Problem Solving and Decision Making

Problem Solving and Decision Making

Decision TheoryEven SwapsStatistical Quality Control for Process

DevelopmentDecision-Making MethodsDecision AnalysisData-based Decision Making and CRM

Presentation Overview

Decision Theory

Decision Theory can be used to determine optimal strategies when a decision maker is faced with several decision alternatives and an uncertain or risk-filled pattern of future events

e.g. Production of a product before the demand is actually known

Decision Theory

Pay-off Tables

The future events which are not under the control of decision maker, are referred to as “states of nature”

Pay-off Tables contains any measure of output that may be appropriate for a particular situation e.g cost, profits etc

High Acceptance Low AcceptanceDecision Alternatives s1 s2Lease a large system d1 200,000 (20,000) Lease a medium-sized system d2 150,000 20,000 Lease a small system d3 100,000 60,000

States of Nature

Profit or payoff in $

Types of decision making situations Decision making under certainty:

The process of choosing a decision alternative when the state of nature is known only one column in the payoff table optimal decision is the one corresponding to the best pay off in the column

Decision making under uncertainty: The process of choosing a decision alternative when the state of

nature is not known

Decision Making Situations

Decision making under Uncertainty

Pessimistic approach Maximize the minimum possible payoff (profit

here) Concentrates on worst possible payoffs

Maximin Decision Criterion

High Acceptance Low AcceptanceDecision Alternatives s1 s2Lease a large system d1 200,000 (20,000) Lease a medium-sized system d2 150,000 20,000 Lease a small system d3 100,000 60,000

States of NatureMaximum

of the minimum

payoff values

Optimistic approach Maximize the maximum possible payoff (profit

here) Concentrates on best possible payoffs

Maximax Decision Criterion

High Acceptance Low AcceptanceDecision Alternatives s1 s2Lease a large system d1 200,000 (20,000) Lease a medium-sized system d2 150,000 20,000 Lease a small system d3 100,000 60,000

States of Nature

Maximum of the

maximum payoff values

Compute the expected value for each decision alternatives

Select the alternative yielding the best expected value

Expected Monetary Value

EMV(di )= ∑ P(Sj) V(di, Sj) j= I to N

Even Swaps

A Rational Method for making Trade-Offs A practical way of making trade-offs among any

set of objectives across a range of alternatives

Steps Involved: Creating a consequences Table Eliminating “Dominated” Alternatives Making Even Swaps

Even Swaps

Even Swaps

Statistical Quality Control for Process Development

An approach to solving problems in Production Processes

Can also be used to determine whether the quality of an output is “acceptable” or not.

Designed to find underlying problems which cause defects or other undesirables results, and fix them permanently

Statistical Quality Control for Process Development

Statistical Quality Control for Process Development

Pareto Chart

Contains both bars and a line graph, where individual values are represented in descending order by bars, and the cumulative total is represented by the line.

Fishbone diagrams, cause-and-effect diagrams

A method of showing possible causes of a problem.

An aid to brainstorming and hypothesis generation

Decision-Making Methods

Consensus Method is a group decision making process that seeks not only the agreement of most participants but also the resolution or mitigation of minority objections.

Dialectical Inquiry First group develops a detailed set of recommendations. The 2nd subgroup then develops a reasonable set of opposing recommendations. After discussions, both groups agree on a final, common list of assumptions and recommendations.

Devil’s Advocacy First group develops a detailed set of recommendations. The 2nd subgroup then develops a reasonable set of plausible critique to the other subgroup. The first group then revises its initial proposal and continues until both subgroups can agree.

Decision-Making Methods

Decision Analysis

A decision tree is a decision support tool that uses a tree-like graph or model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility.

It is one way to display an algorithm.

Decision Trees

Decision Trees

Data-based Decision Making and CRM

Case: TESCO

SegmentationSegmentation

Criteria for need-based segments:adequate size cluster principle: members similar and distinct from

members of other segments segments must be addressable and profitable

Definition of Segment A group of customers who share the

same or similar needs

Tesco and CRMTesco and CRM

Why has TESCO been successful?

Lifestyles are built from a customer’s “DNA” profile at Tesco: Miss Jones’ DNA profile

• 25,000 products are used to create a customer’ DNA

• Tesco has a DNA profile for every single customer

A “Time Poor Food Rich” customer

Source: © Dunnhumby, 2006

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Talk n’ Texters(TT)

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Sophisticated Careerists(SC)

Gaming Youths(GY)

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Thank You!