THE DECISION PROCESS IN OPERATIONS FUNDAMENTALS OF DECISION MAKING DECISION TABLES TYPES OF DECISION-MAKING ENVIRONMENTS Decision Making Under Uncertainty Decision Making Under Risk Decision Making Under Certainty Expected Value of Perfect Information (EVPI) DECISION TREES A More Complex Decision Tree Using Decision Trees in Ethical Decision Making SUMMARY KEY TERMS USING SOFTWARE FOR DECISION MODELS SOLVED PROBLEMS INTERNET AND STUDENT CD-ROM EXERCISES DISCUSSION QUESTIONS PROBLEMS INTERNET HOMEWORK PROBLEMS CASE STUDIES: TOM TUCKER’S LIVER TRANSPLANT; SKI RIGHT CORP. ADDITIONAL CASE STUDIES BIBLIOGRAPHY
L EARNING O BJECTIVES
When you complete this module you should be able to IDENTIFY OR DEFINE: Decision trees and decision tables Highest monetary value Expected value of perfect information Sequential decisions DESCRIBE OR EXPLAIN: Decision making under risk Decision making under uncertainty Decision making under certainty
D E C I S I O N -M A K I N G T O O L S
The wildcatter’s decision was a tough one. Which of his new Kentucky lease areas—Blair East or Blair West—should he drill for oil? A wrong decision in this type of wildcat oil drilling could mean the difference between success and bankruptcy for the company. Talk about decision making under uncertainty and pressure! But using a decision tree, Tomco Oil President Thomas E. Blair identified 74 different options, each with its own potential net profit. What had begun as an overwhelming number of geological, engineering, economic, and political factors now became much clearer. Says Blair, “Decision tree analysis provided us with a systematic way of planning these decisions and clearer insight into the numerous and varied financial outcomes that are possible.”1
“The business executive is by profession a decision maker. Uncertainty is his opponent. Overcoming it is his mission.” John McDonald
Operations managers are decision makers. To achieve the goals of their organizations, managers must understand how decisions are made and know which decision-making tools to use. To a great extent, the success or failure of both people and companies depends on the quality of their decisions. Bill Gates, who developed the DOS and Windows operating systems, became chairman of the most powerful software firm in the world (Microsoft) and a billionaire. In contrast, the Firestone manager who headed the team that designed the flawed tires that caused so many accidents with Ford Explorers in the late 1990s is not working there anymore.
THE DECISION PROCESS IN OPERATIONS
What makes the difference between a good decision and a bad decision? A “good” decision—one that uses analytic decision making—is based on logic and considers all available data and possible alternatives. It also follows these six steps: 1. 2. 3. 4. 5. 6. Clearly define the problem and the factors that influence it. Develop specific and measurable objectives. Develop a model—that is, a relationship between objectives and variables (which are measurable quantities). Evaluate each alternative solution based on its merits and drawbacks. Select the best alternative. Implement the decision and set a timetable for completion.
Throughout this book, we have introduced a broad range of mathematical models and tools to help operations managers make better decisions. Effective operations depend on careful decision making. Fortunately, there are a whole variety of analytic tools to help make these decisions. This modHosseini, “Decision Analysis and Its Application in the Choice between Two Wildcat Ventures,” Interfaces, Vol. 16, no. 2. Reprinted by permission, INFORMS, 901 Elkridge Landing Road, Suite 400, Linthicum, Maryland 21090 USA. 1J.
D E C I S I O N TA B L E S
“Management means, in the last analysis, the substitution of thought for brawn and muscle, of knowledge for...