Decision Making Under

Certainty And Uncertainty

Expected
Monetary
Value
 Expected Monetary Value

• Determine the expected payoff of each alternative,

and choose the alternative that has the best
expected payoff
Formula for EMV:
 Example 1:

• Impact of a Risk = $ 10,000

• Probability of Risk Occurring = 15%
• EMV = ???
• EMV = Impact * Probability = 10,000 *
15% = $ 1500
 Example 2:
Project X has a 60% Probability of success
with an impact of $50,000 and has a 40%
chance of failure with an impact of $-20,000.
What is the Expected Monetary Value of
this Project?
• EMV of success = 50000 * 60% = $
30,000
• EMV of failure = -20000 * 40% = $ -8,000
• Total EMV = $ 22,000
 Decision Tree

• Schematic representation of the alternatives

available to a decision maker and their possible
consequences
• a graphic organizer to show how the expected
monetary value of projects can be calculated.
Example 1:
Example 2:
Sensitivity
Analysis
 Sensitivity Analysis

• finds out how sensitive an output is to

any change in an input while keeping
other inputs constant
• tells the model user how dependent
the output value is on each input
• concerned with the uncertainty
inherent in mathematical models
where the values for the inputs used in
the model can vary
 Purpose of Sensitivity Analysis

• provides a way to show how a study’s

results would be affected
• Shows how responsive or sensitive those
results would be
• changes in the values of specific variables
Types of Sensitivity Analysis

1. Partial sensitivity analysis

 select one variable, change its value while holding
the values of other variables constant, and see how
much the CBA results change in response.
Types of Sensitivity Analysis

2. Best-case and worst-case scenarios

– establish the upper and lower boundaries of a cost-
benefit study’s results
– shows how a broad range of a program or policy’s
possible outcomes affect the bottom line
– best-case analysis - use all of the most-favorable
assumptions about the program or policy’s outcomes;
– worst-case scenario -use all of the least-favorable
assumptions.
Types of Sensitivity Analysis

3. Break-even analysis
– helps identify how great a policy’s impact
must be for its benefits to equal its costs,
to break even
– results in a net benefit of 0
– break-even point is feasible, the benefits
are likely to outweigh the costs
– break-even point is not feasible, the
costs are likely to exceed the benefits
Types of Sensitivity Analysis

4. Monte Carlo analysis

– examine multiple variables simultaneously and

simulate thousands of scenarios, resulting in a range
of possible outcomes and the probabilities that they
will occur
 One-Variable Data Table
Steps:
• a) Type the list of values that you want to
evaluate.
• b) Leave a few empty rows and columns
on either side of the values.
• c) If the data table is column-oriented , type
the formula in the cell
• d) Select the range of cells.
• e) The results i.e. incremental changes in
discounting factor would appear in
cells P9:P22.
 2. Two-Variable Data Table

Additional steps
a) The formula cell shifts above the column
variable and right beside the row variable
b) Select the range of cells that you want to
substitute.
c) On the Data tab, click What-If Analysis,
followed by“Data Table”. Type the cell
reference for the “Columninput” cell box.
d) The results of the possible variations in
would automatically appear
 3. Goal Seek

• This
function is
used to find
the missing
input for the
desired
result.
 Methods

a) On the Data tab, click What-If Analysis and then

click “Goal Seek”.
b) In the Set cell box, enter O20 in our case it’s the
average cost of equity.
c) In the To value box, type the target value
15.1%.
d) In the By changing cell box, enter O14
e) Click OK and the result would come up as
12.3% after rounding off.
Estimator
 Estimator
• Estimator is a rule for calculating an
estimate of a given quantity based on
observed data.
• An "estimator" or “point estimate" is
a statistic that is used to infer the value of
an unknown parameter in a statistical
model . The parameter being estimated is
sometimes called the estimand.
 Methods

1. Method of Moments

– a technique for constructing estimators of

the parameters that is based on matching
the sample moments with the
corresponding distribution moments
 Methods

2. Method of Maximum Likelihood

• is the procedure of finding the value

of one or more parameters for a
given statistic which makes
the known likelihood distribution
a maximum
• The maximum likelihood estimate
for a parameter μ is denoted
 Methods
3. Minimum chi-square estimation
– a method of estimation of unobserved quantities
based on observed data

4. Minimum distance estimation (MDE)

– a statistical method for fitting a mathematical model to
data, usually the empirical distribution
 Methods

5. Bayes’ Method

– Parameters are assumed to be random variables with

some known as priori distribution
– seeks to estimate the posterior density 𝑝(𝜃|𝑋) – The
final density 𝑝(𝑥|𝑋) is obtained by integrating out the
parameters 𝑝(𝑥|𝑋)= ∫ 𝑝(𝑥|𝜃)𝑝(𝜃|𝑋)𝑑𝜃
 Properties

• 1. BIAS: How close is the estimate to the

true value?
• 2. VARIANCE: How much does it
change for different datasets?
• 3. EFFICIENT: Estimator is unbiased
and at the same time no other estimator
exists with a lower covariance matrix.
• 4. CONSISTENCY: An estimator
converges in probability to the unknown
parameter
 Bayes’ Theorem
• represented by prior distribution P(θ),
likelihood P(Data | θ), posterior
distribution P(Data | θ)
Production and
Operation Management
 Production and Operation
Management

• refers to the management of the set of

activities that creates goods and services
through the transformation of inputs into
outputs
 Why study POM?

