ABS

Amity Business School

Programme - MBA, Semester II
Course –Operations Management
Name of Faculty – Rajeev Pathak

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 ABS

Decision Tree

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 Making Capacity Planning ABS

Decisions

The three-step procedure for making

capacity planning decisions is as
follows:
1. Identify Capacity Requirements
2. Develop Capacity Alternatives
3. Evaluate Capacity Alternatives

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 Identifying capacity ABS

requirements
• Forecasting Capacity:
– Long-term capacity requirements based on future demand
– Identifying future demand based on forecasting
– Forecasting, at this level, relies on qualitative forecast models
• Executive opinion
• Delphi method
– Forecast and capacity decision must included strategic implications
• Capacity cushions
– Plan to underutilize capacity to provide flexibility
• Strategic Implications
– How much capacity a competitor might have
– Potential for overcapacity in industry a possible hazard

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 Developing & Evaluating Capacity ABS
Alternatives
• Capacity alternatives include
– Could do nothing,
– expand large now (may included capacity
cushion), or
– expand small now with option to add later
• Use decision support aids to evaluate
decisions (decision tree most popular)

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 Decision trees ABS

Diagramming technique which uses

– Decision points – points in time when decisions
are made, squares called nodes
– Decision alternatives – branches of the tree off
the decision nodes
– Chance events – events that could affect a
decision, branches or arrows leaving circular
chance nodes
– Outcomes – each possible alternative listed
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 Decision tree diagrams ABS

Decision trees developed by

– Drawing from left to right
– Use squares to indicate decision points
– Use circles to indicate chance events
– Write the probability of each chance by the
chance (sum of associated chances = 100%)
– Write each alternative outcome in the right
margin
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 ABS

• Example Using Decision Trees: A

restaurant owner has determined that she
needs to expand her facility. The
alternatives are to expand large now and
risk smaller demand, or expand on a
smaller scale now knowing that she might
need to expand again in three years.
Which alternative would be most
attractive?
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 ABS

• The likelihood of demand being high

is .70
• The likelihood of demand being low is .
30
• Large expansion yields profits of
$300K(high dem.) or $50k(low dem.)

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 ABS

• Small expansion yields profits of $80K

if demand is low
• Small expansion followed by high
demand and later expansion yield a
profit of $200K at that point. No
expansion at that point yields profit of
$150K

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ABS

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 Evaluating the Decision Tree ABS

• Decision tree analysis utilizes expected value

analysis (EVA)
• EVA is a weighted average of the chance events
– Probability of occurrence * chance event outcome
• Refer to previous slide
– At decision point 2, choose to expand to maximize
profits ($200,000 > $150,000)
– Calculate expected value of small expansion:
• EVsmall = 0.30($80,000) + 0.70($200,000) = $164,000

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 Evaluating the Decision ABS
Tree
• Calculate expected value of large expansion:
– EVlarge = 0.30($50,000) + 0.70($300,000) = $225,000
• At decision point 1, compare alternatives &
choose the large expansion to maximize the
expected profit:
– $225,000 > $164,000
• Choose large expansion despite the fact that
there is a 30% chance it’s the worst decision:
– Take the calculated risk!

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