04/10/2023

EVALUATION COMPONENTS
S. No. Component Weightage Duration of Nature of
(%) Examination Examination
1 Assignments (Case 15% - Open Book
DECISION MODELLING Presentation) &
Class Participation
MBAA TERM-II 2 Quizzes 10% Between 10- Closed Book
(2023-24) 25 minutes
3 Mid-term Exam 25% 1.5 hour Closed Book
4 End-term Exam 30% 2 hour Closed Book
5 Group Project 20% - Presentation
SESSION 1 Presentation
INTRODUCTION TO DECISION MODELLING
Group project (Group details are already shared)
The group project will provide an opportunity to utilize the course
Dr. Devendra Kumar Pathak concepts and employ the discussed tools/ techniques to formulate and
([Link]. & Ph.D., IIT Delhi)
solve a decision-making problem.
An Introduction to Management Science:
Assistant Professor,
Quantitative Approaches to Decision 2
Operations Management & Decision Sciences, Making by Anderson, Sweeney, Williams,
Email: [Link]@[Link]
Indian Institute of Management (IIM) Kashipur and Martins. Cengage Learning. (15th
Edition)

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INTRODUCTION: DECISION MAKING EXAMPLE: PRODUCT MIX PROBLEM

Pottery Company
 Decision Making is the most generic term in ‘Management’.

 Decision making precedes any activity- personal or

organizational.

 Forecasting and Decision making are two fundamental building

blocks of any managerial function.
Forecasting /
Decision making Action
Prediction about
(Recommendations)
future situation

 The prime focus of Decision Making is to find the

optimum/ best course of action in every situation.
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BUSINESS ANALYTICS REAL LIFE APPLICATIONS

❖ Product Mix & Production scheduling
How many products?, Reduced
Cost, Change in Profit Margin
& Constraints’ RHS ❖ Assignment (assigning Ola/ Uber drivers to customers)

❖ Scheduling (scheduling multiple TV shows simultaneously to

attain the maximum views) or Staff scheduling

❖ Financial Engineering (asset allocation, risk management,

derivatives pricing, portfolio management, etc.)

❖ Pricing Science (airline ticket pricing)

❖ Vehicle Routing (master planning the routes of vehicles so that

minimum vehicles are needed)
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❖ Facility Location (deciding the most appropriate location for new
facilities such as warehouse, factory, or fire station)

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DECISION MODELLING PROCESS PROBLEM SOLVING

 7 Steps of Problem Solving

(First 5 steps are the process of decision making)
1. Define the problem.
2. Determine the set of alternative solutions.
3. Determine the criteria for evaluating
alternatives.
4. Evaluate the alternatives.
5. Choose an alternative (make a decision).
-------------------------------------------------------------------
--
6. Implement the selected alternative.
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7. Evaluate the results.

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QUANTITATIVE ANALYSIS AND DECISION MAKING QUANT./ QUALI. ANALYSIS AND DECISION MAKING

Decision-Making Process

Structuring the Problem Analyzing the Problem

Define Identify Determine Choose

Evaluate
the the the an
Alternatives
Problem Alternatives Criteria Alternative

• Problems in which the objective is to find the best solution

with respect to one criterion are referred to as single-
criterion decision problems. [Car selection based on cost]

• Problems that involve more than one criterion are referred to as

multi-criteria decision problems. [Car selection based on cost,10 11
comfort, fuel efficiency, mileage, resale value, etc.]

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QUALITATIVE ANALYSIS AND DECISION MAKING QUANTITATIVE ANALYSIS AND DECISION MAKING

Analysis Phase of Decision-Making Process Analysis Phase of Decision-Making Process

Qualitative Analysis Quantitative Analysis

• based largely on the manager’s judgment and • analyst will concentrate on the quantitative
experience facts or data associated with the problem
• includes the manager’s intuitive “feel” for the
problem • analyst will develop mathematical expressions
• is more of an art than a science that describe the objectives, constraints, and
other relationships that exist in the problem
Example:
New Product Launch: Which products to cater to which • analyst will use one or more quantitative
market (rural/ urban) methods to make a recommendation
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QUANTITATIVE ANALYSIS AND DECISION MAKING MODEL DEVELOPMENT

 Models are representations of real objects or situations

 Quantitative Analysis Process

 Model Development  Three forms of models are:

 Data Preparation  Iconic models - physical replicas (scalar representations) of
 Model Solution
real objects (e.g., model airplane and toy truck)
 Report Generation
 Analog models - physical in form, but do not physically
resemble the object being modeled (e.g., speedometer,
thermometer)

 Mathematical models - represent real world problems

through a system of mathematical formulas and
expressions based on key assumptions, estimates, or
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statistical analyses

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CLASSIFICATION OF MATHEMATICAL MODELS MATHEMATICAL MODELS

• Descriptive vs. Prescriptive (most ideal decision -- optimal
solution) Deterministic Model – if all uncontrollable inputs to the
• Descriptive decision theory is more about what will occur model are known and cannot vary
in a situation (based on what happened in the past), not what
should.
• Descriptive decision theory takes into consideration outside
factors that influence an actor’s decisions toward less Stochastic (or Probabilistic) Model – if any
optimal and less rational end. uncontrollable is uncertain and subject to variation

