Decision Making: Process, Responsibility, and Analysis PDF

Here is the transcription of the image into a markdown format: # Chapter 2 ## DECISION-MAKING * Managers of all kinds and types, including the engineer manager, are primarily tasked to provide leadership in the quest for the attainment of the organization's objectives. If he is to become effect...

Here is the transcription of the image into a markdown format: # Chapter 2 ## DECISION-MAKING * Managers of all kinds and types, including the engineer manager, are primarily tasked to provide leadership in the quest for the attainment of the organization's objectives. If he is to become effective, he must learn the intricacies of decision-making. Many times, he will be confronted by situations where he will have to choose from among various options. Whatever his choice, it will have effects, immediate or otherwise, in the operations of this organization. * The engineer manager's decision-making skills will be very crucial to his success as a professional. A major blunder in decision-making may be sufficient to cause the destruction of any organization. Good decisions, on the other hand, will provide the right environment for continuous growth and success of any organized effort. ### 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." * 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: * The production manager of a company has received a written request from a section head regarding the purchase of an air conditioning unit. Almost Simultaneously, another request from another selection 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(i.e., top, middle, and 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 functions." ### THE DECISION-MAKING PROCESS Rational decision-making, according to David H. Holt, is a process involving the following steps: 1. diagnose problem 2. analyze environment 3. articulate problem or opportunity 4. develop viable alternatives 5. evaluate alternatives. 6. make a choice 7. implement decision 8. evaluate and adapt decision results #### Diagnose 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. For instance, the management of a construction company entered into a contract with another party for the construction of a 25-story building on a certain site. * The actual situation of the firm is that it has not yet constructed the building. The desired situation is the finished 25-storey building. In this case, the actual situation is different from the desired situation. The company, therefore, has a problem and that is, the construction of the 25-story building. #### Analyze the Environment * The environment where the organization is situated plays a very significant role in the success or failure of such an organization. It is, therefore, very important that an analysis of the environment be undertaken. * The objective of environmental analysis is the identification of constraints, which may be spelled out as either internal or external limitations. Examples of internal limitations are as follows: 1. Limited funds available for the purchase of equipment. 2. Limited training on the part of employees. 3. Ill-designed facilities. Examples of external limitations are as follows: 1. Patents are controlled by other organization. 2. A very limited market for 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. * 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 residents could do. * Components of the Environment. The environment consists of two major concerns: 1. internal 2. external. The internal environment refers to organizational activities within a firm that surrounds decision-making. * The external environment refers to variables 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 management. This is made possible by using a procedure with the following steps: 1. Prepare a list of alternative solutions. 2. Determine the viability of each solution. 3. Revise the list by striking out those which are not viable. Illustration: * An Engineering firm has increasing its output by 30%. This is result of a new agreement of the firm with one of its client. * The list of solutions prepared by the engineering manager shows the following alternative courses of action: 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 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 evaluation will depends on the nature of the problem, the objective of the firm, and the nature of alternatives presented. Suggests that "each alternative must analyzed and evaluated in terms of its value, cost and risk of the characteristics." The value of alternatives refers to benefits can the expected. Example can be decribed as follows: a not profit of $P10$ million per if the alternative is choosen. * The cost of alternatice refers to out-of-pocket cost (like $P100$ million for construction of faalicties), opportunity costs(like the opportunity to enterest of $P2$ million per year if money is invested else where), and follow-on costs (like $P3$ million per year of the maintaince facilities constructed). * The risk characteristics refer to the likelihood of achieving the goals of the alternatives. If the probability of the net profit $P10$ million is only 10 percent, then the decisionmaker may opt considar altermatice with a $P5$ million profit but with an $80$ percent probability of success. * Another example of evaluation of alternatives is shown below: An engineer manager is faced with a problem of chosing between a three of applicants to be filling up a lone vecany for a junior engineer. He will have to set up curtain criteria for eveluate the applicants is the evaluation is not done by the the profesional human resources office, then the engineer. The typocal evluation of job applicats will appear on the page. The title of vacant position is Junoir Engineer. The date of evaluation is December 28, 1996. The table shows applicant, education, training, experience, age, and total points | Applicant | Education | Training | Experience | Age | Total Points | | ------------------ | --------- | -------- | ---------- | --- | ------------ | | Jose Sibayan, Jr. | 40 | 35 | 4 | 10 | 89 | | Menandro Rillon | 40 | 36 | 5 | 9 | 90 | | Dante dela Cruz | 40 | 38 | 6 | 7 | 91 | * The Evaluator is Edgardo J. Viloria, who is the Manager in the Engineering Division III. #### 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. * Choice-making refers to the process of selecting among alternatives representing potential solutions to a problem. At this point, Webber advises that "... particular effort should be made to identify all significant consequences 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 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 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 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 actions 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. ### APPROACHES IN SOLVING PROBLEM * 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 refers to evaluation of alternatives using intuition and 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. Example: * A factory operations on three shifts the following schedule: * First shift - 6:00 A.M. to 2:00 P.M. * Second shift - 2:00 P.M. to 10:00P.M. * Third shift - 10:00 P.M. to 6:00 A.M. * Each shift consists of 200 workers manning 200 machines. On September 16, 1996, 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 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 Evaluation This term refers to the evaluation of alternatives using any technique in a group classified as rational and analytical. ### QUANTITATIVE MODELS FOR DECISION-MAKING * The types of quantitative techniques which may be useful in decision-making are 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. There 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 in inventory. 2. Production order quantity model - this is an economic order quantity technique applied to production orders. 3. Back order inventory mode - 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 a 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 processes 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 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, manpower 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 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. #### 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 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 useful 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 marketing research. * When data gathering is expensive, sampling provides an alternative. Sampling, in effect, saves time and money. #### 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 explanation 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 assessments 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. **Figure Descriptions** * Figure 2.1 shows the Engineering Firm and the Internal Environment in Decision-Making. This is depicted as a flowchart starting from The Engineering Firm in the center, branched into Internal Environment and External Environment. The Internal Environment further divides into Organizational Aspects (structure, policies, rules), Marketing Aspects (product strategy, promotion strategy), Personal Aspects (recruitment practices, incentive systems), Production Aspects (plant layout, inventory control) and Financial Aspects (liquidity, profitability). The External Environment is connected by DECISION. * Figure 2.2 shows the The Engineering Firm and its External Environment. This is depicted as a diagram of a typical business and lists Engineers, Government, Labor Unions, Clients, Suppliers, Competitors, Public, Banks. * Figure 2.3 portrays Feedback as a Control Mechanism in the Decision-Making Process and follows the steps of problem solving.