5S Decision Theory - Describe the different environments under which operations decisions are made
- Describe and use techniques that apply decision making theory under uncertainty
- Describe and use the expected-value approach
Learning Objectives - Construct a decision tree and use it to analyze a problem
- Compute the expected value of perfect information
- Conduct sensitivity analysis on a simple decision problem
Decision Theory represents a general approach to decision making which is suitable for a wide range of operations management decisions, including:
Product and service design
Equipment
selection
Location
planning
Capacity
planning
Decision Theory
A set of possible future conditions exists that will have a bearing on the results of the decision - A set of possible future conditions exists that will have a bearing on the results of the decision
- A list of alternatives for the manager to choose from
- A known payoff for each alternative under each possible future condition
Decision Theory Elements
Identify possible future conditions called states of nature - Identify possible future conditions called states of nature
- e.g., (demand will be low, medium, or high; the competitor will or will not introduce a new product)
- Develop a list of possible alternatives, one of which may be to do nothing
- Determine the payoff associated with each alternative for every future condition
Decision Theory Process
If possible, determine the likelihood of each possible future condition - If possible, determine the likelihood of each possible future condition
- Evaluate alternatives according to some decision criterion and select the best alternative
Decision Theory Process (Cont’d)
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