Chapter 14 - Multicriteria Decision Making 1

Chapter 14
Multicriteria Decision Making
Introduction to Management Science
8th Edition
by
Bernard W. Taylor III
Chapter 14 - Multicriteria Decision Making 2
Goal Programming
Graphical Interpretation of Goal Programming
Computer Solution of Goal Programming Problems with
QM for Windows and Excel
The Analytical Hierarchy Process
Chapter Topics
Chapter 14 - Multicriteria Decision Making 3
Study of problems with several criteria, multiple criteria,
instead of a single objective when making a decision.
Two techniques discussed: goal programming, and the
analytical hierarchy process.
Goal programming is a variation of linear programming
considering more than one objective (goals)
in the objective function.
The analytical hierarchy process develops a score for each
decision alternative based on comparisons of each under
different criteria reflecting the decision makers preferences.
Overview
Chapter 14 - Multicriteria Decision Making 4
Beaver Creek Pottery Company Example:
Maximize Z = $40x
1
+ 50x
2

subject to:
1x
1
+ 2x
2
s 40 hours of labor
4x
2
+ 3x
2
s 120 pounds of clay
x
1
, x
2
> 0
Where: x
1
= number of bowls produced
x
2
= number of mugs produced
Goal Programming
Model Formulation (1 of 2)
Chapter 14 - Multicriteria Decision Making 5
Adding objectives (goals) in order of importance, the
company:
Does not want to use fewer than 40 hours of labor per
day.
Would like to achieve a satisfactory profit level of
$1,600 per day.
Prefers not to keep more than 120 pounds of clay on
hand each day.
Would like to minimize the amount of overtime.
Goal Programming
Model Formulation (2 of 2)
Chapter 14 - Multicriteria Decision Making 6
All goal constraints are equalities that include deviational
variables d
-
and d
+
.
A positive deviational variable (d
+
) is the amount by which a
goal level is exceeded.
A negative deviation variable (d
-
) is the amount by which a
goal level is underachieved.
At least one or both deviational variables in a goal
constraint must equal zero.
The objective function in a goal programming model seeks
to minimize the deviation from goals in the order of the goal
priorities.

Goal Programming
Goal Constraint Requirements
Chapter 14 - Multicriteria Decision Making 7
Labor goals constraint (1, less than 40 hours labor; 4,
minimum overtime):
Minimize P
1
d
1
-
, P
4
d
1
+
Add profit goal constraint (2, achieve profit of $1,600):
Minimize P
1
d
1
-
, P
2
d
2
-
, P
4
d
1
+
Add material goal constraint (3, avoid keeping more than
120 pounds of clay on hand):
Minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
+
, P
4
d
1
+

Goal Programming
Goal Constraints and Objective Function (1 of 2)
Chapter 14 - Multicriteria Decision Making 8
Complete Goal Programming Model:
Minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
+
, P
4
d
1
+

subject to:
x
1
+ 2x
2
+ d
1
-
- d
1
+
= 40
40x
1
+ 50 x
2
+ d
2
-
- d
2
+
= 1,600
4x
1
+ 3x
2
+ d
3
-
- d
3
+
= 120
x
1
, x
2
, d
1
-
, d
1
+
, d
2
-
, d
2
+
, d
3
-
, d
3
+
> 0
Goal Programming
Goal Constraints and Objective Function (2 of 2)
Chapter 14 - Multicriteria Decision Making 9
Changing fourth-priority goal limits overtime to 10 hours
instead of minimizing overtime:
d
1
-
+ d
4
-
- d
4
+
= 10
minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
+
, P
4
d
4
+
Addition of a fifth-priority goal- important to achieve the
goal for mugs:
x
1
+ d
5
-
= 30 bowls
x
2
+ d
6
-
= 20 mugs
minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
-
, P
4
d
4
-
, 4P
5
d
5
-
, 5P
5
d
6
-
Goal Programming
Alternative Forms of Goal Constraints (1 of 2)
Chapter 14 - Multicriteria Decision Making 10
Goal Programming
Alternative Forms of Goal Constraints (2 of 2)
Complete Model with New Goals:
Minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
-
, P
4
d
4
-
, 4P
5
d
5
-
, 5P
5
d
6
-

