Unit 2

Decision Making and Operations

Management

1. Decision Making as
A Managerial Function

2. Decision 3. Capacity &

Models Systems Design

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 1

Decision Making as a Managerial Function

Thousand of business decisions are made everyday. Not all the decisions will
make or break the organization. But each one adds a measure of success or
failure to the operations.
Hence decision making essentially involves choosing a particular course of
action, after considering the possible alternatives.

1) MANAGEMENT AS A SCIENCE
 Management scientists hold that, education, scientific training and
experience can improve a person’s ability to make decisions.
 Scientific decision-making rests upon organized principles of knowledge
and depends largely upon the collection and analysis of Data.
 Computers are helpful in these tasks because they can easily store data
and use the more sophisticated and statistical analysis tools.
Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 1

Decision Making as a Managerial Function

 But not all variables are quantifiable, so decision-makers must still

use some value-based judgments in a decision process.

Characteristics of Management as a Science:

Management as a science is characterized by the following aspects:
1. Organized principle of knowledge.
2. Use of empirical data.
3. Systematic analysis of data.
4. Repeatable results.

2) CHARACTERISTICS OF DECISIONS
Operations decision range from simple judgments to complex analyses,
which also involves judgment.

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 1

Decision Making as a Managerial Function

The appropriateness of a given type of analysis depends on :

o 􀁺 The significant or long lasting decisions,
o 􀁺 The time availability and the cost of analysis, and
o 􀁺 The degree of complexity of the decision.

The significant or long lasting The degree of complexity of the

decisions deserve more decision increases when many
considerations than routine ones. variables are involved, variables are
Plant investment, which is a long- highly independent and the data
range decision, may deserve more describing the variables are
thorough analysis. uncertain.

The time availability and the

cost of analysis also influence
the amount of analysis.
Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 1

Decision Making as a Managerial Function

The Information Environment of Decisions:

Fig. 2.1 depicts the information environment of decisions. In some
situations a decision maker has complete information about the decision
variables; at the other extremes, no information is available.

Operations
management
decisions are
made all along
this continuum.

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 1

Decision Making as a Managerial Function

Complete certainty in decision-making requires data on all elements

in the population. If such data are not available, large samples lend
more certainty than do small ones. Beyond this, subjective information
is likely to be better than no data at all.

3) FRAMEWORK FOR DECISION-MAKING

An analytical and scientific framework for decision implies the following
systematic steps:
􀁺 Defining the problem.
􀁺 Establish the decision criteria.
􀁺 Formulation of a model.
􀁺 Generating alternatives .
􀁺 Evaluation of the alternatives.
􀁺 Implementation and monitoring.
Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 1

Decision Making as a Managerial Function

a. Defining the Problem b. Establishing the Decision Criteria

Defining the problem enables to Establish the decision criterion is

identify the relevant variables and important because the criterion reflects the
the cause of the problem. goals and purpose of the work efforts.
Careful definition of the problem is For many years profits served as a
crucial. Finding the root cause of a convenient and accepted goal for many
problem needs some questioning organisations based on economic theory.
and detective work.
Nowadays organisations have usually
If a problem defined is too narrow, multiple goals such as employee welfare,
relevant variable may be omitted. If it high productivity, stability, market share,
is broader, many tangible aspects growth, industrial leadership and other
may be included which leads to the
social objectives.
complex relationships.

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 1

Decision Making as a Managerial Function

c. Formulation of Model d. Generating alternatives

Formulation of a model lies at the Alternatives are generated by varying

heart of the scientific decision- the values of the parameters.
making process.
Mathematical and statistical models are
Model describes the essence of a particularly suitable for generating
problem or relationship by alternatives because they can be easily
abstracting relevant variables from modified.
the real world situation.
The model builder can experiment with
Models are used to simplify or a model by substituting different values
approximate reality, so the for controllable and uncontrollable
relationships can be expressed in variable.
tangible form and studied in isolation.