• Static vs. Dynamic

Static models are at an equilibrium or steady state, as
opposed to dynamic models which change with respect to
time

•Single objective vs. Multiple Objective 16 17

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MATHEMATICAL MODELS MATHEMATICAL MODELS

 Objective Function – a mathematical expression that Constraints – a set of restrictions or limitations, such as
describes the problem’s objective, such as maximizing production capacities
profit or minimizing cost
To continue our example, a production capacity
 Consider a simple production problem. constraint would be necessary if, for instance, 5
hours are required to produce each unit and only a
 Suppose x denotes the number of units maximum of 40 hours are available per week.
produced and sold each week,
 the firm’s objective is to maximize total weekly The production capacity constraint is given by
profit. 5x < 40.
 With a profit of $10 per unit,

The value of 5x is the total time required to produce x

 the objective function units; the symbol indicates that the production time
= 10x. 18 required must be less than or equal to the 40 hours 19
available.

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MATHEMATICAL MODELS MATHEMATICAL MODELS

Uncontrollable Inputs – Environmental factors that Decision Variables – A decision variable is a quantity
are not under the control of the decision maker that the decision-maker controls and would like to
determine for the stated problem. These are the unknowns
In the preceding mathematical model, the profit per of a mathematical programming model. Typically, we will
unit ($10), the production time per unit (5 hours), determine their optimum values with an optimization
and the production capacity (40 hours) are method.
environmental factors not under the control of the
manager or decision maker. In the preceding mathematical model, the
production quantity x is the controllable input to the
model.

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MATHEMATICAL MODELS MATHEMATICAL MODELS

Deterministic Model – if all uncontrollable inputs to the

A complete mathematical model for our simple model are known and cannot vary
production problem is:

Maximize 10x (objective function) Stochastic (or Probabilistic) Model – if any

subject to: 5x < 40 (constraint) uncontrollable is uncertain and subject to variation
x>0 (non-negativity constraint)
Stochastic models are often more difficult to analyze.
[The second constraint reflects the fact that it is not In our simple production example, if the number of
possible to manufacture a negative number of units.] hours of production time per unit could vary from 3
to 6 hours depending on the quality of the raw
material, the model would be stochastic.
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MATHEMATICAL MODELS MODEL SOLUTION

 The analyst attempts to identify the alternative (the set of

Uncontrollable Inputs decision variable values) that provides the “best” output
(Environmental Factors) for the model.

 The “best” output is the optimal solution.

Controllable If the alternative does not satisfy all of the model

Output 
Inputs Mathematical constraints, it is rejected as being infeasible, regardless
(Projected
(Decision Model of the objective function value.
Results)
Variables)
 If the alternative satisfies all of the model constraints, it is
feasible and a candidate for the “best” solution.
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MODEL SOLUTION MODEL SOLUTION

▪ Trial-and-Error Solution for Production Problem  A variety of software packages are available for solving
mathematical models.
Production Projected Total Hours Feasible
Quantity Profit of Production Solution
 Microsoft Excel: Solver
0 0 0 Yes
 LINGO
2 20 10 Yes
([Link]
4 40 20 Yes
6 60 30 Yes
8 80 40 Yes
10 100 50 No
12 120 60 No

Maximize 10x (objective function) 26 27

subject to: 5x < 40 (constraint)
x>0 (constraint)

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REPORT GENERATION EXAMPLE: PRODUCT MIX PROBLEM

 A managerial report, based on the results of the model,

should be prepared.
 The report should be easily understood by the decision
maker.
 The report should include:
 the recommended decision
 other pertinent information about the results (for example,
how sensitive the model solution is to the assumptions and
data used in the model)

Given these limited resources, the

28 company desires to know how many29
bowls and mugs to produce each day to
maximize profit.

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EXAMPLE: PRODUCT MIX PROBLEM-- FORMULATION EXAMPLE: PRODUCT MIX PROBLEM

 Step 1. Define the decision variables

 How many bowls and mugs to produce

 Step 2. Define the objective function

 Maximize profit

 Step 3. Define the constraints

 The resources (clay and labor) available

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KEY TERMINOLOGIES KEY TERMINOLOGIES

Feasible Solution:

•Any solution LPP which does not violate constraints is called feasible Decision variables –
solution. A decision variable is a quantity that the decision-maker controls and would like
to determine for the stated problem
• Feasible solution may be optimal (best) solution.
Objective function -a linear mathematical relationship describing an
•Any LPP/NLP can have more than one feasible solution.
objective of the firm, in terms of decision variables -this function is to
•Optimal solution to LPP/NLP must be a feasible solution. be maximized or minimized.

Infeasible Solution: Constraints –requirements or restrictions placed on the firm by the

•Any solution that violates at least one constraint is called infeasible operating environment, stated in linear relationships of the decision
solution. variables.

•Any LPP may have infinite number of infeasible solution. Parameters -numerical coefficients and constants used in the objective
32 function and constraints. 33
•Infeasible solution lies outside the bounded region.

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ASSIGNMENT

CASELET
HELP, I’M NOT GETTING ANY YOUNGER
[DIET PLANNING]

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