subject to:
x
1
+ 2x
2
+ d
1
-
- d
1
+
= 40
40x
1
+ 50x
2
+ d
2
-
- d
2
+
= 1,600
4x
1
+ 3x
2
+ d
3
-
- d
3
+
= 120
d
1
+
+ d
4
-
- d
4
+
= 10
x
1
+ d
5
-
= 30
x
2
+ d
6
-
= 20
x
1
, x
2
, d
1
-
, d
1
+
, d
2
-
, d
2
+
, d
3
-
, d
3
+,
d
4
-
, d
4
+
, d
5
-
, d
6
-
> 0
Chapter 14 - Multicriteria Decision Making 11
Minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
+
, P
4
d
1
+

subject to:
x
1
+ 2x
2
+ d
1
-
- d
1
+
= 40
40x
1
+ 50 x
2
+ d
2
-
- d
2
+
= 1,600
4x
1
+ 3x
2
+ d
3
-
- d
3
+
= 120
x
1
, x
2
, d
1
-
, d
1
+
, d
2
-
, d
2
+
, d
3
-
, d
3
+
> 0
Figure 14.1
Goal Constraints
Goal Programming
Graphical Interpretation (1 of 6)
Chapter 14 - Multicriteria Decision Making 12
Figure 14.2
The First-Priority Goal: Minimize
Minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
+
, P
4
d
1
+

subject to:
x
1
+ 2x
2
+ d
1
-
- d
1
+
= 40
40x
1
+ 50 x
2
+ d
2
-
- d
2
+
= 1,600
4x
1
+ 3x
2
+ d
3
-
- d
3
+
= 120
x
1
, x
2
, d
1
-
, d
1
+
, d
2
-
, d
2
+
, d
3
-
, d
3
+
> 0
Goal Programming
Graphical Interpretation (2 of 6)
Chapter 14 - Multicriteria Decision Making 13
Figure 14.3
The Second-Priority Goal: Minimize
Minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
+
, P
4
d
1
+

subject to:
x
1
+ 2x
2
+ d
1
-
- d
1
+
= 40
40x
1
+ 50 x
2
+ d
2
-
- d
2
+
= 1,600
4x
1
+ 3x
2
+ d
3
-
- d
3
+
= 120
x
1
, x
2
, d
1
-
, d
1
+
, d
2
-
, d
2
+
, d
3
-
, d
3
+
> 0
Goal Programming
Graphical Interpretation (3 of 6)
Chapter 14 - Multicriteria Decision Making 14
Figure 14.4
The Third-Priority Goal: Minimize
Minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
+
, P
4
d
1
+

subject to:
x
1
+ 2x
2
+ d
1
-
- d
1
+
= 40
40x
1
+ 50 x
2
+ d
2
-
- d
2
+
= 1,600
4x
1
+ 3x
2
+ d
3
-
- d
3
+
= 120
x
1
, x
2
, d
1
-
, d
1
+
, d
2
-
, d
2
+
, d
3
-
, d
3
+
> 0
Goal Programming
Graphical Interpretation (4 of 6)
Chapter 14 - Multicriteria Decision Making 15
Figure 14.5
The Fourth-Priority Goal: Minimize
Minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
+
, P
4
d
1
+

subject to:
x
1
+ 2x
2
+ d
1
-
- d
1
+
= 40
40x
1
+ 50 x
2
+ d
2
-
- d
2
+
= 1,600
4x
1
+ 3x
2
+ d
3
-
- d
3
+
= 120
x
1
, x
2
, d
1
-
, d
1
+
, d
2
-
, d
2
+
, d
3
-
, d
3
+
> 0
Goal Programming
Graphical Interpretation (5 of 6)
Chapter 14 - Multicriteria Decision Making 16
Goal programming solutions do not always achieve all goals
and they are not optimal, they achieve the best or most
satisfactory solution possible.
Minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
+
, P
4
d
1
+

