Module 5: Decision Theory - Techniques and Characteristics for Effective Decision-Making

In this theory we will discuss about decision theory and below are the summaries point:- Decision theory is a technique for evaluating alternatives for future capacity in a business organization. Suitable decision problems have a set of possible future conditions, a list of alternatives, and a known payoff for each alternative. The decision-making process involves identifying the problem, developing suitable alternatives, analyzing and comparing alternatives, selecting the best alternative, implementing the solution, and monitoring results.

MODULE 5 – DECISION THEORY
DECISION THEORY
 technique for evaluating alternative for
future capacity in a business organization
 Act of deciding or choosing an action among
all alternative taken into account
 Success or failure that persons, companies
and management experience depends on
the decisions they make.
 General approach to decision-making that is
useful in many different aspects of
operations management. Provide
framework for analysis of decision.
o Involving:
 Capacity Planning
 Product and Service Design
 Equipment Selection
 Location Planning
CHARACTERISTICS OF SUITABLE PROBLEMS
 Characteristics of decisions that are suitable
for using decision theory
o A set of possible future conditions
that will have a bearing on the
results of the decision
o A list of alternatives from which to
choose
o A known payoff for each alternative
under each possible future
condition.
PROCESS FOR USING DECISION THEORY
1. Identify the possible future states of nature
2. Develop a list of possible alternatives
3. Estimate the payoff for each alternative for
each possible future state of nature
4. If possible, estimate the likelihood of each
possible future state of nature
5. Evaluate alternatives according to some
decision criterion and select the best
alternative
STEP IN DECISION PROCESS
1. Identify the problem
2. Specify the objectives and criteria for a
solution
3. Develop suitable alternatives
4. Analyze and compare alternatives
5. Select the best alternative
6. Implement the solution
7. Monitor to see that desired results is
achieved.
CAUSE OF POOR DECISIONS
1. Managers fail to appreciate the importance
of each step in the decision process.
2. Managers may skip a step & not devote
enough effort to complete it before jumping
into the next step (*making quick decisions
or failure to recognize the consequences of
a poor decision).
3. Managers have the impression that they
can do no wrong or manager’s
unwillingness to admit a mistake.
4. Inability to make decisions – takes a long
time to decide when the decision should
have been rendered.
5. Bounded Rationality – limits imposed on
decision making by costs, human abilities,
time, technology, & the availability of
information.
6. Sub-optimization – an attempt to reach a
solution that is optimum for that
department. It is manifested by
departmentalized decision which might be
optimal for one dept. and might not be
optimal for the other department which can
have negative consequences.
DECISION ENVIRONMENTS
 Three general environment categories:
o Certainty
 Environment in which
relevant parameters have
known values
o Risk
 Environment in which certain
future events have
probabilistic outcomes
o Uncertainty
 Environment in which it is
impossible to assess the

likelihood of various possible
future events
Decision Making Under Uncertainty
 No information is available on how likely
the various states of nature are
 Decision Criteria:
o Maximax
 Best possible payoff/best
possible outcome
 Very optimistic approach
 Best among the best
o Maximin
 Worst possible payoff/worst
possible outcome
 Guarantee minimum
 Best among the worst
o Laplace
 Average payoff
o Minimax Regret
 Worst regret and choose the
best worst.
 Least or minimum
opportunity loss or regret.
 Opportunity losses or regrets
– subtract the highest pay off
to all entries in a specific
nature.
Decision Making Under Risk
 Made under the condition that the
probability of occurrence for each state of
nature can be estimated.
 Utilizes a widely applied criterion is
expected monetary value (EMV) criterion or
expected value approach (EV)
o Determine the expected payoff
(EPO) of each alternative, choose
the best expected payoff
o Shows weighted average of all pay
offs for a certain alternative
o Decision Tree
 Schematic representation of
the available alternatives and
their possible consequences
 Useful for analysing
sequential decisions
 Branches
o Alternatives –
branches
leaving a
square node.
o Chance Events
– branches
leaving a
circular node.
 Nodes
o Decision
Nodes –
square nodes.
o Chance Nodes
– circular
nodes.
Probability
 Measure of the degree of “sureness” or
“uncertainty” of the occurrence of an event.
 Tool for prediction, estimates,
approximates and even forecasting about
the occurrence of an event.
Expected Value of Perfect Information – The
decision maker can have access to more
information that would lead to the prediction as to
which nature will actually occur.
Expected Value of Perfect Information – the payoff
given a perfect information remains expected value
 Two Methods for Calculating EVPI:
o EVPI – expected payoff under
certainty – expected payoff
under risk.
o EVPI – minimum expected
regret or minimum
opportunity loss.

