Decision-Making PDF

DECISION-MAKING ENGR. FHER NOAH N. LEONGSON | EM 101 | UNIVERSITY OF SAN AGUSTIN - ILOILO  C O N T E N TS 01 Decision Making as Management Responsibility 05 Quantitative Models for Decision Making 02 What is Decision Ma...

DECISION-MAKING ENGR. FHER NOAH N. LEONGSON | EM 101 | UNIVERSITY OF SAN AGUSTIN - ILOILO  C O N T E N TS 01 Decision Making as Management Responsibility 05 Quantitative Models for Decision Making 02 What is Decision Making? 03 The Decision Making Process 04 Approaches in Solving Problems 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 e ective, 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 e ects, immediate or otherwise, in the operations of this organization. DECISION-MAKING 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 su cient 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 e ort. DECISION-MAKING AS A MANAGEMENT RESPONSIBLITY 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. DECISION-MAKING AS A MANAGEMENT RESPONSIBLITY It is understandable for managers to make wrong decisions at times. The wise manager will correct them as soon as they are identi ed. 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 RESPONSIBLITY 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. DECISION-MAKING AS A MANAGEMENT RESPONSIBLITY 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 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 two requested items due to budgetary constraints. WHAT IS DECISION-MAKING? Decision-making may be de ned as "the process of identifying and choosing alternative courses of action in a manner appropriate to the demands of the situation." The de nition indicates that the engineer manager must adapt a certain procedure designed to determine the best option available to solve certain problems. WHAT IS DECISION-MAKING? 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 THE DECISION-MAKING PROCESS Diagnose Problem If a manager wants to make an intelligent decision, his rst 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, "identi cation of the problem is tantamount to having the problem half-solved." THE DECISION-MAKING PROCESS Diagnose Problem What is a Problem? A problem exists when there is a di erence 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-storey building on a certain site. The actual situation of the rm is that it has not yet constructed the building. The desired situation is the nished 25-storey building. In this case, the actual situation is di erent from the desired situation. The company, therefore, has a problem and that is, the construction of the 25-storey building. THE DECISION-MAKING PROCESS Analyze the Environment The environment where the organization is situated plays a very signi cant 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 identi cation of constraints, which may be spelled out as either internal or external limitations. THE DECISION-MAKING PROCESS Analyze the 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. Ill-designed facilities. 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. THE DECISION-MAKING PROCESS Analyze the Environment 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 identi ed. THE DECISION-MAKING PROCESS 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 nished in a short period.  When the clearance for the commencement of operation was sought from local authorities, this could not be given. THE DECISION-MAKING PROCESS Analyze the Environment  It turned out that the residents opposed the operation of the rm 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. THE DECISION-MAKING PROCESS Analyze the Environment Components of the Environment The internal environment refers to organizational activities within a rm that surrounds decision-making. Shown in Figure 2.1 are the important aspects of the internal environment. THE DECISION-MAKING PROCESS Analyze the Environment Components of the Environment The external environment refers to variables that are outside the organization and not typically within the short-run control of top management. Figure 2.2 shows the forces comprising the external environment of the rm. THE DECISION-MAKING PROCESS Develop Viable Alternatives Oftentimes, problems may be solved by any of the solutions o ered. The best among the alternative solutions must be considered by management. THE DECISION-MAKING PROCESS Develop Viable Alternatives 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 solutions. 3. Revise the list by striking out those which are not viable. THE DECISION-MAKING PROCESS Develop Viable Alternatives To illustrate:  An engineering rm has a problem of increasing its output by 30%.  