Kathmandu University MGTS 403: Engineering Management

Decision Making
Lecture 6

Management Science Process

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Formulate the Problem

Construct a Mathematical Model Test the Model Derive a Solution from the Model

Apply the Models Solution to the Real System

Types of Decisions
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Routine Decisions delegation/rules based

Payroll processing Reordering standard inventory Paying suppliers

Non-Routine Decisions
Unstructured situations Usually more at higher level of management Based on statistical decision making Based on subjective decisions

Types of Decision- limitation Decisiony

Objective Rationality
Viewing all behavior alternatives All consequences of choosing an alternative Values assigned for singling out the alternative

Bounded Rationality
Take only known factors Time and resource constraint forever analysis Choose a good enough criteria Solution that satisfices rather than best

Categories of Decision Making Tools

Pay-off Table State of Nature/Probability N1 Alternative P1 A1 O11 A2 O21 Ai Am N2 P2 O12 O22 Nj Pj O1j O2j Aij Amj Nn Pn O1n O2n Ain Aim

Ai1 Ai2 Am1 Am2

Categories of Decision Making Tools

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Decision Making under Certainty

Certain of the future states of nature Probability p1 of future N1 is 1.0 other future states has zero prob. Choose alternative Ai that gives most favorable outcome Oij Linear Programming, Queuing models, critical path model, Deterministic Inventory models most widely used tools

Decision Making under Risk

Probabilities are known from experience and statistical data collection Expected monetary value, Expected (opportunity or regret ) loss (EOL) used

Decision Making under Uncertainty

Can not know the probabilities of the outcome Decision making is very difficult because of less information Some techniques are
x x x x

Criteron of optimism Maximax Criterion of pessimism - Maximin Criterion of Regret (Loss) Minimax Criteria of Realism (Hurmiczs)

Decision Making Under Risk

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Expected Value Decision Trees Queuing Simulation

Decision Making Under Risk

Expected Value criterion : Decision making Under Risk States of nature Decision N3: Big Well Expected Value Alternatives N1: Dry Hole N2: Small Well p1 = 0.6 p2 = 0.3 p3 = 0.1 A1: Don't drill 0 0 0 0 A2: Drill alone -500,000 300,000 9,300,000 720,000 Subcontract (a3) 0 125,000 1,250,000 162,500

= =

Decision Making Under Risk

Expected Value criterion : Decision making Under Risk States of nature Decision N3: Big Well Expected Value Alternatives N1: Dry Hole N2: Small Well p1 = 0.6 p2 = 0.3 p3 = 0.1 A1: Don't drill 0 0 0 0 A2: Drill alone -500,000 300,000 9,300,000 720,000 Subcontract (a3) 0 125,000 1,250,000 162,500
Expected Value criterion : Decision Tree Decision Chance (Outcome) node Aj node Nj Oij No fire: Fire No fire: Fire (-200) (-200) 0 -100,000

x x= x x x=

(Probability) Pj 0.999 0.001 0.999 0.001

= = = = =

Expected Value Ei + = -199.8 = -200 - 0.2 -0 + - 100 = -100

Decision Making Uncertainty

Case 1: Maximax - Optimistic Criterion States of nature Decision Alternatives High (N1) Moderate (N2) Low (N3) Nil (N4) Expand (a1) 40,000 20,000 -30,000 -35,000 Build (a2) 65,000 30,000 -40,000 -75,000 Subcontract (a3) 25,000 10,000 -15,000 -20,000 Case 2: Maximin - Pessimistic Criterion States of nature Decision Alternatives High (N1) Moderate (N2) Low (N3) Nil (N4) Expand (a1) 40,000 20,000 -30,000 -35,000 Build (a2) 65,000 30,000 -40,000 -75,000 Subcontract (a3) 25,000 10,000 -15,000 -20,000 Max. Max of the Payoff max pay-off 40,000 65,000 65,000 25,000

