Cebu Institute of Technology

University
N. Bacalso Avenue, Cebu City, Philippines
COLLEGE OF ENGINEERING AND ARCHITECTURE
Department of Industrial Engineering

COURSEWARE
ES034 | ENGINEERING MANAGEMENT
Week 3 & 4 (April 19 to May1, 2021)

Prepared by: ENGR. JOYCE MARIE MONTEGRANDE

Adopted by:
Engr. Aries M. Rivero
Engr. Anna Marie A. Granaderos
Engr. Ciara C. Bacalso

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 INFORMATION AND
DECISION MAKING
PART THREE

Information, Technology and Management

Information and Managerial Decisions
The Decision Making Process
Issues in Managerial Decision Making
Qualitative and Quantitative Models for Decision Making

INTENDED LEARNING OUTCOMES

✓ Conclude the role of information in the management process
✓ Generalize how managers use information to make decisions
✓ Enumerate and discuss the steps in the decision-making process
✓ Use techniques / tools in decision making
✓ Distinguish the current issues in managerial decision making

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 INFORMATION, TECHNOLOGY, AND MANAGEMENT
The challenges begin with the fact that our society is now highly information-driven, digital, networked, and
continuously evolving. Career and personal success increasingly requires three “must-have” competencies:
technological competency—the ability to understand new technologies and to use them to their best
advantage; information competency—the ability to locate, gather, organize, and display information; and
analytical competency—the ability to evaluate and analyze information to make actual decisions and
solve real problems.

What Is Useful Information?

This sign should be on every manager’s desk—Warning: Data ≠
Information! Data are raw facts and observations. Information is data
made useful and meaningful for decision making. We all have lots of
access to data, but we don’t always turn it into useful information that
meets the test of these five criteria:

1. Timely—The information is available when needed; it meets

deadlines for decision making and action.
2. High quality—The information is accurate, and it is reliable; it can
be used with confidence.
3. Complete—The information is complete and sufficient for the
task at hand; it is as current and up to date as possible.
4. Relevant—The information is appropriate for the task at hand; it
is free from extraneous or irrelevant materials.
5. Understandable—The information is clear and easily understood by the user; it is free from
unnecessary detail.

Even when the information is good, we don’t always make the right decisions based upon it. The term
analytics, sometimes called business analytics or management analytics, describes the systematic
evaluation and analysis of information to make decisions. Think of it as putting data to work for informed
decision making. Analytics is critically important to all aspects of the management process—planning,
organizing, leading, and controlling.

Information System and Business Intelligence

People perform best when they have available to them the right information at the right time and in the right
place. This is the function served by management information systems that use the latest technologies
to collect, organize, and distribute data. Silicon Valley pioneer and Cisco Systems CEO John Chambers
once pointed out that he always has the information he needs to be in control—be it information on earnings,
expenses, profitability, gross margins, and more. “Because I have my data in that format,” he said, “every
one of my employees can make decisions that might have had to come all the way to the president. . ..
Quicker decision making at lower levels will translate into higher profit margins. . .. Companies that don’t
do that will be noncompetitive.” Given the great power of technology today, information systems are
indispensable executive tools.

Business intelligence is the process of tapping or mining information systems to extract data that is most
useful for decision makers. It sorts and reports data in organized ways that help decision makers detect,
digest, and deal with patterns posing important implications. One of the trends in business intelligence is
use of executive dashboards that visually display and update key performance metrics as graphs, charts,
and scorecards on a real-time basis.

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Information Needs in Organization

Information serves the variety of needs described in the

Figure. At the organization’s boundaries, information in
the external environment is accessed. Managers use this
intelligence information to deal with customers,
competitors, and other stakeholders such as government
agencies, creditors, suppliers, and stockholders.
Organizations also send vast amounts of public
information to stakeholders and the external environment.
This often takes the form of advertising, public relations
messages, and financial reports that serve a variety of Figure 3.1 Internal and external information needs in organizations
purposes, etc. And within organizations, people need vast
amounts of internal information to make decisions and solve problems in their daily work. They need
information from their immediate work setting and from other parts of the organization.

INFORMATION AND MANAGERIAL DECISIONS

Information is the anchor point for all three—information helps a leader sense the need for a decision, frame
an approach to the decision, and communicate about the decision with others.

Managers as Information Processors - Managers are information processors who are continually gathering,
giving, and receiving information. This information processing is now as much electronic as it is face to
face. Managers use technology at work the way we use it in our personal lives—always on, always
connected.

Managers as Problem Solvers – In all company situations, the manager’s skill in problem solving - the
process of identifying a discrepancy between an actual and a desired state of affairs, and then taking action
to resolve – is very essential. Success in problem solving comes from using information to make good
decisions—choices among alternative possible courses of action.