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 1

Decision Making as a Managerial Function

e. Evaluating of the Alternatives f. Implementation & Monitoring

Evaluation of the alternatives is Implementation and monitoring are
relatively objective in an analytical essential for completing the managerial
decision process because the criteria action.
for evaluating the alternatives have The best course of action or the solution
been precisely defined. to a problem determined through a
The best alternative is the one that model is implemented in the business
most closely satisfies the criteria. world.
Then the follow-up procedures are
required to ensure that the appropriate
action is taken. This stage includes an
analysis and evaluation of the solution
along with the recommendations for
changes or adjustments.

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 1

Decision Making as a Managerial Function

4) DECISION SUPPORT SYSTEM

 Decision support system (DSS) is computer-based systems designed to aid
decision-makers of any stage of the decision process in the development of
alternatives and evaluation of possible course of action.
 Their purpose is to provide the information and analytical support that
enables managers to better control and guide the decision process.
 Emphasis is given for giving useful information and appropriate quantitative
models that support the manager’s skills.
 DSS helps the managers to learn better, how to apply data processing and
modeling capabilities of computers to the analysis of ill-structured and
value based decisions.

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models
Decision Models Framework

The kind and amount of information

available helps to determine which
analytical methods are most
appropriate for modeling a given The degree of certainty is
decision. classified as:
Figure 2.1 illustrates some useful  Complete certainty.
quantitative methods that are  Risk and uncertainty.
classified according to the amount  Extreme uncertainty.
of certainty that exists with respect
to the decision variables and
possible outcomes. These analytical
techniques often serve as the basis
for formulating models, which help
to reach operational decisions.
Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models

Fig. 2.1
Quantitative methods as a function of
degree of certainty
Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models

(1) Decision-Making Under Uncertainty

No information is available on how likely the various states of nature are under
those conditions. Four possible decision criteria are Maximin, Maximax,
Laplace, and Minimax regret. These approaches can be defined as follows:
 Maximin:
Determine the worst possible pay-off for each alternative, and choose the
alternative that has the “best worst.” The Maximin approach is essentially a
pessimistic one because it takes into account only the worst possible outcome
for each alternative. The actual outcome may not be as bad as that, but this
approach establishes a “guaranteed minimum.”

 Maximax:
Determine the best possible pay-off, and choose the alternative with that pay-off.
The Maximax approach is an optimistic, “go for it” strategy; it does not take into
account any pay-off other than the best.
Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models

 Laplace:
Determine the average pay-off for each alternative, and choose the alternative
with the best average. The Laplace approach treats the states of nature as
equally likely.
 Minimax regret:
Determine the worst regret for each alternative, and choose the alternative with
the “best worst.” This approach seeks to minimize the difference between the
pay-off that is realized and the best pay-off for each state of nature.

ILLUSTRATION 1:
Referring to the pay-off table shown blow, determine which alternative would
be chosen under each of these strategies:
(a) Maximin
(b) Maximax
(c) Laplace.
Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models

Possible future demand in Millions (LE)

Alternatives Low Moderate High
Small Facility 10 10 10
Medium Facility 7 12 12
Large Facility (4) 2 16

SOLUTION:
(a) Using Maximin,
The Worst pay-offs for the alternatives are:
Small facility: LE. 10 million
Medium facility: 7 million
Large facility: – 4 million
Hence, since LE 10 million is the best, choose to build the small facility using
the maximum strategy.
Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models

b) Using Maximax,
The Best pay-offs for the alternatives are:
Small facility: LE. 10 million
Medium facility: 12 million
Large facility: 16 million
The best overall pay-off is the LE 16 million in the third row. Hence, the
Maximax criterion leads to building a large facility.

c) Using Laplace,

For the Laplace criterion, first find the row totals, and then divide each of
those amounts by the number of states of nature (three in this case). Thus,
we have the following table:

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models

Alternatives Low Moderate High Total Average

Small Facility 10 10 10 30 10.00
Medium Facility 7 12 12 31 10.33
Large Facility (4) 2 16 14 4.67

Because the medium facility has the highest average (10.33 Million LE), it
would be chosen under the Laplace criterion.
ILLUSTRATION 2:
Using the above information, determine which alternative would be chosen
using a Minimax Regret approach to the Capacity-planning Programme.
SOLUTION:
The first step: Prepare a table of opportunity losses, or Regrets.
To do this, subtract every pay-off in each column from the best pay-off in that
column. The results will be as follows:
Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models
Subtract each Subtract each
pay-off from the pay-off from the Subtract each pay-off
bet one (10) bet one (12) from the bet one (16)

