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Decision Making. Decision Making : a process of choosing among alternative courses of action for the purpose of attaining a goal or goals Managerial Decision Making Ex: Planning involves a series of decisions: what should be done?, When?, How?, Where?, By whom?. Decision Aspects

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Decision making l.jpg

Decision Making

  • Decision Making: a process of choosing among alternative courses of action for the purpose of attaining a goal or goals

  • Managerial Decision MakingEx:

    Planning involves a series of decisions: what should be done?, When?, How?, Where?, By whom?

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Decision Aspects

  • Decision may be made by a group

  • Several, possibly contradictory objectives

  • Hundreds or thousands of alternatives

  • Results of the decision often occur in the future ( and no one is a perfect predictor of the future)

  • Different attitudes towards risk

  • “What-if” scenarios

  • Trial-and-error (experimentation with the real system): may result in a loss

  • Experimentation with the real system can only be done once

  • Changes in the environment can occur continuously

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Systems

  • A SYSTEM is a collection of objects such as people, resources, concepts, and procedures intended to perform a specific function or to serve a goal

  • System Levels (Hierarchy): All systems are subsystems interconnected through interfaces

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The Structure of a System

Three Distinct Parts of Systems

  • Inputs

  • Processes

  • Outputs

    Systems

  • Are surrounded by an environment

  • Frequently include a feedback mechanismA human, the decision maker, is usually considered part of the system

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System & Environment

Customer Government Banks Vendors

Inputs

Processes

Outputs

Procedures

Programs

Tools

Activities

Decisions

Raw materials

Costs

Resources

Performance

Products

services

suppliers

Boundary

Decision

Maker

Competitors Weather conditions

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  • Inputs are elements that enter the system

  • Processes convert or transform the inputs into outputs

  • Outputs describe the finished products or the consequences of being in the system

  • Feedback is the flow of information from the output to the decision maker, who may modify the inputs or the processes (closed loop)

  • The Environment contains the elements that lie outside but impact the system's performance

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Answer Two Questions (Churchman [1975])

1. Does the element matter relative to the system's goals? [YES]2. Is it possible for the decision maker to significantly manipulate this element? [NO]

Environmental Elements Can Be

Social

Political

Legal

Physical

Economical

Often Other Systems

How to Identify the Environment?

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The Boundary Separates a System From Its Environment

Boundaries may be physical or nonphysical (by definition of scope or time frame)

Information System Boundaries are Usually Directly Defined!

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Closed and Open Systems

  • A Closed System is totally independent of other systems and subsystems

  • An Open System is very dependent on its environment

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An Information System

  • Collects, processes, stores, analyzes, and disseminates information for a specific purpose

  • Is often at the heart of many organizations

  • Accepts inputs and processes data to provide information to decision makers and helps decision makers communicate their results

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System Effectiveness and Efficiency

  • Effectiveness is the degree to which goals are achievedDoing the right thing!

  • Efficiency is a measure of the use of inputs (or resources) to achieve outputsDoing the thing right!

    DSS emphasizes effectivenessOften: several non-quantifiable, conflicting goals

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Models

  • A Major Component of any DSS

  • Use Models instead of experimenting on the real system

  • A model is a simplified representation or abstraction of reality.

  • Reality is generally too complex to copy exactly

  • Much of the complexity is actually irrelevant in problem solving

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Degrees of Model Abstraction

(Least to Most)

  • Iconic (Scale) Model: Physical replica of a system

  • Analog Model behaves like the real system but does not look like it (symbolic representation)

  • Mathematical (Quantitative) Modelsuse mathematical relationships to represent complexityUsed in most DSS analyses

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Benefits of Models

A DSS employs models because

1. Time compression2. Model manipulation is much easier3. Low cost of construction4. Low cost of execution

5. Can model risk and uncertainty6. Can model large and extremely complex systems with possibly infinite no. of solutions7. Enhance and reinforce learning, and training. Computer graphics advances: more iconic and analog models complement math models (e.g. visual simulation)

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Example: How Much to Order for a small Grocery?

  • The Question: How much bread to stock each day?