ACTION LEARNING EXERCISE FOR DECISION MAKERS 3.1: You are the Mayor
Base on the trend of the positive cases of the novel coronavirus, COVID 19, in Cebu, what would you
implement to lessen the number of the positive cases as the Cebu City Mayor and why? Give at least 3.
How can electronic communications such as the Internet and news be used to improve the decision-
making process?

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 THE DECISION MAKING PROCESS

The decision-making process can be understood in the context of the following short case.

The Ajax Case. On December 31, the Ajax Company decided to close down its Murphysboro plant. Market
conditions were forcing layoffs, and the company could not find a buyer for the plant. Some of the 172
employees had been with the company as long as 18 years; others as little as 6 months. All were to be
terminated. Under company policy, they would be given severance pay equal to one week’s pay per year
of service.

This case reflects how competition, changing times, and the forces of globalization can take their toll on
organizations, the people who work for them, and the communities in which they operate. Think about how
you would feel as one of the affected employees. Think about how you would feel as the mayor of this small
town. Think about how you would feel as a corporate executive having to make the difficult business
decisions.

STEP 1. Identify and Define the Problem

The first step in decision making is to find and define the problem. Information gathering and deliberation
are critical in this stage. The way a problem is defined can have a major impact on how it is resolved, and
it is important to clarify exactly what a decision should accomplish. The more specific the goals, the easier
it is to evaluate results after the decision is actually implemented.

Back to the Ajax Case. Closing the Ajax plant will put a substantial number of people from the small
community of Murphysboro out of work. The unemployment will have a negative impact on individuals, their
families, and the town as a whole. The loss of the Ajax tax base will further hurt the community. The local
financial implications of the plant closure will be great. The problem for Ajax management is how to minimize
the adverse impact of the plant closing on the employees, their families, and the community.

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STEP 2. Generate and Evaluate Alternative Courses of Action

Once a problem is defined, it is time to assemble the facts and information that will solve it. This is where
we clarify exactly what is known and what needs to be known. Extensive information gathering should
identify alternative courses of action, as well as their anticipated consequences. Key stakeholders in the
problem should be identified, and the effects of possible courses of action on each of them should be
considered. A cost-benefit analysis is a useful approach for evaluating alternatives. It compares what an
alternative will cost in relation to the expected benefits. The benefits of an alternative should be greater
than its costs, and it should also be ethically sound.

Back to the Ajax Case. The Ajax plant is going to be closed. Given that, the possible alternative
approaches that can be considered are (1) close the plant on schedule and be done with it; (2) delay the
plant closing until all efforts have been made to sell it to another firm; (3) offer to sell the plant to the
employees and/or local interests; (4) close the plant and offer transfers to other Ajax plant locations; or (5)
close the plant, offer transfers, and help the employees find new jobs in and around Murphysboro.

STEP 3. Choose a Preferred Course of Action

This is the point where an actual decision is made to select a preferred course of action.

Back to the Ajax Case. Ajax executives decided to close the plant, offer transfers to company plants in
another state, and offer to help displaced employees find new jobs in and around Murphysboro.

STEP 4. Implement the Decision

Once a decision is made, actions must be taken to fully implement it. Nothing new can or will happen unless
action is taken to actually solve the problem. Managers not only need the determination and creativity to
arrive at a decision, they also need the ability and willingness to implement it.

Back to the Ajax Case. Ajax ran ads in the local and regional newspapers. The ad called attention to an
“Ajax skill bank” composed of “qualified, dedicated, and well-motivated employees with a variety of skills
and experiences.” Interested employers were urged to contact Ajax for further information.

STEP 5—Evaluate Results

The decision-making process is not complete until results are evaluated. If the desired outcomes are not
achieved or if undesired side effects occur, corrective action should be taken. Evaluation is a form of
managerial control. It involves gathering data to measure performance results and compare them against
goals. If results are less than what was desired, it is time to reassess and return to earlier steps. In this way,
problem solving becomes a dynamic and ongoing activity within the management process. Evaluation is
always easier when clear goals, measurable targets, and timetables were established to begin with.

Back to the Ajax Case. How effective were Ajax’s decisions? We don’t know for sure. But after the
advertisement ran for some 15 days, the plant’s relations manager said: “I’ve been very pleased with the
results.” That’s all we know and more information would certainly be needed for a good evaluation of how
well management handled this situation. Wouldn’t you like to know how many of the displaced employees
got new jobs locally and how the local economy held up? You can look back on the case as it was described
and judge for yourself. Perhaps you would have approached the situation and the five steps in decision
making somewhat differently.

ACTION LEARNING EXERCISE FOR DECISION MAKERS 3.2

Base on your possible solutions to lessen the case of COVID-19 in Cebu (Activity 3.1: You are the
Mayor), applying the decision-making process and define your actions on each of the steps in decision
making.

