HUT310

MANAGEMENT FOR ENGINEERS

Module 3 – PRODUCTIVITYAND
DECISION MAKING
 DECISION MAKING
• It is defined as the selection of a course of action
from among alternatives.
• A plan cannot be said to exist unless a decision has
been made.
• People must have a clear understanding of alternative
courses by which a goal can be reached under
existing circumstances and limitations.
• They must find a best solution by selecting the
alternative that most effectively satisfies goal
achievement.
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 DECISION MAKING PROCESS
1. Defining the problem.
2. Analyzing the problem.
3. Developing alternative solutions (Principle of
limiting factor).
4. Deciding upon the best solution.
5. Implementing the decision.
6. Follow up.

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DECISION MAKING PROCESS

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 FACTORS AFFECTING DECISION
MAKING
• Decision situation.
• Decision makers.
• Time.
• Decision support techniques.
• People affected by the decision.
• Decision criteria.

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CHARACTERISTICS OF DECISION
MAKING
• Decision making implies choice.
• Continuous activity/process.
• Inbuilt uncertainty and risk.
• Goal oriented process.
• Time consuming activity.

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 IMPORTANCE OF DECISION
MAKING
• Better utilization of resources.
• Facing problems and challenges.
• Achieving objectives.
• Increases efficiency.
• Facilitate innovation.
• Motivates employees.

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 LIMITATIONS OF DECISION
MAKING
• Time consuming.
• Compromised decision.
• Biased decisions.
• Limited analysis.
• Uncontrollable environmental factors.
• Uncertain future.

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 MODELS OF DECISION MAKING
• Decision making models are tools used to
make effective decisions.
• Models suggest different approaches to
decision making, depending on the context and
nature of decision that needs to be made.
– RATIONAL DECISION MODEL
– INTUITIVE DECISION MODEL
– RECOGNITION-PRIMED DECISION
MODEL

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 RATIONAL DECISION MODEL
(Classical Model)
• This model follow logical steps to find a
solution to a problem.
• Steps followed in rational decision making
model are:
– Define the goal or obstacle.
– Determine the relevant information.
– Create list of options.
– Arrange options by their values.
– Choose the best option.

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 INTUITIVE DECISION MODEL
• In this model, feelings and instincts are used to
make decisions.
• This is less structured because of lack of time and
may use previous knowledge of similar goals or
obstacles to determine a useful solution.
• Steps followed are:
– Define the goal or obstacle.
– Identify similar goals or obstacles.
– Determine a usable solution.

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 RECOGNITION-PRIMED MODEL
• Similar to intuitive model except that this model
is little more structured.
• Steps followed are:
– Define the goal or obstacle.
– Consider relevant information and similar situations.
– Create a potential solution.
– Consider if the solution works.
– If needed, change the solution.
– Finalize your decision and take action.

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 EVALUATION OF ALTERNATIVES

• Point of ultimate decision making.

• Quantitative and Qualitative factors.
• Techniques for evaluation of alternatives
– Marginal Analysis
– Cost Benefit Analysis (CBA) = Benefit/Cost

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 SELECTING FROMALTERNATIVES

•Experience

•Experimentation

•Research and
Analysis

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 TYPES OF DECISIONS
PROGRAMMED DECISIONS NON PROGRAMMED DECISIONS

• These decisions are • These decisions are non

recurring in nature. recurring.
• Problems are structured. • Problems are unstructured.
• Decisions are relatively
• Decisions are simple and
complex and have a long
have a small impact. term impact.
• Decisions are guided by • Decisions are guided by the
organizational policies, factors of particular
procedures, etc. situation.
• Decisions are taken by • Decisions are taken by top
lower management. level management.

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 TECHNIQUES FOR NON
PROGRAMMED DECISIONS
• Delphi Method
• Nominal Group Technique
• Experience
• Quantitative Decision making tools
• Quality Circles

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 DECISION MAKING
ENVIRONMENT
• Decision making under RISK.
• Decision making under CERTAINITY.
• Decision making under UNCERTAINITY.

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 RISK
• Risk refers to a decision making situation where
there are different possible outcomes and the
probabilities of these outcomes can be measured
in some way.
• It involves choices with multiple outcomes where
the probability of each outcome is known or can
be estimated.
• Every business involves risks and most people do
not like being involved in any risky enterprise.
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 TYPES OF RISKS

TYPES OF RISKS

SYSTEMTIC UNSYSTEMATIC

Market Inflation Interest

risk risk rate risk Business Credit risk Liquidity
risk risk

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 DECISION MAKING
ENVIRONMENT
• Decision-making under Certainty:
– A condition of certainty exists when the decision-maker
knows with reasonable certainty what the alternatives are,
what conditions are associated with each alternative, and
the outcome of each alternative.
– Under conditions of certainty, accurate, measurable, and
reliable information on which to base decisions is available.
– The cause and effect relationships are known and the future
is highly predictable under conditions of certainty.
– Such conditions exist in case of routine and repetitive
decisions concerning the day-to-day operations of the
business.
– Eg :- LINEAR PROGRAMMING (LP)

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 DECISION MAKING
ENVIRONMENT
• Decision-making under Risk:
– When a manager lacks perfect information or whenever an
information asymmetry exists, risk arises.
– Under a state of risk, the decision maker has incomplete
information about available alternatives but has a good idea of
the probability of outcomes for each alternative.
– While making decisions under a state of risk, managers must
determine the probability associated with each alternative on the
basis of the available information and his experience.
– Eg :-
1. EXPECTED MONETARY VALUE (EMV)
2. EXPECTED OPPORTUNITY LOSS (EOL)
3. DECISION TREE ANALYSIS

