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PRODUCTION PLANNING
AND CONTROL

LECTURE 2

DECISION THEORY
Under certainity
DEFINITION:
A process of selecting an act out
of several available alternative
courses of action judged to be
the best action according to
some pre- determined criteria.
 OBJECTIVE:
The main aim of decision theory is
to help the decision–maker in
selecting best course of action from
amongst the available course of
action.
STRUCTURE OF DECISION –MAKING:
Decision Maker:
The decision maker refers to individual or a
group of individuals responsible for making the
choice of an appropriate courses of action
amongst the available courses of action.
Courses of action:
The alternatives courses of action or strategies
are the acts that are available to decision
maker.
Example: The number of units of a particular
item to be ordered for stock.
States of nature (outcomes):
The events identify the occurrence which are
outside of the decision maker’s control and which
determine the level of success for a given act.
Example: The level of market demand for a
particular item.

Payoff(conditional profit values):

Each combination of a course of action and a
state of nature is associated with a payoff, which
measures the net benefit to the decision maker
that accrues from a given combination of decision
alternatives and events.
Payoff table:
For a given problem , lists the states of nature
(outcomes) and a set of given courses of
action. For each combination of state of nature
and courses of action ,the payoff is calculated.
Regret or opportunity loss:
The opportunity loss has been defined to be
the difference between the highest possible
profit for a state of nature and the actual profit
obtained for the particular action taken.
TYPES OF DECISION –MAKING :
 Decision making under certainty
 Decision making under uncertainty

 Decision making under risk

DECISION MAKING UNDER CERTAINTY:

The decision maker knows with certainty the

consequences of selecting every course of
action or decision choice.
Technique Used:
(i) System of equations

(ii) Linear programming

(iii) Integer programming etc

SYSTEMS OF EQUATIONS:
Example 1
A grocery receives its weekly supply of eggs every Thursday morning. This
shipment must last until the following Thursday when a new
shipment is received. Any eggs left unsold by Thursday are destroyed.
Eggs sell for $10 per hundred and cost $8 per hundred. The weekly
demand for eggs at this grocery varies from week to week. From past
experience, the following probability distribution is assigned to weekly
demand:

Demand
(hundreds of eggs): 10 11 12 13 14
Probability: 0.1 0.2 0.4 0.2 0.1

This pattern of demand remains stable throughout the year. the demand
for eggs is not seasonal, and the trend is flat.

How many eggs should be ordered for delivery every Thursday?

DECISION MAKING UNDER CERTAINTY:

Example 2
The manufacturer of a certain product is considering the
purchase of one of three different packaging systems.
The product sells for $10, and the production cost (excluding
packaging cost) is $5 per unit.

Which system should be bought?

The cost data for the three packaging systems are given
below:
Example 3.

A product is manufactured by a certain automatic

machine in batches of 3 items. The selling price is
$10, and the production cost is $5 per item. Before
each batch is produced, the machine may be
adjusted by a skilled mechanic at a cost of $6 per
batch. If the machine is so adjusted, there will be no
defectives in the batch. If it is not adjusted, some
items may be defective; on the basis of past
experience, the probability distribution of the
number of defectives is estimated as follows:
Reprocessed items can be sold as good items.
Should the machine be adjusted before each batch is
produced?
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