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 ISSUES IN MANAGERIAL DECISION MAKING

Decision Errors and Traps

Framing Error

Which one of these products would you pick: ‘80% fat-free’ frozen
yogurt or ‘20% fat’ frozen yogurt; ‘90% lean’ ground beef or ‘10%’ fat
ground beef? Most people would be more likely to choose the first
option in both cases, even though the two choices are identical.

Managers sometimes suffer from framing error that occurs when a

problem is evaluated and resolved in the context in which it is
perceived—either positively or negatively. Another example is when
data show a product that has a 40% market share. A negative frame
views the product as deficient because it is missing 60% of the market.
The likely discussion would focus on: “What are we doing wrong?”
Alternatively, the frame could be a positive one, looking at the 40% share as a good accomplishment. In
this case the discussion is more likely to proceed with “How do we do things better?” Sometimes people
use framing as a tactic for presenting information in a way that gets other people to think inside the desired
frame. In politics, this is often referred to as “spinning” the data.

Availability Bias

The availability bias occurs when people assess a current event

or situation by using information that is “readily available” from
memory. An example is deciding not to invest in a new product
based on your recollection of a recent product failure. The potential
bias is that the readily available information is fallible and irrelevant.
For example, the product that recently failed may have been a good
idea that was released to market at the wrong time of year.

Representativeness Bias

The representativeness bias occurs when people assess

the likelihood of something happening based on its similarity
to a stereotyped set of occurrences. An example is deciding
to hire someone for a job vacancy simply because he or she
graduated from the same school attended by your last and
most successful new hire. The potential bias is that the
representative stereotype masks factors important and
relevant to the decision. For instance, the abilities and career
expectations of the job candidate may not fit the job
requirements; the school attended may be beside the point.

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Anchoring and Adjustment Bias

The anchoring and adjustment bias occurs

when decisions are influenced by inappropriate
allegiance to a previously existing value or starting
point. For example, someone is trying to ask on
the average price of a German cars - more or less
than $100,000. Thinking about luxury cars and
your previous experience with these types of cars
lets you think that you should be paying around
$75,000 and said that it’s too high. You were then
asked if it’s higher or lower than $20,000 and you
said that it’s too low – still thinking about luxury cars. Your estimate on the average price of German cars
will be much lower if that person will ask first about small cars and mentioning low number then luxury cars
and mentioning high number.

From that price point, you can now make adjustments as needed based on the brand, model, and additional
features. The higher your starting point, the more likely you are to settle on a higher final purchase price.
The lower your starting point, the more likely you are to settle on a lower purchase price.

Confirmation Error

One of our tendencies after making a decision is

to try and find ways to justify it. In the case of
unethical acts, for example, we try to “rationalize”
them after the fact. This is called confirmation
error. It means that we notice, accept, and even
seek out only information that confirms or is
consistent with a decision we have just made.
Contrary information that shows what we are
doing is incorrect is downplayed or denied.

Escalating Commitment

Another decision-making trap is escalating commitment. This

occurs as a decision to increase effort and perhaps apply more
resources to pursue a course of action that is not working. Managers
prone to escalation let the momentum of the situation and personal
ego overwhelm them. They are unwilling to admit they were wrong
and unable to “call it quits,” even when facts indicate that this is the
best thing to do. This is a common decision error, perhaps one that
you are personally familiar with. It is sometimes called the sunk-cost
fallacy.

ACTION LEARNING EXERCISE 3.3 – Oh! I didn’t know it’s a bias!

State any personal experience on each of the decision traps and bias.

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 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 Approach; and

2. Quantitative Approach.

Qualitative Approach. 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 / low cost and (4) immediate
decisions are needed. An example of an evaluation using the qualitative approach is as follows:

A factory operates on three shifts with the following schedule: (1) First shift — 6:00 A.M. to 2:00 P.M. (2)
Second shift — 2:00 P.M. to 10:00 P.M and (3) 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 engineer, was notified at 1:00 P.M. that five of the workers assigned to the second
shift could not report for work because of injuries sustained in a traffic accident while they were on their
way to the factory. Because of time constraints, the manager made an instant decision on who among the
first shift workers would work overtime to man the five machines.

