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Multi Criteria Decision Making

Typical Decision Problem in Outsourcing


Supposedly, you
Supposedly, you are
are facing
facing the
the problem
problem ofof choosing
choosing aa distributor.
distributor. The
The
firstchoice
first choiceisisaalong-term
long-termcontract
contractwith
withaafirm
firmwith
withwhom
whomyou youhave
havedone
done
businessininthe
business thepast,
past,and
andwhose
whosedistribution
distributionsystems
systemsreaches
reaches50%50%ofofall
all
potentialcustomers.
potential customers.At Atthe
thelast
lastmoment,
moment,however,
however,aacolleague
colleaguesuggest
suggest
thatyou
that youconsider
considersigning
signingaaone-year
one-yearcontract
contractwith
withanother
anotherdistributor.
distributor.
Althoughaayear
Although yearago
agotheir
theircoverage
coveragereached
reachedonlyonly25
25%%ofofcustomers,
customers,they
they
claimthey
claim theyinvested
investedheavily
heavilyinindistribution
distributionresources
resourcesand
andnownowexpect
expecttoto
beable
be ableto
toreach
reachpercent
percentofofcustomers.
customers.
 Whichdistributor
Which distributorwould
wouldyouyouchoose?
choose?

just
just
BLINK?
BLINK? orTHINK?
or THINK? Or
Or
???
???
Multi Criteria Decision Making

 Key problems in business, engineering and sciences can be


formulated in terms of:

1. A set of known alternatives and


2. A set of known criteria

What ifif the


What the alternatives
alternatives and
and criteria
criteria are
are
unknown?
unknown?
Weighted-Score/Sum Method

Criteria Weight A1 A2  Aj
(%)
C1 w1 a11 a12 a1j
C2 w2 a21 a22 a2j

Ci wi ai1 ai2 aij


Total weighted-score w1a11 + w1a12 + w2a22 w1a1j +
w2a21 + ….. + ….. + wiai2 w2a2j + …..
+ wiai1 + wiaij

Select the alternative with the highest total weighted-


score
Multifactor Evaluation Process

 In multi criteria decision making, individuals


subjectively and intuitively consider the various
criteria/factors/attributes in making their selection.

 All of the important factors can then be given


appropriate weights and each alternative can be
evaluated in terms of these factors.

 When the factor weight and alternative evaluation


can be easily assigned, an approach so-called the
multifactor evaluation process (MFEP).
Analytic Hierarchy Process (AHP)
 In situations in which we can assign evaluations and weights to the
various decision factors, the MFEP described previously works fine. In
other cases, decision makers may have difficulties in accurately
determining the various factor weights and evaluations.

 In this case, the analytic hierarchy process (AHP) can be used. This
process was developed by Thomas L. Saaty and published in his 1980
book, The Analytic Hierarchy Process.

 This process involves pairwise comparisons. The decision maker starts


by laying out the overall hierarchy of the decision. This hierarchy
reveals the factors to be considered as well as the various alternatives
in the decision. Then, a number of pairwise comparisons are done,
which result in the determination of factor weights and factor
evaluations.
AHP decision problem
Pairwise comparison scale:

Objective
1 – Equally preferred
2 – Equally to moderately
preferred
Criteria 1 Criteria 2 Criteria j
3 – Moderately preferred
4 – Moderately to strongly
preferred
5 – Strongly preferred
Alternative 1 Alternative 2 Alternative k 6 – Strongly to very strongly
preferred
7 – Very strongly preferred
8 – Very to extremely
strongly preferred
9 – Extremely preferred
Structuring a Decision Problem

Best Supplier

Capability Cost Responsiveness

S 1: S2: S3:
Supplier 1 Supplier 2 Supplier 3
AHP – Step by step
Step 1 – Pairwise comparison
Step 2 – Column total
Step 3 – Normalization
Step 4 – Row average
Step 5 – Do step 1-4 for other criteria
Step 6 – Complete local priorities
Step 7 – Determine criteria weights
Step 8 – Global priority
Step 9 – Check consistency
Step 1: Performing Pairwise Comparison