Min. Max of the Payoff min pay-off -35,000 -75,000 -20,000 -20,000

Decision Making Uncertainty

Case 3: Minimax - Regret Criterion States of nature Decision High (N1) Moderate (N2) Low (N3) Nil (N4) Alternatives Expand (a1) 25,000 10,000 15,000 15,000 Build (a2) 0 0 25,000 55,000 Subcontract (a3) 40,000 20,000 0 0 Case 4: Realism Criteron (Hurwicz Criterion) States of nature Decision High (N1) Moderate (N2) Low (N3) Nil (N4) Alternatives Expand (a1) 40,000 20,000 -30,000 -35,000 Build (a2) 65,000 30,000 -40,000 -75,000 Subcontract (a3) 25,000 10,000 -15,000 -20,000 Cofficient of Optimism = 0.7 considered above Hurwicz Criterion = (Max. Pay Off) + (1- )(Min. pay off) Max. Mini max Regret Regrets 25,000 25,000 55,000 40,000

Hurwicz Measure of Value realism 17,500 23,000 23,000 11,500

Decision Making under Certainty

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Linear Programming One of best known tools of Management Science Used to determine optimal allocation of an organizations limited resources

Linear Programming or LP
The word linear refers the existence of linear relationship among the variables in a model developed to solve the problem y LP is one the mathematical models which is designed to allocate some limited or scarce resources to optimize a single stated criterion y Optimizing is either minimizing or maximizing such as revenue, loss etc.
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Notations in Linear Programming

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Linearity
The relationship amongst the variables representing different phenomenon are linearly related

Objective Function
Linearly expressed function used to optimize the problem Mathematically f(x1, x2, ., xn) = c1x1 +c2x2+ c3x3+ ..+cnxn Where c1, c2 etc are constants and x1, x2 are decision variables

Notations in Linear Programming

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Constraints
Limitation on resources which are to be allocated among competing activities Resources may be raw material, human resources, time, machinery etc. Expressed in linear equations or inequalities eg. a11x1+ a12x2+ + a1n xn b1 a21x1+ a22x2+ + a2n xn b2 . . an1x1+ an2x2+ + ann xn bn Where a11, a12 etc are constants and x1, x2 are decision variables

Notations in Linear Programming

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Non-negative Criteria
All the considering variables are assumed to be non-negative which means a decision variables, x1, x2 etc. are equal or greater than zero i.e. . x1 0, x2 0, , xn 0 Where a11, a12 etc are constants and x1, x2 are decision variables

Feasible Solutions Feasible region or area

All those possible solutions, that can be worked out under given constraints of a LP Problem are feasible solution satisfy all non-negative criteria Any solution, that optimizes the objective function is the optimal feasible solution Region or area covered by feasible solution is referred as feasible region.

Notations in Linear Programming

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Formulating (or Statement) LP Problem Generally written as:

Optimize f(x1, x2, ., xn) = c1x1 +c2x2+ c3x3+ ..+cnxn Subject to the constraints or s.t. a11x1+ a12x2+ + a1n xn < or or = or b1 a21x1+ a22x2+ + a2n xn < or or = or b2 . . an1x1+ an2x2+ + ann xn < or or = or bn and x1 0, x2 0, , xn 0; non-negativity

LP Problem are now solved using computer software but the most used methods are
1. Graphical Method 2. Simplex Method

Solutions steps for the LP Problems

Identify the LPP Formulate LPP Convert linear constraints in to equations Draw Graphs Obtain optimal solution Evaluate the objective function Interpret the result

Notations in Linear Programming

1. Solve the following LP Problem graphically
Maximize f = 40x1+35x2 Subject to the constraints 2x1+ 3x2 60 4x1+ 3x2 96 and x1 0, x2 0

2. Find the optimum solution using graphic method

Maximize Z = 40A+70B Subject to the constraints 3A+ 3B 36 5A+ 2B 50 2A+ 6B 60 A, B 0

Linear Programming
Objective Function y $10 profit for selling a unit of X and $14 for selling a unit of Y
Profit function: P = 10X + 14 Y maximize

Constraints y X requires 3 hours machining and 1 hour assembly and Y requires 2 hours machining and 2 hours assembly
3X + 2Y <=120 hours (machining) X + 2Y <=80 hours (assembly)