Quantitative Approach. It concentrates on the quantitative facts or data associated with the problem and
develop mathematical expression that describes the objectives, constraints, and other relationships that
exist in the problem. Used when: (1) The problem is complex, and the manager cannot develop a good
solution without the aid of quantitative analysis, (2) The problem is very important (e.g. great deal of money
is involved), (3) The problem is new and the manager has no previous experience from which to draw, (4)
The problem involves many variables, (5) There are data which describe the decision environment, (6)
There are data which describe the value or utility of the different possible alternatives, (7) The goals of the
decision maker or her organization can be described in quantitative term and (8) Workable models are
available for these situations

QUANTITATIVE MODELS FOR DECISION MAKING

1. Inventory Models – consist of several types all designed to help the engineering manager make
decision regarding inventory. They are as follows:
a. Economic order quantity model - calculate the number of items that should be ordered at one
time to minimize yearly cost of placing orders and carrying items in inventory
b. Production Order Quantity Model – economic order quantity technique applied to production
orders
c. Back Order Inventory Model – used for planned shortages
d. Quantity Discount Inventory Model – minimize the total cost when quantity discounts are
offered by suppliers
2. Queuing Theory – describes how to determine the number of service units that will minimize both
customer waiting time and cost of service. This is applicable to companies where waiting lines are
a common situation. Examples are cars waiting for service at the car wash center, ships and barges
waiting at the harbor for loading and unloading by dockworkers, etc.
3. Network Models – models where the large tasks are broken into smaller segments that can be
managed independently. Two most prominent network models are:
a. Program Evaluation Review Technique (PERT)– enables managers to schedule, monitor and
control large and complex projects with three time estimates for each activity
b. Critical Path Method (CPM) – network technique using only one-time factor per activity
4. Forecasting - the collection of past and current information to make predictions about the future
5. Regression Analysis - a forecasting method that examines the association between two or more
variables. It uses data from previous periods to predict future events.
a. Simple Regression – one independent variable is involved

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 b. Multiple Regression – two or more independent variables are involved
6. Simulation - a model constructed to represent reality on which conclusions about real-life problems
can be used
7. Linear Programming - quantitative technique that is used to produce an optimum solution within
the bounds by constraints upon the decision
8. Sampling Theory - quantitative technique where samples of populations are statistically determined
to be used for a number of processes such as quality control and marketing research.
9. Statistical Decision Theory / Decision Analysis - rational way to conceptualize, analyze and solve
problems in situations involving limited or partial information about the decision environment.

Decision environment has three (3) classifications:

a. Decision Making Under Conditions of Certainty - only one state of nature exists. There is
complete certainty about the future.
b. Decision Making Under Conditions of Uncertainty - More than one state of nature exists, but
the decision maker has no knowledge about the various states
c. Decision Making Under Conditions of Risk - More than one state of nature exists, but now the
decision maker has information which will support the assignment of probability values to each
of the states

INVENTORY MODELS (specifically Economic Order Quantity)

In inventory management, economic order quantity is the order quantity that minimizes the total holding
costs and ordering costs. It is one of the oldest classical production scheduling models.

Inventory Cost

• Holding costs - the costs of holding or “carrying” inventory over time; e.g. obsolescence, insurance,
extra staffing, interest, pilferage, damage, warehousing, etc.
• Ordering costs - the costs of placing an order and receiving goods; eg. Supplies, forms, order
processing, clerical support, etc.
• Setup costs - cost to prepare a machine or process for manufacturing an order; e.g. clean-up costs,
re-tooling costs, adjustment costs, etc.

Economic Order Quantity (EOQ)

Basic Assumptions
• Demand is known, constant, and independent
• Lead time is known and constant
• Receipt of inventory is instantaneous and complete
• Quantity discounts are not possible
• Only variable costs are setup and holding
• Stock outs can be completely avoided

EOQ Model Equations

Q = Number of pieces/units per order

Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year

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 Optimal Order Quantity, Q* Expected Number of Orders, N Expected Time Between Order, T
2𝐷𝑆 𝐷 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 / 𝑦𝑒𝑎𝑟
𝑄∗ = √ 𝑁= 𝑇=
𝐻 𝑄∗ 𝑁

Setup Cost Holding Cost

𝐷 𝑄
𝑆𝑒𝑡𝑢𝑝 𝐶𝑜𝑠𝑡 = (𝑆) 𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 = (𝐻)
𝑄 2

Example 1: Forever 25, a famous clothing manufacturer company, wanted to determine the number of
units of needles that they should order to minimize the yearly cost of placing orders. They also want to know
how many times do they need to order in a year, the optimal time between order/replenishment and the
total annual cost for ordering the needles in a year. Following data was provided by the procurement
department.
D = 1,000 units S = $10 per order
Q*= 200 units H = $.50 per unit per year
Solutions:

2𝐷𝑆 2(1,000)(10)
𝑄∗ = √ = √ = 𝟐𝟎𝟎 𝒖𝒏𝒊𝒕𝒔
𝐻 (0.50)

𝐷 1,000
𝑁= = = 𝟓 𝒐𝒓𝒅𝒆𝒓𝒔 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓
𝑄∗ 200

𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 / 𝑦𝑒𝑎𝑟 250

𝑇= = = 𝟓𝟎 𝒅𝒂𝒚𝒔 𝒃𝒆𝒕𝒘𝒆𝒆𝒏 𝒐𝒓𝒅𝒆𝒓𝒔
𝑁 5

𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝑆𝑒𝑡𝑢𝑝 𝐶𝑜𝑠𝑡 + 𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝐶𝑜𝑠𝑡

