DECISIONMAKING

Chapter 2

DECISION MAKING AS A MANAGEMENT

RESONSIBILITY
Decisions must be made at various levels in the workplace.
They are also made at the various stages in the management
process. If certain resources must be used, someone must make a
decision authorizing certain persons to appropriate such resources.
Decision-making is a responsibility of the engineer manager. It
is understandable for managers to make wrong decisions at times.
The wise manager will correct them as soon as they are identified.
The bigger issue is the manager who cannot or do not want to
make decisions. Delaney concludes that this type of managers are
dangerous and should be removed from their position as soon as
possible.
Management must strive to choose a decision option as
correctly as possible. Since they have that power, they are

DECISION-MAKING
The process of identifying and choosing alternative
courses of action in a manner appropriate to the
demands of the situation
Decisions are made at various management levels and
at various management functions. Decision-making,
according to Nickels and others,
IS THE HEART OF ALL THE MANAGEMENT FUNCTIONS.

THE DECISION-MAKING PROCESS

RATIONAL DECISION-MAKING, according to David H. Holt

Diagnose problem

Analyze environment

Articulate problem or opportunity

Develop viable alternatives

Make a choice

Implement decision

Evaluate and adapt decision result

DIAGNOSE PROBLEM
If a manager wants to make an intelligent
decision, his first move must be to identify the
problem. If the manager fails in this aspect, it is
almost impossible to succeed in the subsequent
steps.
IDENTIFICATION OF THE PROBLEM IS THE
TANTAMOUNT TO HAVIING THE PROBLEM HALFSOLVED
A problem exist when there is a difference

ANALYZE THE ENVIRONMENT

The objective of environmental analysis is the identification of
constraints, which may be spelled out as either internal or external
limitations.
INTERNAL LIMITATIONS

Limited funds available for the purchase of equipment

Limited training on the part of employees

Designed facilities
EXTERNAL LIMITATIONS

Patents are controlled by other organizations

A very limited market for the companys products and

services exists.

Components of the Environment

INTERNAL ENVIRONMENT refers to
organizational activities within a firm that
surrounds decision-making
EXTERNAL ENVIRONMENT refers to
variables that are outside the organization
and not typically within the short-run control
of top management.

THE ENGINEERING FIRM

INTERNAL ENVIRONMENT
Organizational Aspects
like org. structure, policies, procedures,
rules,
ability, of management, etc.

The Engineering Firm and the

Internal Environment in
Decision-making

EXTERNAL
ENVIRONMENT

Marketing Aspects

DECISIO
NS

like product strategy, promoting

strategy, etc.

Personnel Aspects
like recruitment practices, incentive
systems, etc.

Production Aspects
like plant facility layout, inventory
control, etc.

EXTERNAL
ENVIRONMENT

The Engineering Firm and Its External

Environment
Government
Engineers

Clients

Labor Unions

ENGINEERI
NG FIRM

Competitors

Suppliers

Banks
Public

DEVELOP VIABLE ALTERNATIVES

Oftentimes, problems may be solved by any of the
solutions offered. The best among the alternative solution
must be considered by management. This is made
possible by using a procedure with the following steps:

Prepare a list of alternative solutions.

Determine the viability of each solutions.

Revise the list by striking out those which are

not viable.

The list of solutions prepared by the engineering

manager shows the following alternatives courses of
action:

1. improve the capacity of the firm by hiring more workers

and building additional facilities
2. secure the services of subcontractors;
3. buy the needed additional output from another firm;
4. stop serving some of the companys customers; and
5. delay servicing some clients

EVALUATE ALTERNATIVES
Proper evaluation makes choosing the right solution less
difficult.
How the alternatives will be evaluated will depend on the
nature of the problem, the objectives of the firm, and the nature of
the alternatives presented. Souder suggested that each
alternative must be analyzed and evaluated in terms of its value,
cost, and risk characteristics.
VALUE OF THE ALTERNATIVES
expected.

refers to the benefits that can be

COST OF ALTERNATIVES

refers to the out-of-pocket costs.

RISK CHARACTERISTICS

refers to the likelihood of achieving

EVALUATION SHEET
Title of Vacant Position: JUNIOR ENGINEERING
Date of Evaluation: December 28, 1996
Applicant
Points
1. Jose Sibayan, Jr.
2. Menandro Rillon
3. Dante dela Cruz

Education
40
40
40

Training
35
36
38

Experience Age
4
5
6

10
9
7

Total
89
90
91

Evaluator:
Edgardo J. Viloria
Manager
Engineering Division III

MAKE A CHOICE
Choice-making refers to the process of selecting among
alternatives representing potential solutions to a
problem. Webber advises that
. . . Particular effort should be made to identify all
significant consequences of each choice.
To make the selection process easier, the alternatives
can be ranked from best to worst on the basis of some
factors like benefits, cost, or risk.