subject to:
x
1
+ 2x
2
+ d
1
-
- d
1
+
= 40
40x
1
+ 50 x
2
+ d
2
-
- d
2
+
= 1,600
4x
1
+ 3x
2
+ d
3
-
- d
3
+
= 120
x
1
, x
2
, d
1
-
, d
1
+
, d
2
-
, d
2
+
, d
3
-
, d
3
+
> 0
x
1
= 15 bowls
x
2
= 20 mugs
d
1
-
= 15 hours
Goal Programming
Graphical Interpretation (6 of 6)
Chapter 14 - Multicriteria Decision Making 17
Exhibit 14.1
Minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
+
, P
4
d
1
+

subject to:
x
1
+ 2x
2
+ d
1
-
- d
1
+
= 40
40x
1
+ 50 x
2
+ d
2
-
- d
2
+
= 1,600
4x
1
+ 3x
2
+ d
3
-
- d
3
+
= 120
x
1
, x
2
, d
1
-
, d
1
+
, d
2
-
, d
2
+
, d
3
-
, d
3
+
> 0
Goal Programming
Computer Solution Using QM for Windows (1 of 3)
Chapter 14 - Multicriteria Decision Making 18
Exhibit 14.2
Goal Programming
Computer Solution Using QM for Windows (2 of 3)
Chapter 14 - Multicriteria Decision Making 19
Exhibit 14.3
Goal Programming
Computer Solution Using QM for Windows (3 of 3)
Chapter 14 - Multicriteria Decision Making 20
Exhibit 14.4
Goal Programming
Computer Solution Using Excel (1 of 3)
Chapter 14 - Multicriteria Decision Making 21
Exhibit 14.5
Goal Programming
Computer Solution Using Excel (2 of 3)
Chapter 14 - Multicriteria Decision Making 22
Exhibit 14.6
Goal Programming
Computer Solution Using Excel (3 of 3)
Chapter 14 - Multicriteria Decision Making 23
Minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
-
, P
4
d
4
-
, 4P
5
d
5
-
, 5P
5
d
6
-

subject to:
x
1
+ 2x
2
+ d
1
-
- d
1
+
= 40
40x
1
+ 50x
2
+ d
2
-
- d
2
+
= 1,600
4x
1
+ 3x
2
+ d
3
-
- d
3
+
= 120
d
1
+
+ d
4
-
- d
4
+
= 10
x
1
+ d
5
-
= 30
x
2
+ d
6
-
= 20
x
1
, x
2
, d
1
-
, d
1
+
, d
2
-
, d
2
+
, d
3
-
, d
3
+,
d
4
-
, d
4
+
, d
5
-
, d
6
-
> 0
Goal Programming
Solution for Altered Problem Using Excel (1 of 6)
Chapter 14 - Multicriteria Decision Making 24
Exhibit 14.7
Goal Programming
Solution for Altered Problem Using Excel (2 of 6)
Chapter 14 - Multicriteria Decision Making 25
Exhibit 14.8
Goal Programming
Solution for Altered Problem Using Excel (3 of 6)
Chapter 14 - Multicriteria Decision Making 26
Exhibit 14.9
Goal Programming
Solution for Altered Problem Using Excel (4 of 6)
Chapter 14 - Multicriteria Decision Making 27
Exhibit 14.10
Goal Programming
Solution for Altered Problem Using Excel (5 of 6)
Chapter 14 - Multicriteria Decision Making 28
Exhibit 14.11
Goal Programming
Solution for Altered Problem Using Excel (6 of 6)
Chapter 14 - Multicriteria Decision Making 29
AHP is a method for ranking several decision alternatives
and selecting the best one when the decision maker has
multiple objectives, or criteria, on which to base the
decision.
The decision maker makes a decision based on how the
alternatives compare according to several criteria.
The decision maker will select the alternative that best
meets his or her decision criteria.
AHP is a process for developing a numerical score to rank
each decision alternative based on how well the alternative
meets the decision makers criteria.
Analytical Hierarchy Process
Overview
Chapter 14 - Multicriteria Decision Making 30
Southcorp Development Company shopping mall site
selection.
Three potential sites:
Atlanta
Birmingham
Charlotte.
Criteria for site comparisons:
Customer market base.
Income level
Infrastructure
Analytical Hierarchy Process
Example Problem Statement
Chapter 14 - Multicriteria Decision Making 31
Top of the hierarchy: the objective (select the best site).
Second level: how the four criteria contribute to the
objective.
Third level: how each of the three alternatives contributes
to each of the four criteria.
Analytical Hierarchy Process
Hierarchy Structure
Chapter 14 - Multicriteria Decision Making 32
Mathematically determine preferences for each site for
each criteria.
Mathematically determine preferences for criteria (rank
order of importance).
Combine these two sets of preferences to mathematically
derive a score for each site.
Select the site with the highest score.
Analytical Hierarchy Process
General Mathematical Process
Chapter 14 - Multicriteria Decision Making 33
In a pair-wise comparison, two alternatives are compared
according to a criterion and one is preferred.
A preference scale assigns numerical values to different
levels of performance.
Analytical Hierarchy Process
Pair-wise Comparisons
Chapter 14 - Multicriteria Decision Making 34
Table 14.1
Preference Scale for Pair-wise Comparisons
Analytical Hierarchy Process
Pair-wise Comparisons (2 of 2)
Chapter 14 - Multicriteria Decision Making 35






