introduction to management lecture notes

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Slide
CHAPTER ONE
Prepared by Dejene Adugna (PhD)
Assistant Professor
Quantitative Analysis for
Managerial Decision
An Overview

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Problem Solving Vs Decision Making
• Problem solving is a process, whereas making
decisions is an action based on insights
derived during the problem-solving process.
• Problem solving is an analytical process used
to identify the possible solutions to the
situation at hand.
• Decision making is a choice made by using
one’s judgement.
• Making decisions is a part of problem solving

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Definition of Decision-Making
• Decision making is the process of
identifying problems and solving them
• Decision-making is the process of selecting
the best option from two or more possible
alternatives based on some criteria.
• A decision represents a course of actions
chosen from a number of possible
alternatives.

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The identification of a problem
• To make a decision, you must first
identify the problem you need to solve or
the question you need to answer
• A problem is defined as a difference
between an existing and a desired state
of affairs.

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Examples of a problems
• Lack of clear goals and outcomes
• Shortage of resources for products and services
• Ineffective advertising and promotions
• Low employee morale
• Little or no available feedback from customers
• Frequent complaints from employees and customer
• Conflict and turnover among employees
• High employee turnover
• Poor performance
• Inefficiencies in activities

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Types of problems
a) Structured problems: are routine in nature.
– They commonly occur and are easily understood by the
organization.
– information about the problem easily defined and
complete.
Example: Customer wanting to return his purchase.
b) Unstructured Problem: are novel and infrequent in nature
– Such problems may be difficult to recognize upon initial
occurrence and require specific analysis and research to fully
understand.
Example: Decision to enter new market segment

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Identification of decision criteria
 Decision criteria are factors that are Important
(relevant) to resolving the problem
 The criteria reflect what a manager think is
relevant in her his decision
• Ease of implementation.
• Cost
• Risk levels
• Increase in sales or market share.
• Return on investment.

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Allocation of weights to criteria
 The criteria's are not equally Important ,
therefore it is necessary to allocate
weights to the items listed in step 2 .
 We give the most important criterion a
weight of 10 lower weights for the rest
criterion
 We use our personal preferences to assign
priorities to the relevant

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Development of alternatives
• The decision maker list the alternatives
that could succeed in resolving the
problem .
• Alternatives is the set of actions, objects,
candidates, decisions... to be explored
during the decision process

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Analysis of alternatives
 Once the alternatives has been identified
the decision maker must critically
analysis each one .
 Each alternative is evaluated by apprising
(asses it)against the criteria .
 The assessment is made by the manager.

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Selection of an alternative
 We simply choose the alternative that
generate the highest score in step 5.
 The choice process is completed in this
step

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Implementation of the alternative
 Putting a decision into action
 The decision may still fail if its not
implemented properly
 The persons who's going to implement
the decision may achieve better outcome
if they have participated in the making of
it.

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Evaluation of decision effectiveness
 Is to appraises the result
 Did the alternative chosen in step 6
and implemented in step 7
accomplished the desired result.

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21. Use
/drink

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Decision making approaches
a)Qualitative approach
• Used in case of simple situations or
routine problems
• Based largely on the manager’s judgment
and experience
• Includes the manager’s intuitive “feel” for
the problem
• Is more of an art than a science

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Decision making approaches
b) Quantitative approach
• Used in novel situations
• Mostly based on statistical analysis of
collected data associated with the
problem
• Analyst will use one or more quantitative
methods to make a recommendation
• Is more of a science than art

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Quantitative approaches …
 Quantitative approaches to decision making is
referred to as
• Operations Research
• Management Science
• Decision Science
• OR deals with the Application of scientific
methods for making decision
• OR is an analytical method of problem-solving and
decision-making that is useful in the management
of organizations.

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Operations Research Origin (History)
• OR originated during World war II, when the
British military management contacted a group of
experts together to apply a scientific approach in
the study of military operations to win the battle.
• The main objective was to allocate scarce resources
in an effective manner to various military
operations and to the activities within each
operation.
• It is now widely used in military, business, industry,
transportation, public health, crime investigation,
etc

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Potential reasons for a quantitative
approach
 The problem is complex
 The problem is very important
 The problem is new

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The Management Science Process

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Steps in the Management Science Process
 Observation - Identification of a problem that exists (or may
occur soon) in a system or organization.
 Definition of the Problem - problem must be clearly and
consistently defined, showing its boundaries and interactions
with the objectives of the organization.
 Model Construction - Development of the functional
mathematical relationships that describe the decision
variables, objective function and constraints of the problem.
 Model Solution - Models solved using management science
techniques.
 Model Implementation - Actual use of the model or its
solution.

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Model Development
 Models are representations of real objects/situations
Types of models:
 Iconic models - physical replicas (scalar
representations) of real objects
 Analog models - physical in form, but do not physically
resemble the object being modeled
 Mathematical models - represent real world problems
through a system of mathematical formulas and
expressions based on key assumptions, estimates, or
statistical analyses

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Advantages of Models
 Generally, experimenting with models
(compared to experimenting with the real
situation):
 Requires less time
 Is less expensive
 Involves less risk
 The more closely the model represents the
real situation, the accurate the conclusions
and predictions will be.

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Mathematical Models
• Objective function:
A mathematical function that describes the problem’s
objective
• Constraint
Restrictions that limit the degree to which the objective can
be pursued (production capacities, availability of inputs,
committed outputs etc.)
• Uncontrollable inputs
Environmental factors affecting the objective function and
the constraints, but beyond the control of the decision maker
• Controllable inputs or decision variable

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Deterministic Vs Stochastic
a) Deterministic Model: Uncontrollable
variables are all known and do not vary.
b) Stochastic or Probabilistic Model: One
or more of the uncontrollable variables
are uncertain and subject to variation.

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Characteristics of OR (Features)
 Decision making approach - the main aim of OR is to
find the best or optimal for a problem under
consideration
 Inter-disciplinary team approach: it uses techniques
from economics, mathematics, chemistry, physics, etc.
 Use of scientific research - It makes use of scientific
research to arrive at a optimum solution.
 Use of Computer : for decision-making and problem
solving computers are widely used
 It gives Quantitative solution
 It considers the human factors also.

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Techniques of Operations Research
 Linear Programming (LP) is a mathematical
technique of assigning a fixed amount of resources
to satisfy a number of demands
 The transportation problem: is used to determine
the minimum cost of distributing a product from a
number of sources to a number of destinations.
 Assignment Problem involves the allocation of n
different facilities to n different tasks
 Goal Programming is a tool to tackle multiple and
incompatible goals of an enterprise.

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Techniques of Operations Research
• Queuing theory is applied in such situations where
decisions have to be taken to minimize the duration
of the queue with minimum investment cost.
• Game theory is used for decision making under
conflicting situations where there are one or more
opponents (i.e., players).
• Inventory Control Models is concerned with the
acquisition, storage, handling of inventories so as to
ensure the availability of inventory whenever needed
and minimize wastage and losses.

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Techniques of Operations Research
• Simulation is a technique that involves setting up a
model of real situation and then performing
experiments.
• Markov Process is a process of predicting regarding
future outcomes based on present state
• Network Scheduling-PERT and CPM is a technique used
for planning, scheduling and monitoring large projects.
• Replacement Models are concerned with the problem
of replacement of machines, individuals, capital assets,
etc. due to their deteriorating efficiency, failure, or
breakdown.

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