects by employing three time estimates for each
activity.
2.The Critical Path Method (CPM) – this is a network technique using only one time factor per activity that
enables engineer managers to schedule, monitor, and control large and complex projects.
 FORECASTING
There are instances when engineer managers make decisions that will have implications in the future.
A manufacturing firm, for example, must put up a capacity which is sufficient to produce the demand
requirements of customers within the next 12 months. As such, man-power and facilities must be procured
before the start of operations. To make decisions on capacity more effective, the engineer manager must be
provided with data on demand requirements for the next 12 months. This type of information may be
derived through forecasting.
Forecasting may be defined as “the collection of past and current information to make predictions
about the future.

REGRESSION ANALYSIS
The regression model is a forecasting method that examines the association between two or more
variables. It uses date from previous periods to predict future events.
Regression analysis may be simple or multiple depending on the number of independent variables
present. When one independent variable is involved, it is called simple regression; when two or more
independent variables are involved, it is called multiple regression.
 SIMULATION
Simulation is a model constructed to represent reality on which conclusions about a real-life problem
can be used. It is highly sophisticated tool by means which the decision maker develops a mathematical
model system under consideration.
Simulation does not guarantee an optimism solution, but it can evaluate the alternative fed into the
process by the decision-maker.

LINEAR PROGRAMMING
Linear programming is a quantitative technique that is used to produce an optimum solution within the
bounds imposed by constraints upon the decision. Linear programming is very solid as a decision -making
tool when supply and demand limitations at plants, warehouse, or market areas are constraints upon the
system.

SAMPLING THEORY
Sampling theory is a quantitative technique where samples of populations are statistically determined
to be used for a number of processes, such as quality control and marking.
 STATISTICAL DECISION-THEORY
Decision theory refers to the “rational way to conceptualize, analyze, and solve problems in situations
involving limited or partial information about the decision environment.
A more elaborate explanations of decision theory is the decision making process presented at the
beginning of this chapter. What has not been included in the discussion on the evaluation of alternatives,
but is very important, is subjecting the alternatives to Bayesian analysis.
The purpose of Bayesian analysis is to revise and update the initial assessment of the event probabilities
generated by the alternative solutions. This is achieved by the use of additional information.
When the decision-maker is able to assign probabilities to the various events, the use of probabilistic
decision rule, called the Bayes criterion , becomes possible. The Bayes criterion selects the decision
alternative having the maximum expected payoff, or the minimum expected loss if he is working with a loss
table.
 Decision-making is a very important function of the engineer
manager. His organization will rise or fall depending on the
outcomes of his decisions. It is, therefore, necessary for the
engineer manager to develop some skills in decision-making.
The process of identifying and choosing alternative courses
action in a manner appropriate to the demands of the situation is
called decision-making. It is done at various management levels

SUMMARY and functions.

The decision-making process consists of various steps, namely
diagnose problem, analyze environment, articulate problem or
opportunity, develop viable alternatives, evaluate alternatives,
make a choice, implement decision, and evaluate and adapt
decision results.
There are two approaches in solving problems, namely
qualitative evaluation and quantitative evaluation. Qualitative
evaluation is used for solving fairly simple problems, while
quantitative evaluation is applied to complex ones.
 ANY
QUESTIONS?