𝐷 𝑄 1000 200
𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑜𝑠𝑡 = (𝑆) + (𝐻) = (10) + (0.50) = $𝟏𝟎𝟎 𝒑𝒆𝒓 𝒚𝒆𝒂𝒓
𝑄 2 200 2

PROBLEM SOLVING 3.1 - Economic Order Quantity

The I-75 Carpet Discount Store in North Georgia stocks carpet in its warehouse and sells it through an
adjoining showroom. The store keeps several brands and styles of carpet in stock; however, its biggest
seller is Super Shag carpet. The store wants to determine the optimal order size and total inventory cost
for this brand of carpet given an estimated annual demand of 10,000 yards of carpet, an annual carrying
cost of $0.75 per yard, and an ordering cost of $150. The store would also like to know the number of
orders that will be made annually and the time between orders (i.e., the order cycle) given that the store
is open every day except Sunday, Thanksgiving Day, and Christmas Day (which is not on a Sunday)
(311 days/yr). Determine the following:
A. Determine the optimal order quantity.
B. Determine the number of orders per year.
C. Determine the time between orders.
D. Determine the annual set-up cost.
E. Determine the annual holding cost.
F. What is the total inventory cost of the Q* system?

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 STATISTICAL DECISION THEORY / DECISION ANALYSIS

A rational way to conceptualize, analyze and solve problems in situations involving limited or partial
information about the decision environment. Three classifications of decision environment are the following:
(1) Decision Making Under Conditions of Certainty, (2) Decision Making Under Conditions of Uncertainty
and (3) Decision Making Under Conditions of Risk.

Definition of terms:

• Decision Alternative – the workable options that must be considered in the decision
• States of Nature – the probable future events that can occur, not under the control of the decision
maker
• Payoff Table – a table which shows the payoffs (profit or loss) which would result from each possible
combination of decision alternative and state of nature

DECISION MAKING UNDER CONDITIONS OF UNCERTAINTY

There are four types of criteria that we will look at (1) Maximax Criterion (Optimist), (2) Maximin Criterion
(Pessimist), (3) Minimax Regret Criterion (Opportunist) and (4) Criterion of Realism (Realist).

Example: Consider the following problem of ABC Company. The company has to choose whether they will
have to expand, build or subcontract a building for company expansion. Come up with a decision using the
different criteria under conditions of uncertainty. The table shows the profit or loss – for example, if they
choose to expand but the demand (states of nature) of their product is low then they will make a loss of
Php250,000. (Amount in Php)

States of Decision Alternatives

Nature Expand Build Subcontract
High 500,000 700,000 300,000
Moderate 250,000 300,000 150,000
Low -250,000 - 400,000 - 10,000
Failure - 450,000 - 800,000 - 100,000

1. Maximax Criterion (Optimist)

The maximax rule involves selecting the alternative that maximizes the maximum payoff
available. In the optimistic criterion, select the decision alternative which would maximize his
maximum payoff. Select the maximum payoff possible for each decision alternative then choose
the alternative that provides the maximum payoff within the group

States of Decision Alternatives The optimistic decision-maker locates

Nature Expand Build Subcontract the maximum payoff for each decision
High 500,000 700,000 300,000
alternatives. The maximum of these
Moderate payoffs is identified and the
250,000 300,000 150,000
corresponding alternative is selected.
Low - 250,000 - 400,000 - 10,000
The optimal decision alternative in the
Failure - 450,000 - 800,000 - 100,000
example, based on this criterion, is to
Maximum
500,000 700,000 300,000 Build with a maximum payoff of
Payoff
Php700,000.

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2. Maximin Criterion (Pessimist)
In the pessimistic criterion, it is to maximize his minimum possible payoff or to choose the best of
the worst. Select the minimum payoff possible for each decision alternative then choose the
alternative that provides the maximum payoff within the group.

States of Decision Alternatives The pessimistic decision-maker locates

Nature Expand Build Subcontract the minimum payoff for each decision
High 500,000 700,000 300,000 alternatives. The maximum of these
Moderate 250,000 300,000 150,000 minimum payoffs is identified and the
Low - 250,000 - 400,000 - 10,000 corresponding alternative is selected.
Failure - 450,000 - 800,000 - 100,000 Since –Php100,000 is maximum out of
Minimum the minimum payoffs, the optimal
- 450,000 - 800,000 - 100,000
Payoff decision alternative is to Subcontract.

3. Minimax Regret Criterion (Opportunist)

Assume that a states of nature actually happened, solve for the regret or the difference of the
largest payoff for that state and the payoff of each decision alternative. Choose the minimum of
these regret values. It is useful for a risk-neutral decision maker. Essentially, this is the technique
for a 'sore loser' who does not wish to make the wrong decision. 'Regret' in this context is defined
as the opportunity loss through having made the wrong decision.

