DECISION MODELS IN MANAGEMENT

PGDM-I TERM III

by PROF. R.N.VENKATESWARAN

Reference Books
An Introduction to Management Science: Quantitative Approaches to Decision Making, by: Anderson Sweeney, Williams, Thomson SouthWestern, 10e Principles of Operations Research for Management (2e) - by Budnick; McLeavey, and Mojena AITB,Delhi edition Operations Research by Taha, HA (6e), Prenhall Principles of Operations Research with applications to Managerial Decisions, (2e), by Wagner, Prenhall, India

DECISION MODELS
Various names given to body of knowledge which use Quantitative Methods in Decision Making: Management Science (MS) Operations Research (OR) Decision Science Modern management requires executive-generalists who are trained and effectively operate in business, industry, government, hospitals, armed forces, educational institutions, service industries etc., They could coordinate the contributions of all of the specialists of an organization. Their task requires the ability to employ structure before content in coping with the extreme diversity of information produced by the organization.

DECISION MODELScontd
Modern Management differs from Taylors scientific management: It views efficiency as secondary achievement, which should follow adequate planning. Both good and poor decisions can be implemented in an efficient way. A company can manufacture a high-quality product at a minimum cost, but the product itself might not be the best choice to meet the companys objectives. Modern management attempts to establish relationship between organizations objectives and its resources. It cuts across traditional areas of management and emphasizes inter-disciplinary approach. People with diverse specialties - e.g. mathematicians, engineers, behavioural scientists, accountants etc., join together to solve an organizational problem

Problem Solving & Decision Making

Problem Solving is the process of identifying a difference between the actual and the desired state of affairs and then taking action to resolve the difference. Decision Making is associated with management process of planning, organizing, coordinating, controlling etc., Management as defined by Websters Dictionary, is the judicious use of means to accomplish an end. Doing and Deciding are both managerial/executive functions. Routine operations require doing. Exceptions require deciding.

Problem Solving & Decision Making

Executive is a word derived from a Latin word meaning to do; the Oxford Dictionary defines it as the action of carrying out or carrying into effect. This does not suggest that the main responsibility and function of the executive is to make decisions.The executive is rewarded and evaluated in terms of his success at making decisions while managing his function. Organization structure is set up to help executives do decision making Managerial PROBLEM SOLVING would involve both doing - with the organization structure and deciding using various management tools and techniques. The manager has to form a partnership between those who perceive they have a problem (users) and those who have the specialized knowledge or skills in problem-solving techniques (specialists)

TAXONOMY OF OR MODELS

OR MODELS

Deterministic

Stochastic

HYBRID

Non-linear Optimization

Linear Optimization

Decision Analysis

PERT/ CPM

Classical Methods

Linear Programming

Queuing Models

Dynamic Programming

Search Methods

Transportation & Assignment

Markov Processes

Inventory Models

GOAL Programming

Simulation

DECISION MODELS TOPICS & SESSIONS

Decision Theory & Modeling Linear Programming Multi-Criteria (Goal Programming). Simulation Transportation Models Assignment Problems Game Theory Queuing (Waiting-line) Models (with simulation application) Markov Processes 2 7 3 3 4 3 2 4

Evaluation Pedagogy
End-Term Exam ... 50% Attendance ... 5% Quizzes ... 20% Cases/Problems(2 Sessions)... 25%

Decision-Making Process
Role of Quantitative Analysis in the Decision-Making Process:
Problem

Experience

Subjective Analysis

Quantitative Analysis

Opinion

Decision Inputs

Problem-solving Process Problem Formulation Model Construction

Need Recognition
System of Interest

Schematic Diagram of Problem Solving Process

Modeling Real System

Data Collection

Implementation & Control

Interpretation of Results

Model Validation & Sensitivity Analysis

Model Solution

Stages of Problem-Solving Process

Green, Lee and Newsom classify problem-solving process into three major stages: Pre-modeling function Modeling function Implementation (Post-modeling)function These stages can be further mapped onto an eight-step process: Pre-modeling: Recognition of Need Problem Formulation
Systems Approach Controllable & Uncontrollable variables Parameters Constraints Objective Function

Objectives,Criteria and Surrogates

Objective: The ultimate desired goal. In DMM we use the term objective function. Surrogates: To say the company has to perform better is a qualitative criterion or objective. But it has to be broken into measurable surrogates - Market Share; Profit after Tax, ROR etc., To say the standard of living of an individual is to be improved is a qualitative criterion. It is to be broken to surrogates such as: Income; growth in income; amount of spending; amount of savings etc.,

Stages of Problem-Solving Processcontd.

Modeling Model Construction - Mathematical Models Doing Data Collection - MIS; Databases; DecisionSupport systems Model Solution(Have alternatives)- OR Models Decision making Model Validation and Sensitivity Analysis (Optimizing/Satisficing) Post-Modeling Interpretation of Results and Implication- Selling your ideas Implementation, and Control - HRD Issues

MODEL BUILDING
A MODEL is a representation of reality intended to explain the behaviour of some aspect of it. Taxonomy of Models: Normative & Descriptive Normative models tend to prescribe what ought to be:
Physicians possess a normative model of health Civil Engineers possess a normative model of a building Philosophers have a code of conduct for ethics

Descriptive Models describe facts and relationships:

Physician conducting tests and analyzing the results to determine the ailment A civil engineer analyzing the soil conditions and other parameters to decide on the type of structure Constructing a physical scale model to give the projected view of the final structure/equipment/device. Analyzing what-if situations in a management problem solving.

