Lesson 2

DECISION-MAKING
Time Frame: 2hrs

Objectives:
 Verifying the roles do judgment & intuition play in an effective decision making
 Discuss the different types of models
 Explain how computers will affect the decision making capability

Managers of all kinds and types, including the engineer manager, are primarily tasked to provide
leadership in the quest for the attainment of the organization's objectives.

If he is to become effective, he must learn the intricacies of decision-making.

The engineer manager's decision-making skills will be very crucial to his success as a professional.
Good decisions, on the other hand, will provide the right environment for continuous growth and success
of any organized effort.

Decision Making as Management Responsibility

The higher the management level is, the bigger and the more complicated decision-making
becomes.

What Is Decision Making?

Decision-making may be defined as “the process of identifying and choosing alternative courses
of action in a manner appropriate to the demands of the situation."

The definition indicates that the engineer manager must adapt a certain procedure designed to
determine the best option available to solve certain problems.

The Decision Making Process

Rational decision-making, according to David H. Holt, is a process involving the following steps:
1. Diagnose problem
2. Analyze environment
3. Articulate problem or opportunity
4. Develop viable alternatives
5. Evaluate alternatives
6. Make a choice
7. Implement decision
8. Evaluate and adapt decision results
Diagnose Problem

An expert once said "identification of the problem is tantamount to having the problem half-
solved."

What is a Problem? A problem exists when there is a difference between an actual situation and a desired
situation.

Analyze the Environment

The objective of environmental analysis is the identification of constraint, which may be spelled
out as either internal or external limitations.

Example of internal limitations are as follows:

1. Limited funds available for the purchase of equipment.
2. Limited training on the part of employees.
3. Ill-designed facilities.

Examples of external limitations are as follows:

1. Patents are controlled by other organizations.
2. A very limited market for the company’s products and services exists.
3. Strict enforcement of local zoning regulations.

Components of the Environment:

1. Internal and
2. External.

The internal environment refers to organizational activities within a firm that surrounds decision
- making.

The external environment refers to variables that are outside the organization and not typically
within the short run control of top management.

Develop Viable Alternatives

Problems may be solved by any of the solutions offered.

1. Prepare a list of alternative solutions.
2. Determine the viability of each solution.
3. Revise the list by striking out those which are not viable

Evaluate Alternatives
Proper evaluation makes choosing the right solution less difficult. How the alternatives will be
evaluated will depend on the nature of the problem, the objectives of the firm, and the nature of
alternatives presented. Souder suggests that "each alternative must be analyzed and evaluated in terms
of its value, cost, and risk characteristics.
The risk characteristics refer to the likelihood of achieving the goals of the alternatives.
Make a Choice
Choice-making refers to the process of selecting among alternatives representing potential
solutions to a problem. At this point, Webber advises that “particular effort should be made to identify all
significant consequences of each choice.

Implement Decision
Implementation refers to carrying out the decision so that the objectives sought will be achieved.
To make implementation effective, a plan must be devised.
At this stage, the resources must be made available so that the decision may be properly implemented.

Evaluate and Adapt Decision Results

It is important for the manager to use control and feedback mechanisms to ensure results and to
provide information for future decisions.
Feedback refers to the process which requires checking at each stage of the process to assure that
the alternatives generated, the criteria used in evaluation and the solution selected for implementation
are in keeping with the goals and objectives originally specified.
Control refers to actions made to ensure that activities performed match the desired activities or
goals, that have been set.

Approaches in Solving Problems

Be familiar with the following approaches:
1. Qualitative evaluation, and
2. Quantitative evaluation.

Qualitative Evaluation. 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.
4. Immediate decisions are needed

Quantitative Evaluation. This term refers to the evaluation of alternatives using any technique in a group
classified as rational and analytical.

Quantitative Models for Decision Making

The types of quantitative techniques which may be useful in decision-making are as follows:
1. Inventory models
2. Queuing theory
3. Network models
4. Forecasting
5. Regression analysis
 6. Simulation
7. Linear programming
8. Sampling theory
9. Statistical decision theory

Inventory Models
Inventory models consist of several types all designed to help the engineer manager make
decisions regarding inventory.
1. Economic order quantity model- this one is used to calculate the number of items that should
be ordered at one time to minimize the total yearly cost of placing orders and carrying the items in
inventory.
2. Production order quantity model - this is an economic order quantify technique applied to
production orders.
3. Back order inventory model - this is an inventory model used for planned shortages.
4. Quantity discount model -an inventory model used to minimize the total cost when quantity
discounts are offered by suppliers.

Queuing Theory
The queuing theory is one that describes how to determine the number of service units that will
minimize both customer waiting time and cost of service.

Network Models
These are models where large complex tasks are broker into smaller segments that can be
managed independently.
The two most prominent network models are:
1. The Program Evaluation Review Technique (PERT) - a technique which enables engineer
managers to schedule, monitor, and control large and complex projects by employing three time
estimates for each activity.
2. The Critical Path Method (CPM) - this is a network technique using only one time factor per
activity that enables engineer managers to schedule, monitor, and control large and complex projects.

Forecasting
Forecasting may be defined as "the collection of past and current information to make predictions
about the future.

Regression Analysis
The regression model is a forecasting method that examines the association between two or more
variables. It uses data from previous periods to predict future events.

Regression analysis may be simple or multiple depending on the number of in dependent variables
present. When one independent variable is involved, it is called simple regression; when two or more
independent variables are involved, it is called multiple regression.

Simulation
Simulation is a model constructed to represent reality, on which conclusions about real-life
problems can be used." It is a highly sophisticated tool by means of which the decision maker develops a
mathematical model of the system under consideration.

Simulation does not guarantee an optimum solution, but it can evaluate the alternatives fed into
the process by the decision-maker.

Linear Programming
Linear programming is a quantitative technique that is used to produce an optimum solution
within the bounds imposed by constraints upon the decision.

Sampling Theory
Sampling theory is a quantitative technique where sample s of populations are statistically
determined to be used for a number of processes, such as quality control and marketing research.
When data gathering is expensive, sampling provides an alternative. Sampling, in effect, saves time and
money.

Statistical Decision Theory

Decision theory refers to the rational way to conceptualize, analyze, and solve problems in
situations involving limited or partial information about the decision environment

Bayesian analysis is to revise and update the initial assessments of the event probabilities
generated by the alternative solutions. This is achieved by the use of additional information.

When the decision-maker is able to assign probabilities to the various events, the use of
probabilistic decision rule, called the Bayes criterion, becomes possible. The Bayes criterion selects the
decision alternative having the maximum expected payoff, or the minimum expected loss if he is working
with a loss table.

ITEM FOR RESEARCH

1. Provide an illustration of how Bayesian analysis is used.
2. Significance of Principles of Management for Organizational Decision Making.

Reference:

1. Engineering Management, Roberto G. Medina