Using the same example, if the demand is high, they will make a maximum profit of 700,000 if they
build. If they had decided to expand, they will only make a profit of 500,000. The difference or regret
between the 500,000 profit and the maximum of 700,000 achievable profit for that state of nature
(high) is 200,000. This means that they had an opportunity loss of 200,000 for choosing to expand
than to build. The regrets can be tabulated as follows:
The regret criterion is based upon
States of Decision Alternatives the minimax principle, i.e., the
Nature Expand Build Subcontract
500,000 - 700,000 700,000 - 700,000 300,000 - 700,000
decision-maker tries to minimize
High
200,000 P0 400,000 the maximum regret. Thus, the
Moderate 250,000 - 300,000 300,000 - 300,000 150,000 - 300,000
decision-maker selects the
50,000 0 150,000
Low - 250,000 -(- 10,000) -400,000 -(- 10,000) - 10,000-(- 10,000) maximum regret for each of the
240,000 390,000 0 decision alternatives and out of
Failure - 450,000 -(- 100,000) -800,000 -(-100,000) - 100,000 -(- 100,000)
350,000 700,000 0 these the alternatives which
Maximum corresponds to the minimum regret
350,000 700,000 400,000
Regret is regarded as optimal. Since
Php350,000 is the minimum regret, the optimal alternative is to Expand.

4. Criterion of Realism
It is considering both optimism and pessimism. Alpha is used as an index of optimism. Determine
the maximum and the minimum payoff for each decision alternative and use the formula. Then a
weighted average/measure of realism of the maximum and minimum payoffs of an action, with α
and 1 - α as respective weights, is computed. The decision alternative with highest average is
regarded as optimal.

𝑴𝒆𝒂𝒔𝒖𝒓𝒆 𝒐𝒇 𝑹𝒆𝒂𝒍𝒊𝒔𝒎 = (𝑴𝒂𝒙𝒊𝒎𝒖𝒎 𝑷𝒂𝒚𝒐𝒇𝒇) 𝜶 + (𝑴𝒊𝒏𝒊𝒎𝒖𝒎 𝑷𝒂𝒚𝒐𝒇𝒇)(𝟏 − 𝜶)

Using the same example, come up with a decision using criterion of realism with an index of
optimism at α = 60%.

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 Decision Alternatives
States of Nature
Expand Build Subcontract
High 500,000 700,000 300,000
Moderate 250,000 300,000 150,000
Low - 250,000 - 400,000 - 10,000
Failure - 450,000 - 800,000 - 100,000
Maximum Payoff 500,000 700,000 300,000
Minimum Payoff - 450,000 - 800,000 - 100,000
500,000*0.6 + -450,000*0.4 500,000*0.6 + -450,000*0.4 500,000*0.6 + -450,000*0.4
Measure of Realism 120,000 100,000 140,000

Since the average for Subcontract is the maximum, it is the optimal alternative.

PROBLEM SOLVING 3.2 - Decision making under conditions of Uncertainty

1. Andre and Zac run a salad shop called "Healthy from A to Z". They need to make the salads a day
before so they have to decide how many salads to make in advance each day before they know the
actual demand. Their choice is between 45, 55 and 65 salads. The following table shows their profit or
loss/ payoff table. Amount in Php.

States of Nature Decision Alternatives (Daily Supply) Determine the optical decision alternative for
(Daily Demand) 45 Salads 55 Salads 65 Salads the four types of criteria. For Criterion of
45 Salads 2000 1000 -1000 Realism, consider an index of optimism at
55 Salads 2000 2500 -500 α=65%.
65 Salads 2000 2500 2600

END OF WEEK 3

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 QUEUING THEORY

- Queuing theory is the mathematics of waiting lines.

- It is extremely useful in predicting and evaluating system performance.
- Queuing theory has been used for operations research, manufacturing and systems analysis.
Traditional queuing theory problems refer to customers visiting a store, analogous to requests
arriving at a device. Commonly used in telecommunications, traffic control, health services (e.g.
control of hospital bed assignments)

Queuing System

Key elements of the queuing system are the (1) customer which refers to anything that arrives at a facility
and requires service, e.g., people, machines, trucks, emails. And (2) server refers to any resource that
provides the requested service, eg. repairpersons, retrieval machines, runways at airport.