In DMM we are concerned with descriptive models.

MODEL BUILDING SIMULATION MODELS

SIMULATION is one of the key techniques of DMM. It involves construction of a mathematical model of the problem; and imitate (simulate) the operation of the system.(System modeling & simulation is an elective course in VI term) E.g: Simulation of an airplane flight in a wind tunnel Simulation of the traffic in traffic junction Simulation of customer servicing in a service counters Simulation of production - in a manufacturing situation. Simulation modeling process helps to understand and analyze the various alternatives, over pre-determined time periods, without physically operating or modifying the system.(we will learn more about it under simulation)

PROBLEM SOLVING FRAMEWORK

1. Verbal Statement of the Problem 2. Decisions:
* Verbal Statement * Mathematical Definition

3. Criteria
* Verbal Statement * Mathematical Definition

4. Constraining Conditions
* Verbal Statement * Mathematical Definition

5. Mathematical Model 6. Model Outcomes 7. Interpretation of the Results

CLASSICAL DETERMINISTIC MODELS

Decision Models for Management

E.g. of Using Problem Solving Framework

In-house Computer -vs.- Service Bureau Decision A large poly-clinic has 30 full-time and visiting doctors. Currently all billing is done manually by clerks. Due to the heavy volume of billing, the hospital management wishes to computerise the billing operation. It has 2 options: (1) To buy a computer and carry-out the billing by itself (the make/own option). Or (2) To contract with an agency that would do the operations (the buy/lease option) Cost Data: The company can lease a small p.c. and the required software at Rs. 15000 per year. The variable cost of doing the billing in this manner is 0.65 paise per bill. Alternatively, the company can sub-contract the operation to an outside agency, who would charge Rs. 3000 fixed charges per year and 0.95 paise per bill processed.
The company would like to know the critical patient volume to make a decision on make-or buy. (this is also a deterministic decision making problem)

Mathematical Representation of Relationships

Assumptions: Criteria are used to make decisions They are quantifiable and can be represented by mathematical functions Such mathematical problems are solved by using Algebra, Simultaneous Equations; Differential Calculus etc., Functional Notation: A function is a mathematical relationship for which the value of a particular variable is determined from the values of one or more other variables. Y = f(x) is a general representation Y = 5x is a specific case. Similarly Y = f(x1,x2,x3) is general and Y = 3x1 + 2x2 + 6x3 is specific.

Applying the Framework

1. Verbal Statement of the Problem: Determine the number of patient-bills, (contrast with no. of patients) beyond which the make option is less costly. 2. Decisions: a. Verbal Statement: Number of patient bills per year b. Mathematical Definition: Let x = no. of patient bills/yr. 3. Criteria: There are no optimizing criteria. Find out that number of patient bills at which the annual costs of make or buy are equal. 4. Constraining Conditions: The critical point beyond which the lease option is less costly is known as break-even point for the two options

Applying the Framework

a. Verbal Statement: The annual cost of agency equals annual cost of in-house operation b. Mathematical statement: To find a value for x such that Own Cost: 15000 + 0.65 x Are both equal Sub-contract: 3000 + 0.95 x 5. Model: Solve for x, where : 3000 + 0.95x = 15000 + 0.65x 6. Model Outcomes: the value of x = 40000 7. Interpretation of the results: If the break-even number of patient bills = 40000. Hence, if the number is expected to be more than 40000, doing billing on our own is cheaper. If the bills number is less than 40000, it is cheaper to sub-contract the operation.

Single Product Pricing Problem (Deterministic Problem; Using problem solving framework)
The Massachusetts Bay Transit Authority (MBTA) wishes to smooth its demand for subway services. The system operates to full capacity during the early morning and later afternoon rush hours. The MBTA wants to stimulate greater demand during off-peak hours and to encourage riders who do not need to travel during peak hours to travel at other times. Currently the normal fares are 75 during normal hours and 30 during off-peak hours. The demand function is estimated from data gathered with demand at different fares. p = off-peak fare; q = off-peak demand (000s of passengers) p = 70 65 60 55 50 q = 10.0 12.6 14.9 17.4 20.1

Single Product Pricing Problem contd

Initial attempt was to fit a least-squares regression line: q = 45 - ()p or p = -2q + 90 If the objective is to maximize demand for off-peak hours, this would suggest eliminating such fares, and demand would be 45,000 passengers. But if we derive that the revenue is TR = q * p, then TR = f(p) = 45p - p2/2 This would yield maximum revenue when p = 45. And the revenue for this is: 1012.5, and substituting this in the regression formula: q = 45 - ()45 = 22.5 or 22500 passengers.