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MGT2070 - Ch. 5~&4.docx

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University of Lethbridge
MGT 2070
Barry Stannard

MGT2070: Operations Management September 26, 2012 Chapter 5: Decision Analysis Supplemental Chapter on Moodle  Decision analysis: scientific method that we can apply to business decisions  A decision that is analyzed with a decision theory approach is characterized by: o at least one random variable with a set of possible values that will have a bearing on the result of the decision o a list of alternatives for the manager to choose from o a known payoff for each alternative under each possible future decision  Decision-makers make rational decisions under limits imposed by o Costs o Human abilities o Time, technology o Availability of information Instead…we achieve a satisfactory solution, called satisficing  Sub-optimization: occurs in the departmentalization of decision making where each department attempts to reach a solution that is optimal for each  Decision maker’s process o Determine goal/objective o Establish decision criteria  Cost less than x, profit greater than y o Select decision-making tool/model o List possible alternatives o Identify possible states of nature for each random variable o Determine payoff for each alternative and state of nature o Estimate likelihood of occurrence for each possible state of nature o Evaluate alternatives according to criterion, select best alternative o Implement decision and evaluate outcome  Ways to display a decision problem o Decision table States of Nature Alternatives Rains No Rain Carry Umbrella Stay dry Stay dry and look weird No umbrella Get wet Stay dry o Payoff table Possible Future Demand (State of nature) Alternatives Low Moderate High Small Facility $10 $10 $10 Medium Facility $7 $12 $12 Large Facility -$4 $2 $16 MGT2070: Operations Management September 26, 2012  When we make decisions under uncertainty, we use: o Maximin (pessimist, extreme
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