Income Level Infrastructure Transportation
A
B
C


(
(
(
(
(
(

1 9 3
1/9 1 1/6
1/3 6 1
(
(
(
(
(
(

1 1/7 1
7 1 3
1 1/3 1
(
(
(
(
(
(

1 1/4 2
4 1 3
1/2 1/3 1


Customer Market
Site A B C
A
B
C
1
1/3
1/2
3
1
5
2
1/5
1

Analytical Hierarchy Process
Pair-wise Comparison Matrix
A pair-wise comparison matrix summarizes the pair-wise
comparisons for a criteria.
Chapter 14 - Multicriteria Decision Making 36
Customer Market
Site A B C
A
B
C

1
1/3
1/2
11/6
3
1
5
9
2
1/5
1
16/5

Customer Market
Site A B C
A
B
C
6/11
2/11
3/11
3/9
1/9
5/9
5/8
1/16
5/16

Analytical Hierarchy Process
Developing Preferences Within Criteria (1 of 3)
In synthetization, decision alternatives are prioritized with
each criterion and then normalized:
Chapter 14 - Multicriteria Decision Making 37
Table 14.2
The Normalized Matrix with Row Averages
Analytical Hierarchy Process
Developing Preferences Within Criteria (2 of 3)
Chapter 14 - Multicriteria Decision Making 38
Table 14.3
Criteria Preference Matrix
Analytical Hierarchy Process
Developing Preferences Within Criteria (3 of 3)
Chapter 14 - Multicriteria Decision Making 39
Criteria Market Income Infrastructure Transportation
Market
Income
Infrastructure
Transportation
1
5
1/3
1/4
1/5
1
1/9
1/7
3
9
1
1/2
4
7
2
1

Table 14.4
Normalized Matrix for Criteria with Row Averages

Analytical Hierarchy Process
Ranking the Criteria (1 of 2)
Pair-wise Comparison Matrix:
Chapter 14 - Multicriteria Decision Making 40
(
(
(
(
(
(
(
(
(
(

0.0612
0.0860
0.6535
0.1993
Analytical Hierarchy Process
Ranking the Criteria (2 of 2)
Preference Vector:
Market
Income
Infrastructure
Transportation


Chapter 14 - Multicriteria Decision Making 41
Overall Score:
Site A score = .1993(.5012) + .6535(.2819) +
.0860(.1790) + .0612(.1561) = .3091
Site B score = .1993(.1185) + .6535(.0598) +
.0860(.6850) + .0612(.6196) = .1595
Site C score = .1993(.3803) + .6535(.6583) +
.0860(.1360) + .0612(.2243) = .5314