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 DECISION MAKING
ENVIRONMENT
• Decision-making under Uncertainty:
– Conditions of uncertainty exist when the future environment is unpredictable
and everything is in a state of flux.
– The decision-maker is not aware of all available alternatives, the risks
associated with each, and the consequences of each alternative or their
probabilities.
– The manager does not possess complete information about the alternatives and
whatever information is available, may not be completely reliable.
– In the face of such uncertainty, managers need to make certain assumptions
about the situation in order to provide a reasonable framework for decision-
making.
– They have to depend upon their judgment and experience for making decisions.
– Eg :-
1. MAXI-MAX CRITERION (OPTIMISTIC APPROACH)
2. MAXI-MIN CRITERION (PESSIMISTIC APPROACH)
3. MINI-MAX CRITERION (COST ANALYSIS)
4. LAPLACE CRITERION (EQUAL PROBABALITY APPROACH)
5. MINIMAX REGRET (SAVAGE PRINCIPLE)

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DECISION MAKING
ENVIRONMENT

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DECISION
TREE
ANALYSIS
 DECISION TREEANALYSIS
• A decision tree is the graphical depiction of all the
possibilities or outcomes to solve a specific issue or avail
a potential opportunity. It is a useful financial tool which
visually facilitates the classification of all the probable
results in a given situation.
• This graphic representation is characterized by a tree-like
structure in which the problems in decision making can
be seen in the form of a flowchart, each with branches for
alternative choices.
• A Decision Tree Analysis is created by answering a
number of questions that are continued after each
affirmative or negative answer until a final choice can be
made.
 DECISION TREEANALYSIS
• This Analysis is commonly represented by lines, squares and circles.
– The squares represent decisions
– The lines represent consequences
– The circles represent uncertain outcomes.
– By keeping the lines as far apart as possible, there will be plenty of
space to add new considerations and ideas.

• The representation of the decision tree can be created in four steps:

1. Describe the decision that needs to be made in the square.
2. Draw various lines from the square and write possible solutions on
each of the lines.
3. Put the outcome of the solution at the end of the line. Uncertain or
unclear decisions are put in a circle. When a solution leads to a new
decision, the latter can be put in a new square.
4. Each of the squares and circles are reviewed critically so that a final
choice can be made.
 PRODUCTIVITY
&
COMPETITIVENESS
 PRODUCTIVITY
• Productivity is defined as an index that measures output
(goods and services) relative to the input (labor, materials,
energy, etc. used to produce output).
• It is the measure of how specified resources are managed to
accomplish timely objectives as stated in terms of quantity and
quality.
Productivity = Output / Input
• Increase in production may or may not be an indicator of
increase in productivity.
• Objective of productivity measurement
– Study the performance of the system.
– Compare with different systems.
– Compare actual productivity with desired productivity.

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 BENEFITS OF PRODUCTIVITY
MEASUREMENT
• Higher profit
• Employee’s welfare
• Better return
• Nice relations
• Customer satisfaction
• Good credit rating
• Goodwill
• Low labour turnover
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 FACTORS AFFECTING
PRODUCTIVITY
Controllable Factors Uncontrollable Factors
• Production factors • Natural resources
• Organizational factors • Government and
• Finance factors Infrastructure
• Technological factors
• Personnel factors
• Managerial factors

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 MEASUREMENT OF
PRODUCTIVITY
• SINGLE FACTOR PRODUCTIVITY
• MULTI FACTOR PRODUCTIVITY
• TOTAL PRODUCTIVITY
• TOTAL FACTOR PRODUCTIVITY

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 SINGLE FACTOR PRODUCTIVITY
• When consumption of only one resource is taken to calculate
the productivity, it is called single factor productivity or partial
productivity.
• Comparison of output with all the input factors ( like labour,
material, machinery, etc.) taken together is called total
productivity index and comparison of output with anyone of
the input factors keeping other factors constant is called partial
productivity index.
Single factor productivity = Total output / Individual input
• Following types are present
– Capital productivity
– Labour productivity
– Material productivity
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 MULTI FACTOR PRODUCTIVITY
• This type utilizes more than a single factor.
• It is the ratio of total output to a subset of inputs.
• Multi factor productivity measures reflect the joint
effects of many factors including new technologies,
economics of sale, managerial skill and changes in
the organization of production.

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 TOTAL PRODUCTIVITY
• It is the ratio of total output to the sum of all input
factors.
Total productivity = Total output / Total input
• Total productivity index gives the absolute
measurement between the output and the input

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 TOTAL FACTOR PRODUCTIVITY
• It is defined as the ratio of net output o the sum of
associated labour and capital (factor) inputs.
TFP = Net output / (Labour + Capital) inputs
• Here, Net output = Total output – Intermediate goods
or services purchased.

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 PROBLEMS IN MEASURING
PRODUCTIVITY
• Difficulty in measuring inputs
• Difficulty in measuring outputs
• Factorial productivity
• Changing conditions
• Service sector
• Different periods
• Difficulty in measuring man-hours
• Technological change

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 COMPETITIVENESS
• It is the ability and performance of a firm to sell and
supply goods and services in a given market, in
relation to the ability and performance of other firms.
• Competitive advantage is the leverage a business has
over its competitors.
– Cost / Price
– Quality
– Product / Service differentiation
– Flexibility / Service

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