Sensitivity Analysis and Decision Making

This assignment provides a comprehensive overview of sensitivity analysis and decision making methods. It covers various techniques such as multi-criteria decision analysis, Bayesian networks, and Rosenbaum bounds sensitivity analysis. The assignment also delves into the applications of these methods in environmental sciences, construction, and water resources management. With a focus on practical approaches to uncertainty quantification, this document is essential for students seeking to understand the complexities of sensitivity analysis and decision making.

Analytical Thinking and
Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................1
Q 1....................................................................................................................................................1
Importance of decision making in management.....................................................................1
Application of decision analysis tool.....................................................................................2
Q 2 Top Management and efficiency...............................................................................................3
Q 3....................................................................................................................................................6
Stages Smart analysis.............................................................................................................6
Q 4....................................................................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES .............................................................................................................................11

Illustration Index
Illustration 1: Sensitivity Analysis...................................................................................................9

INTRODUCTION
Decision making is the most important function of the management of the company. The
report includes the importance of decision making for the management of the organisation. It
also includes the use of various analysis techniques to make decisions. In the report a potential
problem will be identified. And with the use of analysis tool alternative will be found for the give
n problem. The report includes the use of SMART decision analysis for evaluating the decision.
Also, with the help of sources the merits and limitation of the decision analysis tool is captured
in the report.
Q 1
Importance of decision making in management
Decision making is an important part of management. Its is responsibility of the
management to make important decision for the functioning of the organization. The process of
decision making provides advanced approach towards the process that will chosen and also gives
direction to the plan which will be carried out by the company in the following process (De
Groot and Et Al. 2010).
 Better utilization of resources : The use of resources to the optimal level is a critical
element of achieving the set objectives. The use of available resources makes it possible
for the firm to the planned goal. Resource management and allocation is facilitated by
decision making as it helps the firms to utilize its resources up to the maximum level
(Anderson and Et Al. 2015). The resources include human resource, finance, machinery,
methods and market. The decisions made by the management to allocate optimal
resources of each kind to complete the following task help the organisation to get best
results
 Problems and challenges : Organization face a number problem in the course of
business operations. The problems faced by management can be solved and tackled
through decision making. As the issue faced currently can be solved by taking a decision.
Its is important to accept the challenge and reach a solution in order to tackle the
challenge at hand.
 Business growth : The growth of the business is highly influenced by the decisions made
by the management of the organization. The growth made by business depends on the
achievement of goals and objectives set by the company (Čuček, Klemeš and Kravanja,

2012). The business grows and expands when it earns profits from the business. The
decisions made by the management runs the important aspects of the business and help
the company to earn profits in the industry.
 Achieving objectives : The objective set by the management are critical to be achieved
by the organisation to ensure the successful operations. Objectives are set goal points
which a company expects to achieve in a set period of time. Decision making help the
management to achieve the objectives of the company swiftly. The decisions made by
management are rational and are result of analyses of many alternatives.
 Facilitating innovation : The innovation are highly important in the running of the
organizational. Decision making involves innovation which encourages the use of
innovation in the ideas and techniques used by the company (Gregory and Et. Al. 2012).
The decision made by the management develop new and innovative ideas and techniques,
products and services. The management make decision regarding to enhance the working
of the organization . Which create new and innovative ideas in the company.
 Increases efficiency : The decisions made by the company help to improve the
efficiency. The decisions of the management create the high returns from low cost
involved to create the revenue which is considered as high efficiency. This can be
achieved by the innovative techniques developed by the decisions made by the
management.
Application of decision analysis tool
The tool which will be used for decision analysis is sensitivity analysis. Sensitivity
analysis is a technique that takes independent variable and determine the way in which the
change in value of the independent variable will affect the value of dependent variable. The
dependent variable is profitability of an organization which is dependent on various variables.
 Inventory at the end of the month : The inventory left at the end of the month define
the performance the of the company, as high inventory define that less inventory has been
used by the company which leads to declined production (Yager and Kacprzyk, 2012.).
Sensitivity analysis will used on the inventor which is an independent variable to define
that the change in value of the inventory at the end of the month will change the value of
profit too. As the profit generated by the company is dependent on the inventory
management of done by the company.