Overall Ranking:

Site Score
Charlotte
Atlanta
Birmingham

0.5314
0.3091
0.1595
1.0000

Analytical Hierarchy Process
Developing an Overall Ranking
Chapter 14 - Multicriteria Decision Making 42
Analytical Hierarchy Process
Summary of Mathematical Steps
Develop a pair-wise comparison matrix for each decision alternative for
each criteria.
Synthetization
Sum the values of each column of the pair-wise comparison
matrices.
Divide each value in each column by the corresponding column
sum.
Average the values in each row of the normalized matrices.
Combine the vectors of preferences for each criterion.
Develop a pair-wise comparison matrix for the criteria.
Compute the normalized matrix.
Develop the preference vector.
Compute an overall score for each decision alternative
Rank the decision alternatives.
Chapter 14 - Multicriteria Decision Making 43
Exhibit 14.12
Goal Programming
Excel Spreadsheets (1 of 4)
Chapter 14 - Multicriteria Decision Making 44
Exhibit 14.13
Goal Programming
Excel Spreadsheets (2 of 4)
Chapter 14 - Multicriteria Decision Making 45
Exhibit 14.14
Goal Programming
Excel Spreadsheets (3 of 4)
Chapter 14 - Multicriteria Decision Making 46
Exhibit 14.15
Goal Programming
Excel Spreadsheets (4 of 4)
Chapter 14 - Multicriteria Decision Making 47
Each decision alternative graded in terms of how well it
satisfies the criterion according to following formula:
S
i
= Eg
ij
w
j
where:
w
j
= a weight between 0 and 1.00 assigned to criteria j;
1.00 important, 0 unimportant; sum of total weights
equals one.
g
ij
= a grade between 0 and 100 indicating how well
alternative i satisfies criteria j; 100 indicates high
satisfaction, 0 low satisfaction.
Scoring Model
Overview
Chapter 14 - Multicriteria Decision Making 48
Mall selection with four alternatives and five criteria:





S
1
= (.30)(40) + (.25)(75) + (.25)(60) + (.10)(90) + (.10)(80) = 62.75
S
2
= (.30)(60) + (.25)(80) + (.25)(90) + (.10)(100) + (.10)(30) = 73.50
S
3
= (.30)(90) + (.25)(65) + (.25)(79) + (.10)(80) + (.10)(50) = 76.00
S
4
= (.30)(60) + (.25)(90) + (.25)(85) + (.10)(90) + (.10)(70) = 77.75
Mall 4 preferred because of highest score, followed by malls 3, 2, 1.


Grades for Alternative (0 to 100)

Decision Criteria
Weight
(0 to 1.00)

Mall 1

Mall 2

Mall 3

Mall 4
School proximity
Median income
Vehicular traffic
Mall quality, size
Other shopping
0.30
0.25
0.25
0.10
0.10
40
75
60
90
80
60
80
90
100
30
90
65
79
80
50
60
90
85
90
70

Scoring Model
Example Problem
Chapter 14 - Multicriteria Decision Making 49
Exhibit 14.16
Scoring Model
Excel Solution
Chapter 14 - Multicriteria Decision Making 50
Goal Programming Example Problem
Problem Statement
Public relations firm survey interviewer staffing requirements
determination.
One person can conduct 80 telephone interviews or 40 personal
interviews per day.
$50/ day for telephone interviewer; $70 for personal interviewer.
Goals (in priority order):
At least 3,000 total interviews.
Interviewer conducts only one type of interview each day. Maintain
daily budget of $2,500.
At least 1,000 interviews should be by telephone.
Formulate a goal programming model to determine number of
interviewers to hire in order to satisfy the goals, and then solve the
problem.
Chapter 14 - Multicriteria Decision Making 51
Step 1: Model Formulation:
Minimize P
1
d
1
-
, P
2
d
2
-
, P
3
d
3
-

subject to:
80x
1
+ 40x
2
+ d
1
-
- d
1
+
= 3,000 interviews
50x
1
+ 70x
2
+ d
2
-
- d
2
+
= $2,500 budget
80x
1
+ d
3
-
- d
3
+
= 1,000 telephone interviews
where:
x
1
= number of telephone interviews
x
2
= number of personal interviews