  • T&E difficult if:

  • Too many trials to explore

  • High cost of making errors

  • Rapidly Changed Environment

Several Solution Approaches

  • Trial-and-Error (with the real system)

  • Simulation

  • Optimization

  • Heuristics

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The Decision-Making Process

Systematic Decision-Making Process (Simon)

  • Intelligence

  • Design

  • Choice

  • Implementation

    Modeling is Essential to the Process

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  • Intelligence phase

    • Reality is examined

    • The problem is identified and defined

  • Design phase

    • Representative model is constructed

    • The model is validated and evaluation criteria are set

  • Choice phase

    • Includes a proposed solution to the model

    • If reasonable, move on to the next step

  • Implementation phase

    • Solution to the original problem

      Often Backtrack / Cycle Throughout the Process

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The Intelligence Phase

Scan the environment to identify problem situations or opportunities1- Find the Problem

Problems arise out of dissatisfaction with the way things are going

  • Identify organizational goals and objectives

  • Determine whether they are being met

  • Search and scanning procedures

  • Collecting data

  • Identify problem/opportunity

  • Explicitly define the problemreal-world problems are usually complicated by many interrelated factors.

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2- Problem Classification

According to the Degree of Structuredness

Programmed versus Nonprogrammed Problems

NonprogrammedProgrammed

ProblemsProblems

Extreme

Extreme

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3- Problem Decomposition

  • Divide a complex problem into (easier to solve) sub-problems (called Chunking)

    Some poorly structured problems may have some highly structured sub-problems

    4- Problem OwnershipThe decision makers have the capability to solve the problem

    Outcome: Problem Statement

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The Design Phase

Generating, developing, and analyzingpossible courses of actionIncludes the activities:

  • Understanding the problem

  • Testing solutions for feasibility

  • A model of the problem situation is constructed, tested, and validatedModeling

  • Conceptualization of the problem

  • Abstraction to quantitative and/or qualitative forms

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Mathematical Modeling

  • Identify Variables

  • Establish Equations describing their Relationships

  • Simplifications through Assumptions

    (e.g. linearing what is nonlinear)

  • Balance Model Simplification Vs the Accurate Representation of Reality(Simplified model leads to easier manipulation and faster solution, but is less representative of the problem reality)

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Uncontrollable

Variables

Decision

Variables

Result

Variables

Mathematical

Relationships

1- Components of Quantitative Models

  • Decision Variables

  • Uncontrollable Variables (and/or Parameters)

  • Result (Outcome) Variables

  • Mathematical Relationships

    or

  • Symbolic or Qualitative Relationships

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Result Variables

  • Reflect the level of effectiveness of the system

  • Dependentvariables

  • Examples – Total transportation costCustomer satisfaction

    Decision Variables

  • Describe alternative courses of action

  • The decision maker controls them

  • Examples – shipment qnty, Staffing level

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Uncontrollable Variables or Parameters(const)

  • Factors that affect the result variables

  • Not under the control of the decision maker

  • Generally part of the environment

  • Some constrain the decision maker and are called constraints

  • Examples – transportation cost per unit

    demand for service

    Intermediate Result Variables

  • Reflect intermediate outcomes

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Area

Decision

Variables

Result

Variables

Uncontrollable

Variables and Parameters

Financial investment

Investment alternatives and amounts

How long to invest

When to invest

Total profit

Rate of return (ROI)

Earnings per share

Liquidity level

Inflation rate

Prime rate

Competition

Marketing

Advertising budget

Where to advertise

Market share

Customer satisfaction

Customers' income

Competitors' actions

Manufacturing

What and how much to produce

Inventory levels

Compensation programs

Total cost

Quality level

Employee satisfaction

Machine capacity

Technology

Materials prices

Components of Models

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2- The Structure of Quantitative Models

  • Mathematical expressions (e.g., equations or inequalities) connect the components

  • Simple financial-type model P = R - C

  • Present-value modelP = F / (1+i)n

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2- The Structure of Quantitative Models

  • Mathematical expressions (e.g., equations or inequalities) connect the components

  • Simple financial-type model P = R - C

  • Present-value modelP = F / (1+i)n

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Example

The Product-Mix Linear Programming Model

  • MBI Corporation

  • Decision: How many computers to build next month?