 Employee cost : The employee cost refers to the money that has been given to the
employees as salaries. The employee cost is an independent variable. Taking cost as the
dependent factor we put the sensitivity analysis to find out the effect of independent
variable on the dependent variable (Keele, 2010). The values of the employees cost will
changed to see the change in the values of profit duly changed.
 COGS : Cost of goods sold is a critical element of business. The total profit is effected
by the change in values of the COGS. By applying the sensitivity analysis it will be found
out that by what amount the value of profit changes with the increase or decrease in the
value of COGS.
 Operating and non operating expenses : The sensitivity analysis will be used on to find
the change in value of independent variable, operating and non operating expenses, will
effect the value of the dependent variable, profit of the company. The change in expenses
will increase of decrease the value of profit field (Zimmermann, 2012).
 Working capital : With the use the sensitivity it will be found that the values of working
capital impact the amount of profit generated by the company. The increase or decrease
in the value of working capital effect may enhance the value of the profit which is earned
by the organization.
Other than the sensitivity analysis another tool of decision analysis is decision tree.
Decision tree : This tool of decision analysis is based on probability and classification. The
solutions to a problem is found by considering various alternatives solution to a problem and
with a possible consequences such as outcome of the alternatives, resources required and its cost
and the utility of the alternate solution. On the basis of the available information a tree like
structure prepared considering all the possible solution and the probability to their success and
failure in the given situation with the cost and utility of the solution (Yang, and Wang, 2012).
This tool is useful to develop and identify the best suited alternative strategy or solution to reach
the objective of the organization (Stanford and Beran, 2010).
Q 2 Top Management and efficiency
Problem: Reduction in the profitability of the company
The problem faced by the organisation is of reducing profitability in the previous and
current year. The company is facing serious issue here with the declining profitability due to

change in the various aspects of business operations. The two attributes guiding towards the
profitability of the company are:
 Top management: Better management policies and strategies adopted by the enterprise
helps in increasing the profits of the company for further quarters. Weight-age will be
given to the alternatives so as to decide the priority given by the top management on
different available alternatives.
 Efficiency: An efficiency use of available resources helps in better implementation of the
alternatives and goals. A company may be good in one area and may not perform well in
the other. Hence, it is important to give higher weight-age to the alternative where the
enterprise can perform better in comparison to the other alternatives.
The profit of the company is based on number of aspects which lead to the increase or
decrease in value of the earnings. The alternatives available with the company to solve the
problem are as follows:
 Inventory of the company : The inventory of the company which is left at the end of the
month is a crucial factor which depict the performance of the company. When the
inventory left available at the end of the month higher than the expected inventory level.
This evaluates that the performance of the company is lower than the expected
performance which leads to lower production. Which in turn leads to lower profits.
Hence, management of the inventory can lead to increase in the profits.
This alternative has been chosen by the decision makers as it required better top management
attention. Appropriate management of the inventory and strict policies can help in delivering the
best to the customers contributing to increase in the profits as well.
Efficiently utilizing the available inventory and deliver appropriate strategies so that its supply
can be increased in the market.
 Employee cost : The cost of incurred by the company to pay the salaries of the
employees is considered as the employees cost of the company. The company pays the
employees to provide them with the desired output. The produced products are less than
the estimated amounts which is declining the productivity of the company but the
employees are paid the full salaries which in turn increases the cost incurred. Decrease in
the employee cost can help in increase in the profits of the company

