1.

7 The Analytic Hierarchy Process (AHP)

Managers are faced every day with complex decisions consisting of factors that are interconnected and dependent upon one another. It is almost impossible to make such decisions based on just personal intuition and thought. The Analytic Hierarchy Process (AHP) is a decision making process that provides a systematic method of considering all the elements of a problem. It organizes the problem into smaller parts and then only calls for simple pairwise judgments to develop a hierarchy. This hierarchy is then manipulated analytically to produce a final matrix representing the overall priorities of the alternatives relative to each other. One can then make a logical decision based on the pairwise comparisons made between the alternatives and the criteria being used in the decision. The AHP allows managers to make simple comparisons of the factors involved in a decision, thus producing a hierarchy of the decision. The AHP provides managers with logical decisions based on analytical methods. This eliminates much of the chance that is often confronted with decision making. The AHP also allows managers to consider both tangible and intangible factors when constructing the hierarchy. This ensures that the decision will be based on more than just financial or other measurable characteristics.

The Analytical Hierarchy Process

AHP- A multi-attribute decision process that tolerates uncertainty and inconsistency in data and judgments. Analytical- Mathematical and logical reasoning using numbers that are developed to describe a decision. Hierarchal- A method of structuring the decision problem into levels that corresponds to ones understanding of the problem.

The Analytic Hierarchy Process

Methodology of the AHP

Step 1 : Completely define problem and develop a hierarchy which will accurately represent the problem using the following guidelines: Level 1- Final goal or objective Level 2- Criteria used to judge alternatives Level 3- Alternatives

The Analytic Hierarchy Process

SAMPLE PROBLEM BUYING A HOUSE
LEVEL 1 SATISFACTION W/ HOUSE

LEVEL 2

HOUSE SIZE

BUS STOP LOCATION

NEIGHBORHOOD

HOUSE AGE

SIZE OF YARD

MODERN FACILITIES

FINANCING AVAILABLE

CONDITION OF HOUSE

LEVEL 3

HOUSE A

HOUSE B

HOUSE C

The Analytic Hierarchy Process

Step 2: Develop matrices that compare the criteria with themselves (within level 2) and the alternatives with each criteria (between level 2 and level 3). Use a scale of relative importance.

The Analytic Hierarchy Process

Saatys scale of relative importance

Intensity of relative Definition Explanation importance 1 Equal importance Two activities contribute equally to the objective 3 Moderate importance Experience and judgment slightly favor one over another 5 Essential or strong Experience and judgment suggest a strong importance favor over another 7 Very strong importance An activity is strongly favored and its dominance is demonstrated in practice 9 Absolute importance Evidence favoring this activity is of absolute affirmation 2,4,6,8 Intermediate values When compromise is needed Reciprocals: If activity I has one of the above numbers assigned when compared to J; then J has the reciprocal when compared to I

The Analytic Hierarchy Process

NE IGHBORHOOD

HOUS ES IZE

CONDITION

HOUS EAGE

HOUS ES IZE NE IGHBORHOOD

6 3 3

6 1/3 1/4 3 1/5 1/7 4 6 1/5

FINANCING

YARD S IZE

FACILITIE S

BUS S TOP

Criteria Matrix
NUMBERS ARE

BUS S TOP 1/5 1 1/3 5

1/3 3 1 6

HOUS EAGE 1/7 1/5 1/6 1 1/3 1/4 1/7 1/8 YARD S IZE 1/6 1/3 1/3 3 FACILITIE S 1/6 1/3 1/4 4 FINANCING 3 5 1/6 7 CONDITION
4 7 5 8 1 1/2 1/5 1/6 2 5 6 1 1/5 1/6 5 6 1 1/2 2 1

ASSIGNED TO EACH COMPARISON USING SAATYS SCALE

NOTICE ONES

ACROSS THE DIAGONAL

The Analytic Hierarchy Process

Alternatives are compared with respect to each criteria

Size of House
1 6 8 4

Alternative Matrix
Location to Bus
1 7 1/ 5

Neighborhood
1 8 6

Age of House
1 1 1 1 1 1 1 1 1

1/ 6 1

1/ 7 1 1/ 8 5 8 1

1/ 8 1 1/ 4 1/ 6 4 1

1/ 8 1/ 4 1

Yard Space
1 5 4

Modern Facilities
1 8 6

General Condition
1 1/ 2 1/ 2 2 2 1 1 1 1

Financing
1 1/ 7 1/ 5 7 1 3

1/ 5 1 1/ 3 1/ 4 3 1

1/ 8 1 1/ 5 1/ 6 5 1

5 1/ 3 1

The Analytic Hierarchy Process

Methodology of the AHP Step 3:

Compute priority weights of each matrix using eigenvalues.

Step 4:
Compute composite priorities of the alternatives by linearly adding the priority weights.

Step 5:
Calculate a consistency ratio which will determine the consistency of the decision and reveal possible need of revisions to the judgments.

The Analytic Hierarchy Process

The Final Decision

By calculating priority weights for each matrix and linearly combining them, the following priority vector can be developed: A .396 B .341 C .263 Choose the alternative with the highest priority weight. For this problem, House A is the best choice with an overall priority weight of .396.

The Analytic Hierarchy Process

Is the Judgement Consistent?

The overall consistency value for the decision is calculated to be .081. This says there is less than 8.1% inconsistency in the judgement. Values less than 10% inconsistency are considered to be acceptable.

Benefits of the Analytic Hierarchy Process

A sound analytical method of making decisions between alternatives. Eliminates some of the chance in making management decisions. Considers both tangible and intangible factors. Utilizes thought and intuition in a logical fashion.