Chapter 2 Decision Making

Decision-Making As A Management Responsibility

Decision must be made at various levels in the work place. The higher the management level, the bigger
and the complicated decision-making would be.

Decision making

It the process identifying and choosing alternative courses of action in a manner appropriate to the
demands of the situation

The decision making process (by David H. Holt)

1. Diagnose the problems

2. Analyze the 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

Diagnose the problems

Problem is the difference between an actual situation and a desired situation.

Analyze the environment

The environment where the organization is situated plays a very important role in the success or failure
of the organization. The objective of environmental scanning is to identify the constraints, which may be
spelled out as either internal / external limitations.

Internal:

Limited funds
Limited training of manpower
Ill-designed facilities

External

Patents are controlled by other organizations

A very limited market for the companys product and services exists
Strict enforcement of local zoning regulations

Components of the environment:

1. Internal organizations within a firm that surrounds decision making

 2. External variables outside the organization and not typically within the short-run control of top
management

Develop variables alternatives

Ways of solving solutions to the problem identified

Steps:

1. Prepare a list of alternative solutions

2. Determine the viability of each solutions
3. Revise the list by striking out those which are not viable

Example:

An engineering firm has a problem of increasing its output by 30%. This is a result of a new agreement
between the firm and one of its clients.

Internal Environment:

Organization: Structure, policies, procedures, rules, ability of management, etc

Marketing: product strategy, promotions strategy etc.
Personnel: recruitment, practices, incentives system
Production aspect: plant facility layout, inventory controls
Financial; liquidity, profitability, etc.

External environment:

Government
Engineers
Clients
Competitors
Public
Banks
Suppliers
Labour unions

List of solutions prepared by the eng. Manager:

1. Improve the capacity of the firm by hiring more workers and building additional facilities
2. Secure the services of subcontractors
3. Buy the needed additional output from another firm
4. Stop serving some of the companys customers
5. Delay servicing some client

The last two were deleted because of adverse effect of profitability of the firm in the long run.

Evaluate Alternatives
Evaluation of the three remaining alternatives is necessary in order to choose the best solution to the
problem. Each alternative must be evaluated on the basis of value, cost, and risk characteristics.

Value refers to the benefits that can be expected

Cost refers to the out-of-pocket costs, opportunity cost,

Follow-on cost - cost after construction of the project

Risk characteristics refers to the likelihood of achieving the goals of the alternatives

Making a Choice refers to the process of selecting among alternatives presenting potential solution to
the problem

Implement Decision

Refers to carrying out the decision so that the objectives sought will be achieved. To make
implementation effective a plan must be made.

Evaluate and Adapt Decision Results

It is the used of control and feedback mechanisms to ensure results and to provide information for
future decisions

Feedback refers to the process which requires checking at each stage of the process to assure that the
alternatives generated, criteria used in the evaluation and the solution selected for the implementation
are in keeping with the goals and objective originally specified

Control- refers to actions made to ensure that activities performed matched the desired activities or
goals that have been set.

Approaches in solving Problems

1. Qualitative evaluation
2. Quantitative evaluation

Qualitative evaluation - refers to evaluation using intuition and subjective judgement.

It is used when:

1. The problem is fairly simple

2. Problem is familiar
3. Costs involved are not great
4. Immediate decisions are needed

Quantitative evaluation refers to the evaluation of alternatives using any technique in a group
classified as rational and analytical.
Quantitative models for decision making

1. Inventory models
2. Queuing theory
3. Network models
4. Forecasting
5. Regression analysis
6. Simulation
7. Linear programming
8. Sampling theory
9. Statistical decision theory

Inventory models:

1. (EOQ) Economic Order Quantity model used to calculate the number of items that should be
ordered at one time to minimize the total yearly cost of placing orders and carrying items in the
inventory
2. Production Order Quantity model techniques applied to production orders
3. Back order inventory model used for planned shortages
4. Quantity Discount model used to minimize the total cost when quantity discounts are offered
by suppliers

Queuing Theory

Describes how to determine the number of service units that will minimize both waiting time and costs
of service

Network Models

Large complex tasks are broken into smaller segments that can be manage independently

1. (PERT) The Program Evaluation Review Technique enable eng manager to schedule, monitor,
and control large and complex projects by employing three time estimates for each activity
2. (CPM) Critical Path Method network technique using only 1 time factor per activity that
enables engineer manager to schedule, monitor, and control large and complex projects.

Forecasting -

Collection of past and current information to make predictions about the future

To make decision on capacity more effective, the manager must be provided with data on demands
requirements for the next 12 months

Regression Analysis

Is a forecasting method that examines the association between two or more variables? Uses data from
previous period to predict future events
Simulation

Model constructed to represents reality, on which conclusions about real life problems can be used.