Capability Supplier 1 Supplier 2 Supplier 3


Supplier 1 3 9
Supplier 2 6
Supplier 3

Capability Supplier 1 Supplier 2 Supplier 3


Supplier 1 1 3 9
Supplier 2 1/3 1 6
Supplier 3 1/9 1/6 1
Step 2: Getting the Column Totals

Capability Supplier 1 Supplier 2 Supplier 3

Supplier 1 1 3 9

Supplier 2 0.333 1 6

Supplier 3 0.111 0.167 1

Column Totals 1.444 4.167 16


Step 3: Normalize the Matrix

Normalized matrix are obtained by dividing the numbers in the matrix


by their respective column totals

Capability Supplier 1 Supplier 2 Supplier 3

Supplier 1 0.6923 0.7200 0.5625

Supplier 2 0.2300 0.2400 0.3750

Supplier 3 0.0769 0.0400 0.0625


Step 4: Row average

0.6583
0.2819
Row Averages
 

0.0598

(0.6923  0.7200  0.5625) / 3


 ( 0.2300  0.2400  0.3750) / 3
( 0.0769  0.0400  0.0625) / 3

Criteria Supplier 1 Supplier 2 Supplier 3


Capability 0.6583 0.2819 0.0598
Step 5: Evaluation for the other criteria

Cost Supplier 1 Supplier 2 Supplier 3

Supplier 1

Supplier 2 2

Supplier 3 8 5

Responsivene Supplier 1 Supplier 2 Supplier 3


ss
Supplier 1 1 6

Supplier 2 3

Supplier 3
Step 6: Complete Local Priorities

Criteria Supplier 1 Supplier 2 Supplier 3

Capability 0.6583 0.2819 0.0598

Cost 0.0874 0.1622 0.7504

Responsiveness 0.4967 0.3967 0.1066


Step 7: Criteria Weights
OVERALL Capability Cost Responsiveness
OBJECTIVE
Capability
Cost 8 3
Responsiveness 3

CRITERIA CRITERIA WEIGHT


Capability 0.0820
Cost 0.6816
Responsiveness 0.2364
Step 8: Global Priority: the ranking of
suppliers
Criteria Supplier 1 Supplier 2 Supplier 3

Capability 0.6583 0.2819 0.0598

Cost 0.0874 0.1622 0.7504

Responsiveness 0.4967 0.3967 0.1066

Total weighted score:


Supplier 1  0.6583(0.0820) + 0.0874(0.6816) + 0.4967(0.2364) = 0.2310
Supplier 2  0.2819(0.082) + 0.1622(0.6816) + 0.3967(0.2364) = 0.2275
Supplier 3  0.0598(0.082) + 0.7504(0.6816) + 0.1066 (0.2364) = 0.5416
Step 9: Consistency
 In AHP, responses need to be consistent.
 When criteria or alternatives are too many, decision 
makers could lose track of consistency.

Overall objective Capability Cost Responsiveness


Capability 1 1/8 1/3
Cost 8 1 3 x
Responsiveness 3 1/3 1

1(0.0820) + 1/8(0.6816) + 1/3(0.2364) = 0.2460
8(0.0820) + 1(0.6816) + 3(0.2364) = 2.0468
3(0.0820) + 1/3(0.6816) + 1(0.2364) = 0.7096
Consistency

Next, we divide each of these values by the corresponding 
weight from the criteria preference vector:

0.2460/0.0820 = 3.0000
2.0468/0.6816 = 3.0029
0.7096/0.2346 = 3.0017
   9.0046
Then, divide the sum with the number of alternatives/ items 
we’re comparing
9.0046/3 = 3.0015
Consistency
The consistency index, CI, is computed using the following 
formula:

Where
n = the number of items being compared
3.0015 = the average we computed previously

= 0.0008
Consistency
If CI = 0, then perfectly consistent.
If CI not 0, then compared to random index (RI) to check if it’s 
acceptable

Consistency Ratio (CR) = CI/RI = 0.0008/0.58 = 0.001
The degree of consistency is satisfactory if CR < 0.1