An Assignment

on
Multi Criteria Decision Model

Course Code: BST-531

Course Title: Quantitative Business Analysis

Submitted to
Md. Asraful Islam Chowdhury
Assistant Professor (Management)
Business Administration
Department of Business Administration
Leading University, Sylhet.

Submitted by
Dewan Nadim Zafar Chy
ID: 2111017020
MBA Program
Department of Business Administration
Leading University, Sylhet.

Date of Submission: 8th April, 2021

 Table Of Content

No Name Page

1 Executive Summary 01

2 Introduction 02

3 Multi criteria Decision 03

Goal Programming

4 Formulation And Graphical Solution 03-04

5 Goal Programming Model 04-05

6 Scoring Models 06-07

7 Analytic Hierarchy Process 07-08

8 Hierarchy For The Car Selection Problem 09

9 Developing the Hierarchy 09

10 Comarison Scale For The Importance Of 10

Criteria Using AHP

11 Key Learning Points 10-11

12 Conclusion 12

13 Reference 13
 Executive Summary
In this chapter we used goal programming to solve problems with multiple goals within the
linear programming framework. We showed that the goal programming model contains one or
more goal equations and an objective function designed to minimize deviations from the goals.
In situations where resource capacities or other restrictions affect the achievement of the goals,
the model will contain constraints that are formulated and treated in the same manner as
constraints in an ordinary linear programming model. In goal programming problems with
preemptive priorities, priority level 1 goals are treated first in an objective function to identify a
solution that will best satisfy these goals. This solution is then revised by considering an
objective function involving only the priority level 2 goals; solution modifications are considered
only if they do not degrade the solution obtained for the priority level 1 goals. This process
continues until all priority levels have been considered. As a result, we showed how linear
programming can be used to solve a goal programming problem. We then presented a scoring
model as a quick and relatively easy way to identify the most desired decision alternative in a
multi criteria problem. The decision maker provides a subjective weight indicating the
importance of each criterion. Then the decision maker rates each decision alternative in terms of
how well it satisfies each criterion. The end result is a score for each decision alternative that
indicates the preference for the decision alternative considering all criteria. We also presented an
approach to multi criteria decision making called the analytic hierarchy process (AHP). We
showed that a key part of AHP is the development of judgments concerning the relative
importance of, or preference for, the elements being compared. A consistency ratio is computed
to determine the degree of consistency exhibited by the decision maker in making the pairwise
comparisons.. The final step of the analytic hierarchy process involves multiplying the priority
levels established for the decision alternatives relative to each criterion by the priority levels
reflecting the importance of the criteria themselves; the sum of these products over all the criteria
provides the overall priority level for each decision alternative.

1|Page
 Introduction
A variety of quantitative methods can help managers make better decisions. Whenever we
desired an optimal solution, we utilized a single criterion (e.g., maximize profit, minimize cost,
minimize time). In this topic we discuss techniques that are appropriate for situations in which
the decision maker needs to consider multiple criteria in arriving at the overall best decision. For
example, consider a company involved in selecting a location for a new manufacturing plant.
The cost of land and construction may vary from location to location, so one criterion in
selecting the best site could be the cost involved in building the plant; if cost were the sole
criterion of interest, management would simply select the location that minimizes land cost plus
construction cost. Before making any decision, however, management might also want to
consider additional criteria such as the availability of transportation from the plant to the firm’s
distribution centers, the attractiveness of the proposed location in terms of hiring and retaining
employees, energy costs at the proposed site, and state and local taxes. In such situations the
complexity of the problem increases because one location may be more desirable in terms of one
criterion and less desirable in terms of one or more of the other criteria.

To introduce the topic of multi criteria decision making, we consider a technique referred to as
goal programming .Then we next consider a scoring model as a relatively easy way to identify
the best decision alternative for a multi criteria problem. At last , we introduce a method known
as the analytical hierarchy process (AHP).