Goal Programming Example Problem
Solution (1 of 2)
Chapter 14 - Multicriteria Decision Making 52
Goal Programming Example Problem
Solution (2 of 2)
Step 2: QM for Windows Solution:
Chapter 14 - Multicriteria Decision Making 53
Purchasing decision, three model alternatives, three
decision criteria.
Pair-wise comparison matrices:



Prioritized decision criteria:


Price
Bike X Y Z
X
Y
Z
1
1/3
1/6
3
1
1/2
6
2
1


Gear Action
Bike X Y Z
X
Y
Z
1
3
7
1/3
1
4
1/7
1/4
1


Weight/Durability
Bike X Y Z
X
Y
Z
1
1/3
1
3
1
2
1
1/2
1

Criteria Price Gears Weight
Price
Gears
Weight
1
1/3
1/5
3
1
1/2
5
2
1

Analytical Hierarchy Process Example Problem
Problem Statement
Chapter 14 - Multicriteria Decision Making 54
Step 1: Develop normalized matrices and preference
vectors for all the pair-wise comparison matrices for criteria.

Price
Bike X Y Z Row Averages
X
Y
Z
0.6667
0.2222
0.1111
0.6667
0.2222
0.1111
0.6667
0.2222
0.1111
0.6667
0.2222
0.1111
1.0000


Gear Action
Bike X Y Z Row Averages
X
Y
Z

0.0909
0.2727
0.6364

0.0625
0.1875
0.7500

0.1026
0.1795
0.7179

0.0853
0.2132
0.7014
1.0000

Analytical Hierarchy Process Example Problem
Problem Solution (1 of 4)
Chapter 14 - Multicriteria Decision Making 55

Weight/Durability
Bike X Y Z Row Averages
X
Y
Z

0.4286
0.1429
0.4286

0.5000
0.1667
0.3333

0.4000
0.2000
0.4000

0.4429
0.1698
0.3873
1.0000


Criteria
Bike Price Gears Weight
X
Y
Z
0.6667
0.2222
0.1111
0.0853
0.2132
0.7014
0.4429
0.1698
0.3873

Step 1 continued: Develop normalized matrices and
preference vectors for all the pair-wise comparison matrices
for criteria.
Analytical Hierarchy Process Example Problem
Problem Solution (2 of 4)
Chapter 14 - Multicriteria Decision Making 56
Step 2: Rank the criteria.





Price
Gears
Weight (
(
(
(
(
(
(

0.1222
0.2299
0.6479

Criteria Price Gears Weight Row Averages
Price
Gears
Weight

0.6522
0.2174
0.1304

0.6667
0.2222
0.1111

0.6250
0.2500
0.1250

0.6479
0.2299
0.1222
1.0000

Analytical Hierarchy Process Example Problem
Problem Solution (3 of 4)
Chapter 14 - Multicriteria Decision Making 57
Step 3: Develop an overall ranking.

Bike X
Bike Y
Bike Z


Bike X score = .6667(.6479) + .0853(.2299) + .4429(.1222) = .5057
Bike Y score = .2222(.6479) + .2132(.2299) + .1698(.1222) = .2138
Bike Z score = .1111(.6479) + .7014(.2299) + .3873(.1222) = .2806
Overall ranking of bikes: X first followed by Z and Y (sum of
scores equal 1.0000).
(
(
(
(
(
(
(
(

(
(
(
(
(
(
(
(

-
1222 . 0
2299 . 0
6479 . 0
3837 . 0 7014 . 0 1111 . 0
1698 . 0 2132 . 0 2222 . 0
4429 . 0 0853 . 0 6667 . 0
Analytical Hierarchy Process Example Problem
Problem Solution (4 of 4)
Chapter 14 - Multicriteria Decision Making 58