The queuing system has four major

components: Input which is the Arrival
Process, Queue or Waiting Line, Service
Process or the Server and the Output/Exit.
The input or the arrival process is when the
customers arrive. The customers will then
have to wait their turn for service in the queue
or waiting line, are serviced and leave after the
service. Example in a hospital (system), the
patients (customer) are arriving and being
entertained by the nurses (servers).
Queue Structure

Queue Structure is the crucial element of a queuing system, as it shows the queue discipline, which means
the order in which the customers are picked from the queue for the service. It depends on the arrival of
customers and the nature of service being offered. The customers can be chosen from the queue in one of
the following ways:

1. First-come-first-served. When the services are rendered to the customers in order of their arrival,
the queue discipline is the first-come-first-served type. Simply, serving the customer first, who
comes first to the service facility. Example: At the movie ticket counter, a person who came first will
get the tickets first.
2. Last-come-first served. It simply means, the person who comes last will be served first.
Sometimes the customers are serviced in the order reverse of the order in which they enter the
service facility. Example: A pile of files, the file that comes in the last will be read first.
3. Service-in-random-order (SIRO). Under this type of queue structure, the customer is chosen for
service randomly and hence all the customers are equally likely to be selected. Therefore, the time
of arrival of the customer has no consequence on the selection of the customer.
4. Priority Service. Under this rule, customers are grouped in priority classes on the basis of some
attributes such as service time or urgency or according to some identifiable characteristic, and
FCFS rule is used within each class to provide service. Treatment of VIPs in preference to other
patients in a hospital is an example of priority service.

Service System

Parallel channels means, a number of channels providing identical service facilities so that several
customers may be served simultaneously. Series channel means a customer go through successive

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ordered channels before service is completed. A queuing system is called a one-server model, i.e., when
the system has only one server, and a multi-server model i.e., when the system has a number of parallel
channels, each with one server.
a. Arrangement of service facilities in series
1. Single Queue Single Server

2. Single Queue, Multiple Server

b. Arrangement of Service facilities in Parallel

Customer Characteristics/Attitude

1. Balking: “I’m not going to wait in that line”. Customer decides not to join the queue by seeing the
number of customers already in service system.

2. Reneging: “I’m outta here”. Customer after joining the queue, waits for some time and leaves the
service system due to delay in service.

3. Jockeying: “Hey, that line looks like it’s moving faster”. Customer moves from one queue to
another thinking that he will get served faster by doing so.

Single Channel Model

 = Mean number of arrivals per time period

µ = Mean number of units served per time period

Average number of units (customers) in the Average time a unit spends waiting in the
system (waiting and being served), Ls queue, Wq
 
𝐿𝑠 = 𝑊𝑞 =
µ−  µ (µ − )

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 Average time a unit spends in the system
Utilization factor for the system, ρ
(waiting time plus service time), Ws

1 𝜌=
𝑊𝑠 = µ
µ− 

Average number of units waiting in the queue, Probability of 0 units in the system (that is, the
Lq service unit is idle), ρ0
2 
𝐿𝑞 = 𝜌0 = 1 −
µ (µ − ) µ

Example: You are an owner of a single server carwash. The customers arrive at a mean rate of 2 cars per
hour with a service rate/mean number of units served per time period of 3 cars serviced per hour. Compute
for the six parameters of single channel model and conclude whether there is a need to add a carwash boy.

 = 2 cars arriving/hour µ = 3 cars serviced/hour

Average number of units (customers) in the system Average time a unit spends waiting in the queue, Wq
(waiting and being served), Ls  2
𝑊𝑞 = = = 𝟒𝟎 𝒎𝒊𝒏𝒖𝒕𝒆 𝒂𝒗𝒆𝒓𝒂𝒈𝒆 𝒘𝒂𝒊𝒕𝒊𝒏𝒈 𝒕𝒊𝒎𝒆
 2 µ (µ − ) 3 (3 − 2)
𝐿𝑠 = = = 𝟐 𝒄𝒂𝒓𝒔 𝒊𝒏 𝒕𝒉𝒆 𝒔𝒚𝒔𝒕𝒆𝒎 𝒐𝒏 𝒂𝒗𝒆𝒓𝒂𝒈𝒆
µ−  3− 2

Average time a unit spends in the system (waiting time Utilization factor for the system, ρ
plus service time), Ws  2
𝜌= = = 𝟔𝟔. 𝟔% 𝒐𝒇 𝒕𝒊𝒎𝒆 𝒄𝒂𝒓𝒘𝒂𝒔𝒉 𝒃𝒐𝒚 𝒊𝒔 𝒃𝒖𝒔𝒚
1 1 µ 3
𝑊𝑠 = = = 𝟏 𝒉𝒐𝒖𝒓 𝒂𝒗𝒆𝒓𝒂𝒈𝒆 𝒘𝒂𝒊𝒕𝒊𝒏𝒈 𝒕𝒊𝒎𝒆 𝒊𝒏 𝒕𝒉𝒆 𝒔𝒚𝒔𝒕𝒆𝒎
µ−  3− 2