This is the result of a new agreement between the rm and one of its clients. THE DECISION-MAKING PROCESS Develop Viable Alternatives The list of solutions prepared by the engineering manager shows the following alternative courses of action: 1. Improve the capacity of the rm by hiring more workers and building additional facilities; 2. Secure the services of subcontractors; 3. Buy the needed additional output from another rm; 4. Stop serving some of the company's customers; and 5. Delay servicing some clients. The list was revised and only the rst three were deemed to be viable. The last two were deleted because of adverse e ects in the long-run pro tability of the rm. THE DECISION-MAKING PROCESS 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 di cult. THE DECISION-MAKING PROCESS Evaluate Alternatives How the alternatives will be evaluated will depend on the nature of the problem, the objectives of the rm, 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 bene ts that can be expected. THE DECISION-MAKING PROCESS Evaluate Alternatives An example may be described as follows: a net pro t of P10 million per year if the alternative is chosen. The cost of the alternative refers to out-of-pocket costs (like P100 million for construction of facilities), opportunity costs (like the opportunity to earn interest of P2 million per year if money is invested elsewhere), and follow-on costs (like P3 million per year for maintenance of facilities constructed). The risk characteristics refer to the likelihood of achieving the goals of the alternatives. If the probability of a net pro t of P10 million is only 10 percent, then the decision-maker may opt to consider an alternative with a P5 million pro t but with an 80 percent probability of success THE DECISION-MAKING PROCESS 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 ll 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 o cer, then the engineer manager will be forced to use a predetermined criteria. THE DECISION-MAKING PROCESS Evaluate Alternatives A typical evaluation of job applicants will appear as follows: THE DECISION-MAKING PROCESS 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. THE DECISION-MAKING PROCESS Make a Choice At this point, Webber advises that “particular e ort should be made to identify all signi cant 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 bene t, cost, or risk. THE DECISION-MAKING PROCESS 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 e ective, a plan must be devised. THE DECISION-MAKING PROCESS Implement Decision 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. THE DECISION-MAKING PROCESS 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. THE DECISION-MAKING PROCESS Evaluate and Adapt Decision Results 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 speci ed. Control refers to actions made to ensure that activities performed match the desired activities or goals, that have been set. THE DECISION-MAKING PROCESS Evaluate and Adapt Decision Results In this last stage of the decision-making process, the engineer manager will nd 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, Ferreil and Hirt suggest that further analysis is necessary. APPROACHES IN SOLVING PROBLEMS 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 2. Quantitative evaluation APPROACHES IN SOLVING PROBLEMS 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. APPROACHES IN SOLVING PROBLEMS Qualitative Evaluation 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 2:00 P.M. Second shift - 2:00 P.M. to 10:00 P.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 noti ed at 1:00 P.M. that ve of the workers assigned to the second shift could not report for work because of injuries sustained in a tra c accident while they were on their way to the factory. Because of time constraints, the manager made an instant decision on who among the rst shift workers would work overtime to man the ve machines. APPROACHES IN SOLVING PROBLEMS Quantitative Evaluation This term refers to the evaluation of alternatives using any technique in a group classi ed as rational and analytical. QUANTITATIVE MODELS FOR DECISION-MAKING The types 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 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 total yearly cost of placing orders and carrying the items in inventory. 2. Production Order Quantity Model - this is an economic order quantiy 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 o ered by suppliers. QUANTITATIVE MODELS FOR DECISION-MAKING 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 ear 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. QUANTITATIVE MODELS FOR DECISION-MAKING 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. QUANTITATIVE MODELS FOR DECISION-MAKING Forecasting There are instances when engineer managers make decisions that will have implications in the future. A manufacturing rm, for example, must put up a capacity which is su cient 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 e ective, 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 de ned 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 a 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. QUANTITATIVE MODELS FOR DECISION-MAKING Linear Programming Linear programming is a quantitative technique that is used to produce an optimum solution within the wounds 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. QUANTITATIVE MODELS FOR DECISION-MAKING 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 e ect, 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 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. QUANTITATIVE MODELS FOR DECISION-MAKING Statistical Decision Theory 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 payo , or the minimum expected loss if he is working with a loss table. SUMMARY 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 of action in a manner appropriate to the demands of the situation is called decision-making. It is done at various management levels and functions. SUMMARY 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.  END ENGR. FHER NOAH N. LEONGSON | EM 101 | UNIVERSITY OF SAN AGUSTIN - ILOILO