Regrets
Alternatives Low Moderate High Worst
Small Facility 0 2 6 6
Medium Facility 3 0 4 4
Large Facility 14 10 0 14

The second step: Identify the worst regret for each alternative.
For the first alternative, the worst is 6; for the second, the worst is 4; and for the
third, the worst is 14.
The best of these worst regrets would be chosen using Minimax regret. The
lowest regret is 4, which is for a medium facility. Hence, that alternative would
be chosen.
Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models
(2) Decision-Making Under Risk
Between the two extremes of certainty and uncertainty lies the case of Risk:
The probability of occurrence for each state of nature is known. (Note that
because the states are mutually exclusive, these probabilities must add to
1.00).
A widely used approach under such circumstances is the Expected Monetary
Value Criterion.
 The expected value is computed for each alternative, and the one with the
highest expected value is selected.
 The expected value is the sum of the pay-offs for an alternative where each
pay-off is weighted by the probability for the relevant state of nature.

ILLUSTRATION 3:
Using the expected monetary value criterion, identify the best alternative. The
probabilities are: low = 0.30, moderate = 0.50, and high = 0.20.

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models
SOLUTION:

The first step : Find the expected value of each alternative by multiplying the
probability of occurrence by the its payoffs.

Probability Probability Probability

= = =
0.3 0.5 0.2

Expected
Alternatives Low Moderate High Value
Small Facility 0.3(10) 0.5(10) 0.2(10) 10.0
Medium Facility 0.3(7) 0.5(12) 0.2(12) 10.5
Large Facility 0.3(-4) 0.5(2) 0.2(16) 3.0

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models

The second step: Determine the best alternative that has the best-expected
pay-off.
Choose the medium facility because it has the highest expected
value (10.5 Million L.E).

(3) Break-Even Analysis

Break-even Analysis is an economic model describing cost-price-volume
relationships. It is a complete certainty type of model because costs and
revenues are known quantities.

One of the techniques to study the total cost, total revenue and output
relationship is known as Break-even Analysis. ‘A Break-even Analysis indicates
at what level of output, cost and revenue are in equilibrium’. In other words, it
determines the level of operations in an enterprise where the
undertaking neither gains a profit nor incurs a loss.
Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models

Terminology used in Break-Even Analysis [BEA]

 Break-even chart (BEC):
It is a graph showing the variation in total costs at different levels of output
(cost line) as well as the variation in the total revenues at various levels of
output.
 Break-even Point (BEP):
It is that point of activity (sales volume) where total revenues and total
expenses are equal. It is point of zero profit, i.e., stage of no profit and no
loss. BEP can be used to study the impact of variations in volume of sales
and cost of production on profits.
 Angle of Incidence:
It is an angle at which total revenue line intersects total cost line. The
magnitude, of this angle indicates the level of profit. Larger the angle of
incidence, higher will be the profits per unit increase in sales and vice versa.

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models

 Angle of Incidence:
It is excess of budgeted or actual sales over the break-even sales volume,
i.e., margin of safety = (actual sales minus sales at BEP)/actual sales.
A high margin of safety would mean that even with a lean period, where
sales go down, the company would not come in loss area. A small margin of
safety means a small reduction in sale would take company to cross BEP and
come in red zone.

Calculation of Break-Even Point [BEP]

If: F – Fixed Costs, which are independent on quantity produced
a – Variable Cost per unit
b – Selling Price per unit
Q– Quantity (Volume of output)
Then:

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models

Total Cost (TC) = Fixed Cost + Variable Cost

TC = (F + a * Q)
Sales Revenue (SR ) = Selling price per unit × Quantity
SR = b * Q

The point of Intersection of Total Cost line and the sales revenue
is the Break-even Point. Then, At Break-even Point,
Total Cost (TC ) = Sales Revenue (SR)
Quantity of BEP = F / (b - a)

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models

Dr Awatif Ghazy
Unit 2: Decision Making and Operations Management
Chapter 2

Decision Models

Dr Awatif Ghazy
Dr Awatif Ghazy