Top management can use this alternative to increase profits as decrease in the employee cost will
help in decreasing the overall cost of the products as well. It will help in providing the goods and
services to the customer at low rates ultimately raising the demand of the products.
Further, efficiently utilizing the available workforce helps in delivering the best at minimum
possible costs to its customers. It helps in effective utilization of the available resources leading
to decrease in the overall cost of the organization. Hence, it an appropriate alternative in terms of
efficiency.
 Operating and non operating expenses : The company expends daily expenses for the
working of the company which are increase the cost of the company (Hunink, and Et. Al.
2014). The profits are declined by more cost incurred as operating and non operating
expenses. When the production is less than the expenditure of the day gives less output is
obtained from more expenses which declines profit. Reduction in operating and non
operating expenses can lead to increase in the profits of the enterprise.
Management decisions with respect to the operating management plays an important role. Top
level management use this as a priority factor where all the strategic decisions can be taken from
their side. Role of top management hence plays a vital importance in the decision making of
operating and non operating expenses.
Efficiency is another important attribute for operating and non operating expenses. It helps in
generating budget for the company so that these type of expenses can be controlled in the entity.
In addition to this, it also helps in utilizing the available resources and not spending more if the
requirement is not compulsory.
 COGS : Cost of goods sold is the total cost incurred on one unit product. Another
attribute leading to low production is the total cost incurred on the products. With more
expenses being paid with low level of production is leading to increase in the COGS.
Therefore, the profit earned from the sale of products is less, as the cost per good is than
the expected one.
Top management is important attribute for cost of goods sold as preparing strategies to reduce
the cost of goods sold will lead increase in the profits of the company. Further, it will also help in
taking decisions with respect to the production as well.

In case of efficiency, appropriate and efficient use of raw material can lead to reduction in the
cost of goods sold. It will then further help in reducing the losses and increasing profits for the
company.
 Working capital : the company is facing a serious scarcity in the level of working capital
of the company. With the fewer funds available to finance the day to day expenses the
company is facing credit crunch situation which is leading to taking more loans from the
banks. The loans taken from the bank arise the need to pay interest which decreases the
profit of the company (Ragsdale, 2014).
Working capital is another important factor that can be considered by the top level management.
In this case, reduction in the daily expenses and preparing strategies so that expenses are made
only in case of important elements can help in reducing it cost further contributing to increase in
the profits,
Efficiency is another important factor that should be considered where efficient utilization of the
resources is conducted by all the people in the organization.
Q 3
Stages Smart analysis
 Identify the maker : The decision maker is the management of the company. They are
responsible for taking the decision for the further actions of organisation. The problem
can be solved by the company with the help of decision analysis.
 Identify the issuer of issues : The management identified the prime issue to be of the
decline in the profit of the company (Imai, Keele and Yamamoto, 2010.). There are
several problems leading to the decline of profits. There is more inventory left at the end
of the month which depicts low production by the company. The low production leads to
expenses being higher than the production in the ratio, which evaluates to more company
paying more for producing less. The salaries given to the employee, the expenses made
on the production and the increased COGS result in decline of the profits. Also, due to
less working capital being available to the company for running day to day errands, bank
loan had to taken by the company which leads to increased interest being paid.
 Identify the alternatives : The action to be taken is to increase the production through
controlling the given problems in the production (Mutikanga, Sharma and
Vairavamoorthy, 2011). This can be done by ensuring a fix inventory count at the end of

month, this will show high production and profit will be increased, Also with the control
in the expenses and the company will be able to earn more profits.
 Identifying criteria : The standards will be set for each set of problem. The standards set
for each issues can will help to set the alternative solutions in the part.
 Assign values to each criteria : The criteria have been assigned the highest limit as for
standard values. The standards were given a higher limit for analysis.
 Calculating the weighted average of the values assigned to each alternative : Assigning
weight to each of the alternative according to their importance in the dimension. The
normalization table of the relative importance was created (Linkov and Moberg, 2011).
 Perform sensitivity analysis :
As per the owner of the company, the value of 100 will be given to the alternative which
is most preferred and 0 will be given to the values which are least preferable. The alternatives
will be judged based on the chosen attributes.
Alternatives Indications
Inventory of the company A
Employee cost B
Operating and non operating expenses C
COGS D
Working capital E
Alternatives
Attributes Weights A B C D E
Top
Management 60 40 0 100 70 65
Efficiency 40 50 100 0 60 80
Total 100 90 100 100 130 145
Aggregate 44 40 60 66 71 0