  • Two types of computers

  • Labor limit

  • Materials limit

  • Marketing lower limitsConstraintCC7CC8RelLimitLabor (days)300500<=200,000 / moMaterials $10,00015,000<=8,000,000/moUnits1>=100Units1>=200Profit $8,00012,000MaxObjective: Maximize Total Profit / Month

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Linear Programming Model

  • ComponentsDecision variablesResult variableUncontrollable variables (constraints)

  • SolutionX1 = 333.33X2 = 200Profit = $5,066,667

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3- The Principle of Choice

  • What criteria to use?

    • Best solution? Or Good enough solution?

    • High or low-risk approach?

      Selection of a Principle of Choice :

      decision regarding the acceptability of a solution approach

      2 prime principles of choice:

  • Normative

  • Descriptive

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A- Normative Models

  • In which the chosen alternative is the best of all

  • Optimization process:

    • Find the highest level of goal attainment

    • Find the highest productivity (profit per $ invested)

    • Find the alternative with the lowest resources (cost)

  • Normative decision theory is based on rational decision makers

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Suboptimization

  • Optimization without considering the entire organization

  • Narrow the boundaries of a system

  • Leads to (possibly very good, but) non-optimal solutions

    Ex. For production dept: few products in large quantities may reduce the production cost

  • Get the sub-optimization solution:

    • Propose the solution to other subsystems

    • If no significant negative effects then adopt it

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B- Descriptive Models

  • Describe things as they are, or as they are believed to be

  • Extremely useful in DSS for evaluating the consequences of decisions and scenarios

  • Checks the performance of the system for a given set of alternatives (not all)

  • No guarantee a solution is optimal

  • Often a solution will be "good enough”

  • Simulation: Well-known descriptive modeling technique

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4- Developing (Generating) Alternatives

  • In Optimization Models: Alternatives are generated automatically by the Model!Not Always So!

  • Issue: When to Stop?

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5- Predicting the Outcome of Each Alternative

  • Must predict the future outcome of each proposed alternative

  • Consider what the decision maker knows (or believes) about the forecasted results

  • Classify Each Situation as Under

    • Certainty

    • Risk

    • Uncertainty

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Decision Making Under Certainty

  • Assumes that complete knowledge is available (deterministic environment)

  • Example: Bank Savings

  • Typically for structured problems with short time horizons

Increasing Knowledge

RISK

RISK

Certainty

Uncertainty

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Decreasing Knowledge


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Decision Making Under Risk (Risk Analysis)

(Probabilistic or stochastic decision situation)

  • Decision maker must consider several possible outcomes for each alternative (not only one), each with a given probability of occurrence

  • Long-run probabilities of the occurrences of the given outcomes are assumed known or can be estimated

  • Decision maker can assess the degree of risk associated with each alternative (calculated risk)

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Decision Making Under Uncertainty

  • Situations in which several outcomes are possible for each course of action

  • BUT the decision maker does not know, or cannot estimate, the probability of occurrence of the possible outcomes

  • More difficult - insufficient information

  • Modeling involves assessing the decision maker's (and/or the organizational) attitude toward risk

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6- Measuring Outcomes

  • Value of an alternative is judged in terms of goal attainment

  • Maximize profit

  • Minimize cost

  • Customer satisfaction level (Minimize number of complaints)

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7- Scenarios

Describe the decision and uncontrollable variables and parameters for a specific modeling situation

Useful in

  • Simulation

  • What-if analysis

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Importance of Scenarios in MSS

  • Help identify potential opportunities and/or problem areas

  • Provide flexibility in planning

  • Help validate major assumptions used in modeling

  • Help check the sensitivity of proposed solutions to changes in scenarios

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Possible Scenarios

  • Many, but …

    • Worst possible (Low demand, High costs)

    • Best possible (High demand, High Revenue, Low Costs)

    • Most likely (Typical or average values)

  • The scenario sets the context of the analysis to be performed

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The Choice Phase

  • Includes: Search, evaluation, and recommending an appropriate solution to the model

  • A solution to the model is a specific set of values for the decision variables in a selected alternativeThe problem is considered solved after the recommended solution to the model is successfully implemented

    Search Approaches

  • Analytical Techniques

  • Algorithms (Optimization)

  • Blind and Heuristic Search Techniques

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Evaluation: Multiple Goals, Sensitivity Analysis, "What-If," and Goal Seeking

