Chapter 2

Decision-Making
PAOLO E. MAMASPAS
KIMBERLY C. VALLESTEROL
JUNUEL T. MALBAS
JACKSON S. JOANINO
CHRISTIAN L. LEDDA
What is Decision-Making?
 Decision Making- may be defined as “the process of identifying and choosing
alternative courses of action in 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 t 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
1. Diagnose Problem
If a manager wants to make an intelligent decision, his first move must be to identify the problem. If the manager fails in this aspect, it is almost
impossible to succeed in the subsequent steps. An expert once said “identification of the problem is tantamount to having the problem half-solved.” A problem
exists when there is a difference between an actual situation and a desired situation.

2. Analyze the Environment

The environment where the organization is situated plays a very significant role in the success or failure of such an organization.

The objectives of environmental analysis is the identification of constraints, which may be spelled out as either internal or external limitaions. 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.

3. Develop Viable Alternatives

Oftentimes, problems mat ve solved b any of the solutions offered. The best among the alternative solutions must be considered by management. This is
made possible b using a procedure with the following steps:

1. Prepare a lost of alternative solutions.

2. Determine the viability of each solutions.

3. Revise the list bu striking out those which are not viable.
4. Evaluate Alternatives
This is important because the next step involves making a choice. 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
characterestics.”
The value of alternatives refers to benefits that can be expected.

EVALUATION SHEET
Title of Vacant Position: Junior Engineer
Date of Evaluation: December 29, 1996

Applicant Educati Training Experience Age Total Points

on
1. Jose Sibayan 40 35 4 10 89
Jr.
2. Menandro 40 35 5 9 90
Rillon
3. Dante dela 40 35 6 7 91
Cruz
5. Make a Choice
After the alternatives have ben evaluated, the decision-maker must now be ready to make a choice. This is the point where he must be convinced that all the previous
steps were-correctly undertaken.

Choice-making refers to the process of selecting among alternatives representin potential solutions to a problem. “At this point, Webber advises that”…particular
effort should be mad e to identify all significant consequences od each choice.”

6. Implement Decision
After a decision has been made, implementation follows. This is necessary, or decision-making will be an exercise in futility.

Implementation refers to carrying out the decision so that the objectives sought will be achieved. To make implantation effective a plan must be devised.

At this stage, the resources must be made available so that the decision may be properly implemented. Those who will be involved in implementation, according to
Aldag and Stearns, must understand and accept the solution.

7. Evaluate and Adapt Decision Results

In implementing the decision, the results expected may or may not happen. It is, therefore, 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 wwhich 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
 Qualitative Evaluation
 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 fairy simple.
2. The problem is familiar.
3. The costs involved are not great(low cost).
4. Immediate decisions are needed.
Quantitative Evaluation. This term refers to the evaluation of alternatives using any technique a group classified as
rational and analytical
QUANTITATIVE MODELS FOR
DECISION
1. Inventory modelsMAKING
 2. Queuing theory
 3. Network models
 4. Forecasting
 5. Regression
 6. Simulation
 7. Linear programming
 8. Sampling
 9. Statistical decision theory
1. Inventory Models
Inventory models consist of several types all designed to help the engineer manager make decisions regarding inventory. They are as follows:

1. Economic order quantity model- this one is used to calculare the number of items that sould 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 quantity 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 tortal cost when quantity discounts are offered by suppliers.

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

3. Network Models
These are models where large complex tasks are broken 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.

4. Forecasting
There are instances when engineer managers make decisions that will have implications in the future. A manufacturing firm for example, must put up a capacity which
is sufficient to produce the demand requirements of customers within the next 12 months. As much, manpower and facilities must be procured before the start of operations.
To make decisions on capacity more effective, the engineer manager must’ve provided with data on demand requirements for the next 12 months. This type of information my
be derived through forecasting. Forecasting may be defined as the : the collection of past and current information to make predictions about the future.
5. Regression Analysis
The regression model is a forecasting method that examines the association between two or more variables.

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

6. Simulation
Simulation is a model constructed to reperesent rality, on which conclusions about real-life problems can be used. It is a highly sophisticated tool by means of
which the decision maker develop 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.

7. Linear Programming
Linear programming is a quantitative technique that is used to produce an optimum solution with in the bounds imposed by constraints upon the decision
programming is very useful as a decision-making tool whe n supply an demand limitations at plants, warehouse, or market areas are constraints upon the system.

8. Sampling Theory
Sampling theory is a quantitative technique where samples 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.
9. 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.
A more elaborate explanation of decision theory is the decision making process presented at
the beginning of this chapter. What has not been included in the discussion on the evaluation of
alternatives, but is very important, is subjecting the alternatives to Bayesian analysis.
The purpose of Bayesian analysis is to revise nd update the initial assessments of the event
probabilities generated by the alternative solutions. This is achieved by the used of additional
information.
When the decision-maker is able to assign probabilities to the various events, the use of
probabilistic decisions 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.
THANK YOU!