Average number of units waiting in the queue, Lq Probability of 0 units in the system (that is, the service unit
2 22 is idle), ρ0
𝐿𝑞 = = = 𝟏. 𝟑𝟑 𝒄𝒂𝒓𝒔 𝒘𝒂𝒊𝒕𝒊𝒏𝒈 𝒊𝒏 𝒍𝒊𝒏𝒆  2
µ (µ − ) 3 (3 − 2) 𝜌0 = 1 − = 1 − = 𝟎. 𝟑𝟑 𝒑𝒓𝒐𝒃𝒂𝒃𝒊𝒍𝒊𝒕𝒚 𝒐𝒇 𝟎 𝒖𝒏𝒊𝒕𝒔 𝒊𝒏 𝒕𝒉𝒆 𝒔𝒚𝒔𝒕𝒆𝒎
µ 3

Conclusion: Base on the computed parameters, there is a need to add a server/carwash boy. The system
has a low probability of having zero units and with an average of 2 cars waiting and being served. The
customers also have to wait for 40 minutes for a 20-minute service.

PROBLEM SOLVING 4.1 - Queuing Theory

You are an owner of a single server Burger Junction. The customers arrive at a mean rate of 5 customers
per minute with a service rate/mean number of units served per time period of 7 customers serviced per
minute. Compute for the six parameters of single channel model and conclude whether there is a need
to add a server.

PARETO ANALYSIS

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Pareto analysis is a formal technique useful where many
possible courses of action are competing for attention. This
technique is also called the vital few (20%) and the trivial many
(80%). It is statistical technique in decision making for selection
of limited tasks which have significant overall impact. This
technique helps to identify the top 20% of causes that needs to
be addressed to resolve the 80% of the problems.

The value of the Pareto Principle for a project manager is that it

reminds them to focus on the 20% of things that matter. Of the
things you do during your project, only 20% are really important.
Those 20% produce 80% of your results. Identify and focus on those things first, but don't totally ignore the
remaining 80% of causes.

History of Pareto Analysis

• The Pareto effect is named after Vilfredo Pareto, an economist and sociologist who lived from 1848
to 1923.
• He observed in 1906 that 20% of the Italian population owned 80% of Italy’s wealth.

Pareto Chart

• A Pareto Chart is a series of bars whose height reflect the frequency or impact of problems
• The bars are arranged in descending order of height from left to right
• Bars on left are relatively more important (vital few) than that the bars on the right (trivial many)

Example: The business was investigating the delay associated with processing credit card applications, the
data could be grouped into the ff categories: no signature, residential address not valid, non-legible
handwriting, already a customer and other.

Step 1: Identify and List Problems (Record the raw data)

Category Frequency Write out a list of all of the causes to the problem that needs
No address 9 to resolve. Where possible, gather feedback from clients and
Non-legible writing 22 team members. This could take the form of customer
Current Customer 15 surveys, formal complaints, or helpdesk logs, for example.
No signature 40 Score the listed problem; it will depend on the sort of problem
Other 8 that needs to be resolved.

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Step 2: Order the data in descending order
Category Frequency
No signature 40
Non-legible writing 22
Current Customer 15
No address 9
Other 8
Step 3: Determine the percentage that each category represent

Category Frequency Percentage To compute for the percentage, divide each frequency
No signature 40 43% to the total frequency of all the causes and multiply by
Non-legible writing 22 23% 100. From the example, divide the frequency of the ‘No
Current Customer 15 16% signature’ cause by the total of all frequency which is
No address 9 10% 94 and multiply by 100; this will yield 43%.
Other 8 8% Percentages of the causes are shown in the table.

Step 4: Solve for the cumulative percentage

Category Frequency Percentage Cumulative To solve for the cumulative
Percentage percentages, add the percentage of
No signature 40 43% 43% one category to the percentage of the
Non-legible writing 22 23% 66% preceding category. This calculation is
Current Customer 15 16% 82% important in statistics because it shows
No address 9 10% 92% how the percentages add together over
Other 8 8% 100% a time period.

Step 5: Prepare and Analyze the diagram

Make a bar graph with respect to the frequency of

the causes. The cumulative line is plotted at the
midpoint of each bar at a height equal to the
cumulative percentage. Draw a line at 80% on the
y-axis running parallel to the x-axis. Then drop the
line at the point of intersection with the curve on the
x-axis. This point on the x-axis separates the
important causes on the left (vital few) from the
less important causes on the right (trivial many).

Therefore, 80% of the delays in processing the

credit card application is a result from the 20%
causes – no signature & non-illegible writing.

PROBLEM SOLVING 4.2 – Pareto Analysis

1. How is your quarantine period so far – productive or unproductive?
2. Identify at least 10 activities/events in your quarantine period that you often do and identify the
frequency (how often) you do it per month.
3. Conduct a Pareto Analysis to identify the 80% of the reasons that make your quarantine period
productive/unproductive.

END OF WEEK 4

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