2|Page
Multi Criteria Decision
To introduce the topic of multi criteria decision making, we consider a technique referred to as
Goal Programming. This technique has been developed to handle multi criteria situations within
the general framework of linear programming. We next consider a Scoring model as a relatively
easy way to identify the best decision alternative for a multi criteria problem. Finally, we
introduce a method known as the Analytical Hierarchy Process (AHP), which allows the user to
make pair wise comparisons among the criteria and a series of pair wise comparisons among the
decision alternatives in order to arrive at a prioritized ranking of the decision alternative.

Goal Programming-Formulation And Graphical Solution:

To illustrate the goal programming approach to multi criteria decision problems, let us consider a
problem facing Nicolo Investment Advisors. A client has $80,000 to invest and, as an initial
strategy, would like the investment portfolio restricted to two stocks:

U.S. Oil, which has a return of $3 on a $25 share price, provides an annual rate of return of 12%,
whereas Hub Properties provides an annual rate of return of 10%. The risk index per share, 0.50
for U.S. Oil and 0.25 for Hub Properties, is a rating Nicolo assigned to measure the relative risk
of the two investments. Higher risk index values imply greater risk; hence, Nicolo judged U.S.
Oil to be the riskier investment. By specifying a maximum portfolio risk index, Nicolo will avoid
placing too much of the portfolio in high-risk investments. To illustrate how to use the risk index
per share to measure the total portfolio risk, suppose that Nicolo chooses a portfolio that invests
all $80,000 in U.S. Oil, the higher risk, but higher return, investment. Nicolo could purchase
$80,000/$25 3200 shares of U.S. Oil, and the portfolio would have a risk index of 3200(0.50)
1600. Conversely, if Nicolo purchases no shares of either stock, the portfolio will have no risk,

3|Page
but also no return. Thus, the portfolio risk index will vary from 0 (least risk) to 1600 (most
risk).14.1 Goal Programming: Formulation and Graphical Solution 661 Nicolo’s client would
like to avoid a high-risk portfolio; thus, investing all funds in U.S. Oil would not be desirable.
However, the client agreed that an acceptable level of risk would correspond to portfolios with a
maximum total risk index of 700. Thus, considering only risk, one goal is to find a portfolio with
a risk index of 700 or less. Another goal of the client is to obtain an annual return of at least
$9000. This goal can be achieved with a portfolio consisting of 2000 shares of U.S. Oil [at a cost
of 2000($25) $50,000] and 600 shares of Hub Properties [at a cost of 600($50) $30,000]; the
annual return in this case would be 2000($3) 600($5) $9000. Note, however, that the portfolio
risk index for this investment strategy would be 2000(0.50) 600(0.25) 1150; thus, this portfolio
achieves the annual return goal but does not satisfy the portfolio risk index goal. Thus, the
portfolio selection problem is a multi criteria decision problem involving two conflicting goals:
one dealing with risk and one dealing with annual return. The goal programming approach was
developed precisely for this kind of problem. Goal programming can be used to identify a
portfolio that comes closest to achieving both goals. Before applying the methodology, the client
must determine which, if either, goal is more important. Suppose that the client’s top-priority
goal is to restrict the risk; that is, keeping the portfolio risk index at 700 or less is so important
that the client is not willing to trade the achievement of this goal for any amount of an increase
in annual return. As long as the portfolio risk index does not exceed 700, the client seeks the
best possible return.

Goal Programming Model

As we stated, preemptive goal programming problems are solved as a sequence of linear
programs: one linear program for each priority level. However, notation that permits writing a
goal programming problem in one concise statement is helpful. In writing the overall objective
for the portfolio selection problem, we must write the objective function in a way that reminds us
of the preemptive priorities.

4|Page
We can do so by writing the objective function as :

Min P1(d+1 ) + P2(d2-)

The priority levels P1 and P2 are not numerical weights on the deviation variables, but simply
labels that remind us of the priority levels for the goals. We now write the complete goal
programming model as:

Min P1(d+ 1 ) + P2(d2 )

s.t. 25U + 50H ≤ 80,000 Funds available
0.50U + 0.25H - d+1 + d1- =700 P1 goal
3U+ 5H - d+2 + d2- =P2 goal U,H, d+1 + d1- - d+2 + d2- ≥ 0

With the exception of the P1 and P2 priority levels in the objective function, this model is a
linear programming model. The solution of this linear program involves solving a sequence of
linear programs involving goals at decreasing priority levels. We now summarize the procedure
used to develop a goal programming model.