MODULE 6 – PROCESS SELECTION AND FACILITY
LAYOUT
PROCESS SELECTION
 Way production of goods or services will be
organized
o When does occur
 When new products &
services are being planned
 Periodically due to
technological changes in
products or equipment.
o Has major implications for:
 Capacity planning
 Layout of facilities
 Equipment
 Design of work systems
Approaches Process Selection – Process Strategy
 Capacity Intensity
o Mix of equipment and labor that will
be used by the organization.
 Process Flexibility
o Degree to which the system can be
adjusted to changes in processing
requirements due to such factors as
 Product and service design
changes
 Volume changes
 Changes in technology
Two Main Factors that influence Process Selection
 Process choice is demand driven
o How much variety will process need
to be able to handle
o How much volume will the process
need to be able to handle
Main Factors that influence Process Selection
1. Variety and Volume are inversely related
2. Need for flexibility of personnel and
equipment is directly related to the level of
variety the process will need to handle. The
lower the variety, the less the need for
flexibility.
Process Types or types of processing
 Job Shop
o Customized goods or services
o Volume and standardization
(variety) is low and products are
often one of a kind
o Employees are highly skilled craft
employees
o Capacity is difficult to measure due
to complexity of jobs
o Able to handle a wide variety of
work or high flexibility (advantages)
o Slow, high cost per unit, complex
planning and scheduling
(disadvantages)
 Batch
o Skill of workers does not need to be
as high as in job shop
o Batch production is useful for
seasonal items, since manufacturing
can start and stop in accordance
with seasonal production demands
 Repetitive/Assembly
o Standardized goods or services
o Low unit cost, high volume, efficient
(Advantages)
o Low flexibility, high cost of
downtime (Disadvantages)
 Continuous
o Highly standardized goods or
services
o Very efficient, very high volume
(Advantages)
o Very rigid, lack of variety, costly to
change, very high cost of downtime
(Disadvantages)

Project - used for work that is nonroutine, with a
unique set of objectives to be accomplished in a
limited time frame
Lowell Center for Sustainable Production:
Sustainable Production – creation of goods and
services using processes and systems
o Wastes & ecologically incompatible
byproducts are reduced, eliminated
or recycled on site
o Energy & materials are conserved
Ergonomics – way of working smarter-not harder
by designing tools, equipment, work stations and
tasks that allow a job to fit the worker and NOT by
fitting the worker to be job:
o Layout/type of controls & displays
o Lighting & Temperature
o Process (Heights, reaches, weights)
Process Technology – methods, procedures, and
equipment used to produce goods and provide
services
Information Technology – science and use of
computers and other electronic equipment to
store, process and send information
*process and information technology can have a
major impact on costs, productivity and
competitiveness
Automation – machinery that has sensing and
control devices that enable it to operate
automatically
o Fixed automation
 Offers a number of benefits over
human labor, it has low
variability
 Online Banking
o Programmable automation
 Involves the use of high-cost,
general-purpose equipment
controlled by a computer
program that provides both the
sequence of operations and
specific details about each
operation Computer-Aided
Manufacturing (CAM) –
use of computers in
process control, ranging
from robots to
automated quality
control Numerically Controlled
(N/C) Machines –
machines that performs
operations by following
mathematical processing
instructions Robot – machine
consisting of a
mechanical arm, a power
supply, and a controller
o Flexible automation
 Evolved from programmable
automation. Used equipment
that is more customized than
that of programmable
automation. A key difference
between the two is that flexible
automation requires significantly
less changeover time FMS (Flexible
Manufacturing System) –
group of machines
designed to handle
intermittent processing
requirements and
produce a variety of
similar products CIM (Computer
Integrated
Manufacturing) - system
for linking a broad range
of manufacturing
activities through an
integrated computer
system

Facilities Layout
Layout – configuration of departments, work
centers, and equipment, with particular emphasis
on movement of work (customers or materials)
through the system.
o Facilities layout decision arise when: Designing new facilities Re-designing existing facilities
Reasons on the importance of layout decisions
 They require substantial investment
 They involve long term commitments
 They have significant impact on the cost
and efficiency of operations
Basic Layout Types
 Product Layouts
o Layout that uses standardized
processing operations to achieve
smooth, rapid, high-volume flow
o Layout that can handle varied
processing requirements
o Advantages
 High rate of output
 Low unit cost
 Labor specialization
 Low material handling cost
per unit
 High utilization of labor and
equipment
 Established routing and
scheduling
 Routine accounting,
purchasing, and inventory
control
o Disadvantages
 Creates dull, repetitive jobs
 Poorly skilled workers may
not maintain equipment or
quality of output
 Fairly inflexible to changes in
volume or product or process
design
 Highly susceptible to
shutdowns
 Preventive maintenance,
capacity for quick repair and
spare-parts inventories are
necessary expenses
 Individual incentive plans are
impractical
Line Balancing
 Goal of a product layout is to arrange
workers or machines in the sequence that
operations need to be performed.
 Process of assigning tasks to workstations
in such a way that the workstations have
approximately equal time requirements.
Cycle Time
 Maximum time allowed at each workstation
to complete its set of tasks on a unit
 Establishes the output rate of a line
 Line’s capacity is a function of its cycle time
 Output rate of a line
Minimum Cycle Time – longest task time
Maximum Cycle Time – apply if all tasks were
performed at a single workstation
Fixed Position Layouts
 product or project remains stationary, and
workers, materials, and equipment are
moved as needed
 places the product in one spot, and
workers, materials, and equipment come to
it.
Combination Layouts
 operational environments
 moving away from process layouts in an
effort to capture the benefits of product
layout