CHAPTER 2: DECISION MAKING

ENGR. JEFFREY T. LEONEN

DECISION MAKING AS A MANAGEMENT

 Decision must be made at a various level 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.
DECISION MAKING AS A MANAGEMENT

 It is understandable for managers to make wrong decision 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 AS A MANAGEMENT

 Management must strive to choose a decision option as correctly as

possible.
 Since they have the 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.
DECISION MAKING AS A MANAGEMENT

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 air-conditioning
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
requested item due to budgetary constraints.
DECISION MAKING AS A MANAGEMENT

 The production manager must now make a decision. His/her choice,

however must be based on sound arguments for he/she will be held
responsible, later on, if he made the wrong choice.

SEATWORK:
If you are the manager, what will you do? Explain your answer.
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.
 Decision are made at various management levels (i.e., top, middle, lower levels) and at
various management functions(i.e., planning, organizing, directing and controlling)
 Decision-making according to Nickels and others, “is the heart of all the
management function”
THE DECISION-MAKING PROCESS
 Rational decision-making, according to David H. Holt”, is a process
involving the following steps:
1. Diagnose the problem
2. Analyze the environment
3. Articulate problems or opportunity
4. Develop viable alternatives
5. Evaluate alternatives
6. Make a choice
7. Implement decision
8. Evaluate and adapt decision results
DIAGNOSE THE PROBLEM

 If a manager wants to make an intelligent decision, his first move must be

to identify the problem.
 If the manager fails in this aspect, it is almost impossible to succeed in
the subsequent steps.
 An expert once said “identification of the problem is tantamount to
having the problem half-solved”.
 What is a problem? A problem exists when there is a difference
between an actual situation and a desired situation.
ANALYZE THE ENVIRONMENT

 The environment where the organization is situated plays a very

significant role in success or failure of such organization. It is therefore,
very important that an analysis of the environment be undertaken.
 The objective the environmental analysis is the identification of
constraints, which may be spelled out as either internal or external
limitations.
ANALYZE THE ENVIRONMENT

 Example of internal limitations:

1. Limited funds available for the purchase of equipment.
2. Limited training on the part of employees.
3. Ill-designed facilities
 Example of external limitations:
1. Patents are controlled by other organizations.
2. A very limited market for the company’s products and services exits.
3. Strict enforcement of local zoning regulations
ANALYZE THE ENVIRONMENT

 If 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

 An illustration of a failure to analyze the environment is as follows:

The president of a new chemical manufacturing company made a
decision to locate his factory 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.
ANALYZE THE ENVIRONMENT

 This is a clear example of the cost associated with management disregarding

environment when decisions are made. In this case, the president did not
consider what the residents could do.

 Components of environment
1. Internal – refers to organizational activities within a firm that surrounds the
decision-making.
2. External – refers to that are outside the organization and not typically within
the short-run control of top management
DEVELOP VIABLE ALTERNATIVES

 Oftentimes, problems may be solved by any of the solutions offered. The best
among the alternative solutions must be considered by a management.
 This is made possible by using procedure with the following steps:
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.
DEVELOP VIABLE ALTERNATIVES

To illustrate:
 An engineering firm has a problem of
increasing its output by 30%. This is the
result of a new agreement between the
firm and one of its clients.

Figure 1.1 The Engineering Firm and the

Internal Environment in Decision-Making
DEVELOP VIABLE ALTERNATIVES

Figure 1.2 The Engineering Firm and

the External Environment in Decision
-Making

SEATWORK:
List 5 solutions on the previous
problem and identify if it is viable.
DEVELOP VIABLE ALTERNATIVES

 The list of solution prepared by the engineering manager shows the following
alternative course of action:
1. Improve the capacity of the firm by hiring more workers and building additional
facilities;
2. Secure the service of a subcontractor;
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 three were deemed to be viable.
 The last two were deleted because of adverse effects 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 alternative
presented.
 Souder suggest that “each alternative must be analyzed and evaluated in
terms of its value, cost and risk characteristics”.
EVALUATE ALTERNATIVES
 The value of the alternatives refer to the benefits that can be expected. An
example may described as follows: a net profit of ₱10 million per year if the
alternative is chosen
 The cost of the alternative refers to out-of-pocket costs(like ₱100 million
for construction of facilities), opportunity costs(like the opportunity to earn
interest of ₱2 million per year if money is invested elsewhere), and follow-on
cost(like ₱2 million per year for maintenance of facilities constructed).
 The risk characteristics refer to the likelihood of achieving the goals of
alternatives.
 If the probability of a net profit of a net profit of ₱10 million is only 10
percent, then the decision-maker may opt to consider alternative with a ₱5
million profit with an 80 percent of probability of success.
EVALUATE ALTERNATIVES

 Another example of an evaluation of alternatives:

 An engineer manager is faced with a problem of choosing between three
application to fill up a lone vacancy for junior engineer. He will have to up
the certain criteria for evaluating the applicants. If the evaluation is not
done by a professional human resource officer, then the engineer
manager will be forced to use predetermined criteria.
EVALUATE ALTERNATIVES

 A typical evaluation of job applicants will appear as follows:

MAKE A CHOICE

 After alternative 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
 Choice-making refers to the process of selecting among alternatives
representing potential solutions to a problem.
MAKE A CHOICE

 At this point, Webber advised that “…particular effort should be made

to identify all significant consequence of each choice”.