IMPLEMENT DECISION
Implementation refers to carrying out the
decision so that the objectives sought will be
achieved. To make implementation effective, a
plan must be devised.
The resources must be made available so that
the decision may be properly implemented. Those
who will be involved in implementation, according
to Aldag and Stearns, must understand and
accept the solution.

EVALUATE AND ADAPT DECISION RESULT

Feedback refers to the process which requires checking
at each stage of the process to assure that the
alternatives generated, the criteria used in evaluation,
and the solution selected for implementation are in
keeping with the goals and objectives originally specified.
Control refers to actions made to ensure that activities
performed math the desired activities or goals, that have
been set.

Step 1

Diagnos
e
proble
m
Analyze

environm
ent

Articulate
Problem or
opportunity

4
5

Develop
viable
opportunit
y
Evaluate
alternativ
es

Make a
choice

Impleme
nt
decision

Feedback as a Control
Mechanism in the DecisionMaking-Process

Evaluat
e Result
Results
achieve
d

Result
not
achieved
Adapt
decision
results

Determine
steps where
error was
made

APPROACHES IN SOLVING PROBLEMS

QUALITATIVE EVALUATION
refers to evaluation of alternatives using intuition and
subjective jusgement. Stevenson states that managers tend to use
the qualitative approach when:
1. The problem is fairly sample.
2. The problem is familiar.
3. The costs involved are not great.
4. Immediate decision are needed.
QUANTITATIVE EVALUATION
refers to the evaluation of alternatives using any technique in a

QUANTITATIVE MODELS FOR DECISION MAKING

Types of quantitative techniques:
1. inventory models
2. queuing theory
3. network models
4. forecasting
5. regression analysis
6. simulation
7. linear programming
8. sampling theory
9. statistical decision theory

INVENTORY MODELS
1. ECONOMIC ORDER QUANTITY MODEL used to calculate the
number of items that should be ordered at one time to minimize
the total yearly cost of placing orders and carrying the items in
inventory.
2. PRODUCTION ORDER QUANTITY MODEL economic order
quantity technique applied to production order
3. BACK ORDER INVENTORY MODEL inventory models used for
planned shortages
4. QUANTITY DISCOUNT MODEL an inventory models used to

QUEUING THEORY
The queuing theory is one that describes how to
determine the number of service units that will
minimize both customer waiting time and cost of
service
The queuing theory is applicable to companies
where waiting lines are a common situation.

NETWORK MODELS
These are models where large complex tasks are broken into
smaller segments that can be managed independently.
1. THE PROGRAM EVALUATION REVIEW TEHNIQUE (PERT) a
technique which enables engineer managers to schedule,
monitor, and control large and complex project =s by
employing three time estimates for each activity.
2. THE CRITICAL PATH METHOD (CPM) this is a net-work
technique using only one time factor per activity that
enables engineers managers to schedule, monitor, and
control large and complex projects.

FORECASTING
Forecasting may be defined as the
collection of past and current
information to make predictions about
the future.

REGRESSION ANALYSIS
The regression model is a forecasting method that
examines the association between two or more
variables. It uses data from previous periods to
predict future events.
Regression analysis may be simple or multiple
depending on the number of independent
variables present. When one independent variable
is involved, it is called simple regression; when
two or more independent variables are involved, it

SIMULATION
Simulation is a model constructed to represent
reality, on which conclusions about real-life
problems can be used. It is a highly sophisticated
tool by means of which the decision maker
develops a mathematical model of the system
under consideration.
Simulation does not guarantee an optimum
solution, buy it can evaluate the alternatives fed
into the process by the decision-maker.

LINEAR PROGRAMMING
Linear programming is a quantitative
technique that is used to produce an
optimum solution within the bounds
imposed by constraints upon the
decision. Linear programming is very
useful as a decision-making tool when
supply and demand limitations at
plants, warehouse, or market areas are

SAMPLING THEORY
Sampling theory is a quantitative technique where
samples of populations are statistically
determined to be used for a number of processes,
such as quality control and marketing research .
When data gathering is expensive, sampling
provides an alternative. Sampling, in effect, saves
time and money.

STATISTICAL DECISION-THEORY
Decision theory refers to the rational way to
conceptualize, analyze, and solve problems in
situation involving limited or partial information
about the decision environment.
A more elaborate explanation of decision theory is
the decision making process presented at the
beginning of this chapter. What has not been
included in the discussion on the evaluation of
alternatives, but is very important, is subjecting

The Bayesian analysis is to revise and update the

initial assessments of the event probabilities
generated by the alternative solutions. This is
achieved by the use of additional information.
When the decision-maker is able to assign
probabilities to the various events, the use of
probabilistic decision rule, called the Bayes
criterion, becomes possible. The Bayes criterion
selects the decision alternatives having the
maximum expected payoff, or the minimum
expected loss if he is working with a loss table