Step 1. Identify the goals and any constraints that reflect resource capacities or other restrictions
that may prevent achievement of the goals.

Step 2. Determine the priority level of each goal; goals with priority level P1 are most important,
those with priority level P2 are next most important, and so on.

Step 3. Define the decision variables.

Step 4. Formulate the constraints in the usual linear programming fashion.

Step 5. For each goal, develop a goal equation, with the right-hand side specifying the target
value for the goal. Deviation variables and are included in each goal equation to reflect the
possible deviations above or below the target value.

Step 6. Write the objective function in terms of minimizing a prioritized function of the
deviation variables.

5|Page
Scoring Models

A scoring model is a relatively quick and easy way to identify the best decision alternative

for a multi criteria decision problem. We will demonstrate the use of a scoring model for a

job selection application.

Assume that a graduating college student with a double major in finance and accounting received
job offers for the following three positions:

• A financial analyst for an investment firm located in Chicago

• An accountant for a manufacturing firm located in Denver

• An auditor for a CPA firm located in Houston

When asked about which job is preferred, the student made the following comments:

“The financial analyst position in Chicago provides the best opportunity for my long-run

Career advancement . However, I would prefer living in Denver rather than in Chicago or

Houston. On the other hand, I liked the management style and philosophy at the Houston

CPA firm the best.” The student’s statement points out that this example is clearly a multi
criteria decision problem. Considering only the long-run career advancement criterion, the
financial analyst position in Chicago is the preferred decision alternative. Considering only the
location criterion, the best decision alternative is the accountant position in Denver. Finally,
considering only the management style criterion, the best alternative is the auditor position with
the CPA firm in Houston. For most individuals, a multi criteria decision problem that requires a
trade-off among the several criteria is difficult to solve.

6|Page
The steps required to develop a scoring model are as follows:

Step 1 : Develop a list of the criteria to be considered. The criteria are the factors that

the decision maker considers relevant for evaluating each decision alternative.

Step 2 : Assign a weight to each criterion that describes the criterion’s relative importance.

Let,

wi = the weight for criterion i

Step 3 : Assign a rating for each criterion that shows how well each decision alternative

satisfies the criterion. Let,

rij = the rating for criterion i and decision alternative j

Step 4 : Compute the score for each decision alternative. Let

Sj = score for decision alternative j

The equation used to compute Sj is as follows:

❑
i ij
Sj¿ ∑ w r
i

Step 5. Order the decision alternatives from the highest score to the lowest score to provide the
scoring model’s ranking of the decision alternatives. The decision alternative with the highest
score is the recommended decision alternative.

7|Page
Analytic Hierarchy Process
The analytic hierarchy process (AHP), developed by Thomas L. Saaty, 1 is designed to solve
complex multi criteria decision problems. AHP requires the decision maker to provide judgments
about the relative importance of each criterion and then specify a preference for each decision
alternative using each criterion. The output of AHP is a prioritized ranking of the decision
alternatives based on the overall preferences expressed by the decision maker.

To introduce AHP, we consider a car purchasing decision problem faced by Diane Payne. After a
preliminary analysis of the makes and models of several used cars, Diane narrowed her list of
decision alternatives to three cars: a Honda Accord, a Saturn, and a Chevro let Cavalier.