 To make the selection process easier, the alternatives can be ranked from
best to worst on the basis of some factors like benefit, cost or risk.
IMPLEMENT DECISION

 After 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 available so that the decision may
be properly implemented.
 Those who will be involved in implementation, according to Aldag and Stearns,
“must understand and accept solution”.
EVALUATE AND ADOPT RESULTS

 In implementing the decision, the result expected may or may not

happen.
 It is, therefore, important for the manager to use control and feedback
mechanism 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 keeping
with the goals and objectives originally specified.
EVALUATE AND ADOPT RESULTS

 Control refers to the actions made to endure that activities performed

match the desired activities or goals, that have been set.
 In this 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, Ferrel and Hirt suggest that further analysis is
necessary.
APPROACHES IN SOLVING PROBLEMS

 In decision-making, the engineer manager is faced with problem which

may either be simple or complex.
 To provide him with some guide, he must be familiar with the following
approaches:
1. Qualitative evaluation
2. Quantitative evaluation
APPROACHES IN SOLVING PROBLEMS

 Qualitative evaluation refers to evaluation of alternatives using intuition

judgement.
 Stevenson states that managers tend to use qualitative approach when:
1. The problem is fairly simple
2. The problem is familiar
3. The costs involved are not great
4. Immediate decision is needed
APPROACHES IN SOLVING PROBLEMS

Example:
A factory operates on three shifts with the following schedule
 First shift – 6:00 A.M. to 2:00 P.M.
 Second Shift – 2:00 P.M. to 10:00 P.M.
 Third shift – 10:00 P.M. to 6:00 P.M.
 Each shift is consist of 200 workers manning 200 machines. On September 16,
the operations went smoothly until the factory manager, an industrial engineer
was notified at 1:00 P.M. that five of the workers assigned to second shift could
not report to work because of injuries sustained in a traffic accident while
they were on the way to the factory
APPROACHES IN SOLVING PROBLEMS

Because of time constraints, the manager made an instant decision on who

the first shift workers would work overtime to man the five machine.
QUANTITATIVE MODELS FOR DECISION-MAKING

 The type of quantitative techniques 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
QUANTITATIVE MODELS FOR DECISION-MAKING

 Inventory models consist of several types all designed to help the engineer manager
make decision 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 total yearly cost of placing
orders and carrying the items 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 to suppliers.
QUANTITATIVE MODELS FOR DECISION-MAKING

 The Queuing theory is one that describe how to determine the number of service
units will minimize both customer waiting time and cost service.
 The queuing theory is applicable to companies where waiting lines are common
situation.
 Example:
1. Cars waiting for service at car service center
2. Ships and barges waiting at the harbor for loading and unloading by dock-workers
3. Programs to be run in a computer system that process jobs
QUANTITATIVE MODELS FOR DECISION-MAKING

 Network models – these models where large complex task are broken into smaller
segments that can managed independently.
 The two most prominent network models are:
1. The Program Evaluation Review Technique(PERT) – a technique which enables
engineer manager to schedule, monitor, and control large and complex projects by
employing three times estimates for each activity.
2. The Critical Path Method – this is a network technique using only one time factor
per activity that enables engineer managers to schedule, monitor, and control large
complex numbers.
QUANTITATIVE MODELS FOR DECISION-MAKING

 Forecasting – there are instance when engineer managers make decisions that will
have implications in the future.
 Example:
 A manufacturing firm must put up a capacity which is sufficient to produce the
demand requirements of customers within the next 12 months. As such, manpower
and facilities must be produced before the start of the operations. To make decision
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”,
QUANTITATIVE MODELS FOR DECISION-MAKING

Regression Analysis
 The regression model is a forecasting method that examines the association between
two or more variables.
 It uses data 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.
QUANTITATIVE MODELS FOR DECISION-MAKING

Simulation
 Simulation is a model constructed to represent reality, on which conclusions about
real-life problems can be used.
 It is highly sophisticated tool by means of which the decision maker develops a
mathematical model of the system under consideration.
 Simulation does not guarantee an optimum solution, but it can evaluate the
alternatives fed into the process by decision-maker.
QUANTITATIVE MODELS FOR DECISION-MAKING

Linear Programming – is a quantitative technique that is used to produce an optimum

solution within the bounds imposed by constraints upon the decision.
 Lincar programming is very useful as a decision-making tool when supply and demand
limitations at plants, warehouse, or market areas are constraints upon the system.
Sampling Theory – is a quantitative technique where samples of population are
statistically determined to be used for a number of processes, such as quality control
and marketing research.
 When data gathering is expensive, sampling provides alternative.
 Sampling, in effect, saves time and money
QUANTITATIVE MODELS FOR DECISION-MAKING

Statistical Decision-Theory
 Decision theory refers to the “rational way to conceptualize, analyze, and solve problems in
situation involving limited or partial information about the decision environment.
 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 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.