Linear programming

It is a quantitative technique that is used to produce an optimum solution within the bounds imposed by
constraints upon the decision. It is very useful when supply and demands limitation at plants,
warehouse, or market areas is constraints upon the system

Sampling Theory

Used when samples of populations are statistically determined to be used for a number of processes,
such as quality control and marketing research

Statistical Decision Theory

Refers to the rational way to conceptualize, analyze and solve problems in situations involving limited or
partial information about the decision environment

Case Analysis: Its now or never

Case Background:

Mr. Engineer Romeo Estabillo, after his graduation in college and after passing the civil engineering board
examination immediately establish his own construction company in his hometown, San Tiago City. At
the beginning, he started accepting constructions of residential houses; later even prominent people in
their place also avail of his services.

At the start he has 2 assistant who help him in his daily business undertakings. At the third year of
operation he already has his own building inside his residential compound. He already have 2 female
office assistant, six full time civil engineer, 2 draftsmen, 10 administrative personnel, 1 messenger, and 1
security guard. Foreman and labourers are all contractual.

By June 1996, his business is continuously growing and he is thinking to hire 4 additional engineers, but
he felt that he will not be able to supervise them all, as he is the one who directly supervised the job of
all his civil engineering staff. He is thinking that he might not be able to perform his job effectively. He
also found out that as his business grow, operation became complicated, and decision making also
become more scientific, thus he is thinking whether to continue with his plan or not.

External Environment

Opportunities Threat
economic Clients of construction firms
grew in number
In 1996, the business
continuously growing

Socio cultural Even prominent customer

availed services of small
construction firm

Internal environment:

strength
Human resource Personnel were able to multitask
different job in the office and
field
As Eng. Estabillo, gained
experience, his clients grew in
number, even the most
prominent persons in Isabela
availed of his services
Administration Able to have own building in a
span of 3 years.
Marketing As Eng. Estabillo, gained
experience, his clients grew in
number, even the most
prominent persons in Isabela
availed of his services
Research and development
Finance/ Accounting
weakness
Mr Estabillo, as he was directly
supervising all operations, he
now feels that he may not be
able to perform his function
effectively.
Without enough staff to satisfy
the demands of customers
There is no segregation of duties,
same personnel performs. Same
personnel or staff performs
purchasing, bookkeeping and
other related administrative
duties
Without new ways on how to
supervised his growing market
Bookkeeping and other related
administrative duties are
performed by the second
assistant, Mr. Romeo Mamaril

Statement of the Problem:

Inability to apply rational ways in evaluating the maximum capacity requirements and growing
demands of his company, (human resource, duties and responsibilities of personnel and staffs,
Research and development, finance and or accounting), resulting to confusion in his decision making as
to whether to hire 4 additional civil engineer on a full time basis or not.

Alternative Courses of Action:

ACA 1 ACA 2 ACA 3
Use network models, such as Use Forecasting method to Use Linear programming in order
PERT and or CPM in order to effectively planned the human to effectively evaluate the
schedule, monitor large and resource requirement of the personnel requirement of the
complex projects current and company future demands firm future market demands
future to be able to plan and
identify human resourse
requirements in order to satisfy
future demands
Evaluation of Alternative Courses of Action:
Alternatives Value(40%) Cost(30%) Risk(30%) Total
ACA1 20 (1)F 15 (1) 10(2) 45 choice
ACA2 12 (2) 10 (2) 15(1) 37
ACA3 8 (3)u 5 (3)u 5 ( 3) u 18
No. 1:
Old new Variance
Value 100,000 120,000
Cost 50,000 57,500
Benefits50 62,500 12,500 Choice

No. 2:
Value 100k 112K
Cost 50k 55k
Benefit 50 57 7,000F

No. 3
Value100k 108k
Cost 50K 52.5
Benefit 50k 55,500 5,500F

(Example of PERT CPM)

Personnel (Staff) Categories
A B C D
 Senior Engineer Software Eng 1 Doc. Specialist Training Specialist
Number Persons Number Persons Number Person Number person Total
Of Weeks of Weeks of Weeks of Weeks Person
People people People people Weeks

Task1 1 3 3
Task2 1 2 2
Task3 1 2 1 2 4
Task4 1 1 1 1 2
Task5 1 1 1
Task6 1 1 1 1 2
Task7 1 2 1 2 1 3 1 1 8
Task8 1 1 1 1 1 1 3

Totals: 10 10 3 2 25

1
Project
Requirements
Analyzed

0 7
system
Start operation
Start
3 4 documente
5 d
Costs Alternativ
Software
Alternative e
Purchase
sdefined Selected
d 8
Personnel
Trained

6
2
Software
Project
installed
environment
Examined
;