Both the attributes taken for decision making are important however, higher weight age is
given to top management. Hence, C alternative that is Operating and non operating expenses has
managed to receive 100 weight which shows that the top level management will focus the most
on this alternative. In case of efficiency, B alternative has received the highest weight age which
is employee cost. Hence, in order to make the entity efficient, the major focus will rely on
reduction in employee cost. The weight age method has helped to establish the relationship
between attributes and alternatives in quantitative terms.
 In the next step of calculation, weights will be assigned to each alternative
Here, only two alternatives are taken into consideration and values of the weights are assumed
for both of them.
Attributes Employee cost (B) Operating and non operating
expenses (C)
Top management 0 100
Efficiency 100 0
Weights 4 2
Hence, the aggregate value can be calculated in the following manner:
B = (0*4) + (100*4) = 400
C = (100*2) + (0*2) = 200
From the above table, it can be analysed that B attribute will be considered as the best
one as its aggregate is higher in comparison to the C one. Hence, inclination towards employee
cost is better than compared to that of operating and non operating expenses. With the help of
these swing weight the company will be able to divide the alternatives in different categories.
Hence, on the basis of the alternatives, normalised weights are given to the attributes
accordingly.
Attributes Weights Normalized value
Top Management 80 53
Efficiency 70 47

Total 150 100
Therefore, the upper level weight of the value tree is 53 and the lower level weight of the
same is 47.
 In the final step, the value of each attribute is found by the aggregating value scores. In
order to perform this calculation, additive model will be used
For inventory of the company, Additive model will be used in the following manner:
Attributes Inventory of the
company (A) values
Weight Value * Weight
Top management 40 60 2400
Efficiency 50 40 2000
Total 90 100 4400
The sum received from multiplying weights and values will be divided by 100. Hence,
the aggregate value of inventory of the company is 44. Hence, it can be concluded that the
highest benefit can be seen by the company if appropriate management practice and efficiency
measure is applied to the inventory management system.
 The least step is related to sensitivity analysis it helps in evaluating the alternative in
robust manner ((Huang, Keisler and Linkov, 2011). Any change in the weight can direct
directly affect the decision making policy. At that point of time, the management need to
take follow better decision making process.

Hence, out of all the alternatives available with the company, it will tend to choose
inventory management in order to cope up with the problem of lower profits. Better managing
skills and efficiency will directly contribute to rise in the profits.
Q 4
The used analysis is a potential tool for taking decision with by analysing the total value.
The SMART can be used to take critical business decision in the company (Ishizaka, and
Nemery, 2013).
Merits :
 This analysis IS widely successful in analysis complex problems.
 Work on the basis of weight system where, weight is assigned to the criteria with
according to the relative importance.
 Considers the importance of each alternative and takes decision on the basis of the
priority of the decision maker (Durbachand and Stewart2012).
 Allows any kind of weighting techniques in the analysis of the identified problem.
Illustration 1: Sensitivity Analysis

 Multiple objectives can be formed in the analysis which gives the decision maker to take
in account multiple goals which are to reached.
 Minimized the efforts of the decision maker.
 Forms many alternatives during the analysis which allows the decision maker to take his
decision by looking at many possible solutions.
Demerits :
 The process is long and hard to perform which takes too much time of the decision
maker.
 The procedure is not very convenient to process considering the frame work used in the
analysis.
 The alternatives with less performing potential are rejected which leaves subset of
alternatives to be considered in more detail the SMART method is considered to be not
correct choice (Velasquez and Hester, 2013).
 The analysis highly complex and used techniques within the analytics areas which causes
problem for the decision maker.
 With the screening process the alternatives are removed which might play potential part
in the decision making process.
 The alternatives which are chosen from the top of the list after the screening process are
frequently similar, which creates the possibility of solution being bases on similar
objectives.
 The level of inputs must be high to satisfy the SMART analysis, as the input demand for
the details demanded in the input are mostly high in the SMART analysis (Jato-Espino
and Et. Al. 2014).
CONCLUSION
The report concludes that the decision making is as important part of management. The
management of the company is responsible for taking the necessary decision in the company.
These decision impact the financial decision of the company. The report highlights the
importance of the decision making for the business. It concludes that the various analysis tools
help the management of the company to make important decision. The company made analysis
with the help of the SMART analysis. It was concluded that the profit decreases with the
increases in the expenses of the company. Moreover, it was also concluded through sensitivity

analysis that the company can make improvement in the profit by deceasing the expenses made
by the company.

REFERENCES
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