  • Evaluation (coupled with the search process) leads to a recommended solution

  • Multiple Goals

    Complex systems have multiple goalsSome may conflict

  • Typical quantitative models have a single goal

  • Can transform a multiple-goal problem into a single-goal problem

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Sensitivity Analysis

  • To check the impact of a change in the input data or parameters on the proposed solution ( the result variable)

  • Change inputs or parameters, look at model results

  • Sensitivity analysis checks relationships

    Types of Sensitivity Analysis

  • Automatic (e.g. to get the range within which a certain input variable can vary without impacting the solution in LP)

  • Trial and error

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Trial and Error

  • Determines the impact of changes in any variable, or in several variables, on the solution

  • Better and better solutions can be discovered

  • How to do? Easy in spreadsheets (Excel)

    • what-if

    • goal seeking

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What-If Analysis

  • “What will happen to the solution if an input variable or a parameter value is changed?“

    Goal Seeking

  • Backward solution approach

  • Computes the amount of inputs necessary to achieve a desired level of an output (goal)

  • Example: determine the quantity to produce to achieve zero profit ( Break-even point)

  • In a DSS the what-if and the goal-seeking options must be easy to perform

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2.10 The Implementation Phase

There is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things (Machiavelli )*** The Introduction of a Change ***Important Issues

  • Resistance to change

  • Degree of top management support

  • Users’ roles and involvement in system development

  • Users’ training

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2.11 How Decisions Are Supported

Specific MSS technologies relationship to the decision making process (see Figure 2.10)

  • Intelligence: DSS, ES, ANN, MIS, Data Mining, OLAP, EIS, GDSS

  • Design and Choice: DSS, ES, GDSS, Management Science, ANN

  • Implementation: DSS, ES, GDSS

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2.12 Human Cognition and Decision Styles

Cognition Theory

  • Cognition: Activities by which an individual resolves differences between an internalized view of the environment and what actually exists in that same environment

  • Ability to perceive and understand information

  • Cognitive models are attempts to explain or understand various human cognitive processes

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Cognitive Style

  • The subjective process through which individuals perceive, organize, and change information during the decision-making process

  • Often determines people's preference for human-machine interface

  • Impacts on preferences for qualitative versus quantitative analysis and preferences for decision-making aidsCognitive style research impacts on the design of management information systems

  • Analytic decision maker

  • Heuristic decision maker(See Table 2.4)

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Decision Styles

The manner in which decision makers

  • Think and react to problems

  • Perceive

    • Their cognitive response

    • Their values and beliefs

  • Varies from individual to individual and from situation to situation

  • Decision making is a nonlinear processThe manner in which managers make decisions (and the way they interact with other people) describes their decision style

  • There are dozens

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Some Decision Styles

  • Heuristic

  • Analytic

  • Autocratic

  • Democratic

  • Consultative (with individuals or groups)

  • Combinations and variations

  • For successful decision making support, an MSS must fit the

    • Decision situation

    • Decision style

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  • The system

    • should be flexible and adaptable to different users

    • have what-if and goal-seeking

    • have graphics

    • have process flexibility

  • An MSS should help decision makers use and develop their own styles, skills, and knowledge

  • Different decision styles require different types of support

  • Major factor: individual or group decision maker

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The Decision Makers

  • Individuals

  • Groups

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Individuals

  • May still have conflicting objectives

  • Decisions may be fully automated

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Groups

  • Most major decisions in medium and large organizations are made by groups

  • Conflicting objectives are common

  • Variable size

  • People from different departments

  • People from different organizations

  • The group decision making process can be very complicated

  • Consider Group Support Systems (GSS)

  • Organizational DSS can help in enterprise-wide decision making situations

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Summary

  • Managerial decision making is synonymous with the whole process of management

  • Problem solving also refers to opportunity's evaluation

  • A system is a collection of objects such as people, resources, concepts, and procedures intended to perform an identifiable function or to serve a goal

  • DSS deals primarily with open systems

  • A model is a simplified representation or abstraction of reality

  • Models enable fast and inexpensive experimentation with systems

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Summary (cont.)

  • Modeling can employ optimization, heuristic, or simulation techniques

  • Decision making involves four major phases: intelligence, design, choice, and implementation

  • What-if and goal seeking are the two most common sensitivity analysis approaches

  • Computers can support all phases of decision making by automating many of the required tasks

  • Human cognitive styles may influence human-machine interaction

  • Human decision styles need to be recognized in designing MSS

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