Diane decided that the following criteria were relevant for her car selection decision process:

• Price

• Miles per gallon (MPG)

• Comfort

• Style

However, measures of Comfort and Style cannot be specified so directly. Diane will need to
consider factors such as the car’s interior, type of audio system, ease of entry, seat adjustments,
and driver visibility in order to determine the comfort level of each car. The style criterion will
have to be based on Diane’s subjective evaluation of the color and the general appearance of
each car. Even when a criterion such as price can be easily measured, subjectivity becomes an
issue whenever a decision maker indicates his or her personal preference for the decision
alternatives based on price. For instance, the price of the Accord ($13,100) is $3600 more than
the price of the Cavalier ($9500). The $3600 difference might represent a great deal of money to
one person, but not much of a difference to another person. Thus,whether the Accord is
considered “extremely more expensive” than the Cavalier or perhaps only “moderately more
expensive” than the Cavalier depends upon the financial status and the subjective opinion of the
person making the comparison. An advantage of AHP is that it can handle situations in which the
unique subjective judgments of the individual decision maker constitute an important part of the
decision-making process.
8|Page
Hierarchy For The Car Selection Problem

Developing the Hierarchy

The first step in AHP is to develop a graphical representation of the problem in terms of the
overall goal, the criteria to be used, and the decision alternatives. Such a graph depicts the
hierarchy for the problem. Figure 14.6 shows the hierarchy for the car selection problem. Note
that the first level of the hierarchy shows that the overall goal is to select the best car. At the
second level, the four criteria (Price, MPG, Comfort, and Style) each contribute to the
achievement of the overall goal. Finally, at the third level, each decision alternative— Accord,
Saturn, and Cavalier—contributes to each criterion in a unique way. Using AHP, the decision
maker specifies judgments about the relative importance of each of the four criteria in terms of
its contribution to the achievement of the overall goal. At the next level, the decision maker
indicates a preference for each decision alternative based on each criterion. A mathematical
process is used to synthesize the information on the relative importance of the criteria and the
preferences for the decision alternatives to provide an overall priority ranking of the decision
alternatives. In the car selection problem, AHP will use Diane’s personal preferences to provide
a priority ranking of the three cars in terms of how well each car meets the overall goal of being
the best car.

9|Page
Comarison Scale For The Importance Of Criteria Using
AHP

Key Learning Points

In goal programming with preemptive priorities, we never permit trade-offs between higher and
lower level goals

To achieve a goal exactly, the two deviation variables must both equal zero.

We must solve one linear program for each priority level.

One approach that can often be used to solve a difficult problem is to break the problem into two
or more smaller or easier problems. The linear programming procedure we use to solve the goal
programming problem is based on this approach.

Not all goal programming problems involve multiple priority levels. For problems with one
priority level, only one linear program need be solved to obtain the goal programming solution.

The analyst simply minimizes the weighted deviations from the goals.

A scoring model enables a decision maker to identify the criteria and indicate the weight or
importance of each criterion.

10 | P a g e
By comparing the scores for each criterion, a decision maker can learn why a particular decision
alternative has the highest score.

AHP allows a decision maker to express personal preferences and subjective judgments about
the various aspects of a multi criteria problem.

AHP uses the numerical ratings from the pairwise comparisons to establish a priority or
importance measure for each criterion.

11 | P a g e
 Conclusion

In multi criteria decision models techniques have been offered, a number of suitable approaches
have been provided for modeling decision aiding and help is provided for the development of
alternatives as they consider the complexity of the process. Choosing a problem solution
approach and a model is dependent upon the actors that are involved in the process of multi
criteria decision models desired goals, available information, time, and so on. The most
important advantage of the multiple criteria methods is their capability of addressing the
problems that are marked by different conflicting interests. Using these techniques, actors are
capable of solving the problems that it is not possible to solve by the use of common
optimisation models. Multi criteria decision models techniques and approaches are being
employed increasingly for the evaluation of alternatives and comparative analysis. The goal
programming model contains one or more goal equations and an objective function designed to
minimize deviations from the goals. In situations where resource capacities or other restrictions
affect the achievement of the goals, the model will contain constraints that are formulated and
treated in the same manner as constraints in an ordinary linear programming model. a variation
of the linear programming graphical solution procedure can be used to solve goal programming
problems with two decision variables. a scoring model as a quick and relatively easy way to
identify the most desired decision alternative in a multi criteria problem. The decision maker
provides a subjective weight indicating the importance of each criterion.

12 | P a g e
 Reference
https://www.pdfdrive.com/an-introduction-to-management-science-e27090870.html

13 | P a g e