35% or more of all jobs are in operations

management-related areas
POM activities are at the core of all
business organizations
POM is the most costly part of an
organization.
 Historical Summary
Date Contribution Contributor
1776 Specialization of labor in manufacturing Adam Smith
1799 Interchangeable parts, cost accounting Eli Whitney and others
1832 Division of labor by skill; assignment of jobs by Charles Babbage
skill; basics of time study

1900 Scientific management time study and work Frederick Taylor

study developed; dividing planning and doing of
work

1900 Motion of study of jobs Frank B. Gilbreth

1901 Scheduling techniques for employees, machines Henry L. Gantt
jobs in manufacturing

1915 Economic lot sizes for inventory control F.W. Harris

1927 Human relations; Hawthorne studies Elton Mayo
1931 Statistical inference applied to product quality: W.A. Shewart
quality control charts
1935 Statistical sampling applied quality control: H.F. Dodge & H.G. Roming
inspection sampling plans
1940 Operations research applications in World War II P.M. Blacker and others

1946 Digital computer John Mauchlly and J.P.

Eckert
1947 Linear programming G.B. Dantzig, Williams and
others
1950 Mathematical programming, on linear and A. Charnes , W.W. Cooper
stochastic processes and others
1951 Commercial digital computer: large-scale Sperry Univac
computations available

1960 Organization behavior: continued study of L. Cummings, L. Porter

people at work

1970 Integrating operation into overall strategy and W. Skinner, J. Orlicky and
policy, Computer applications to G. Wright
manufacturing, Scheduling and control,
Material requirement planning (MRP)

1980 Quality and productivity applications from W.E. Deming and J. Juran
Japan: robotics, CAD-CAM
 Production Management
 is a process of planning, organizing,
directing and controlling the activities of
the production function
 Objectives

• Right Quality
• Right Quantity
• Right Time
• Right Manufacturing Cost.
 Operations Management

 management of systems or processes

that create goods and services

Objectives:
1.Customer Service
2.Resource Utilisation
Scope of POM
 Scope of POM

1. Location of Facilities
Long-term capacity decision which
involves a long term commitment about
the geographically static factors that
affect a business organization
 Scope of POM
2. Plant Layouts and Material Handling
• Plant layout
refers to the physical arrangement of
facilities.
• Material Handling
Moving of materials from store room to
the machine & from one machine to
the next during the process of manufacture.
 Scope of POM

3. Product Design
Deals with conversion of ideas into reality
4. Process Design
Macroscopic decision-making of an
overall process route for the converting
the raw materials into finished goods
 Scope of POM
5. Production and Planning Control
Lies in the statement “First plan your
work and the work on your plan”
Main Functions:
a. Planning
b. Routing
c. Scheduling
d. Dispatching
e. Follow-up
 Scope of POM
6. Quality Control
A system that is used to maintain a
desired level of quality in a product or
services
7. Materials Management
Concerned with the acquisition, control
and use of materials needed and flow
of goods and services
 Scope of POM

8. Maintenance Management
The equipment and machinery are a
very important part of the total
productive efforts. Therefore, it should
be properly maintained.
Functions within Business
Organization
 Functions within Business
Organization
1. Operations
is the core of most business organizations
involves overseeing, designing, controlling
the process of production and
redesigning business operations in the
production of goods and services
Operations Management within the
Organization
2. Marketing
-consists of selling and promoting the
goods or services of an organization
a. Satisfying demand (long term)
b. Satisfying demand (short term)
c. Quality
d. Inventory Control
3. Finance
- securing resources at favorable prices
and allocating it throughout the organization
a. Provision of money
b. Economic analysis of investment
products
c. Budgeting and timing of funds
4. Personnel (Human Resource Management)
-recruiting labor, training labor, and
labor relationships
5. Research and Development
-Idea generation, product formulations,
prototype development,test marketing
6. Accounting
-preparation of financial statements,
cost data in labor, materials and
overhead & Insurance
7. Maintenance
-responsible for general upkeep and
repair of properties
8. Public Relations
-for building and maintain a positive
public image of the organization
9. Industrial Engineering
-scheduling, performance standards,
work methods, quality control, and material
handling
 Current Trends

1. Global Marketplace

 Globalization of business has compelled

many manufacturing firms to give operations
in many countries where they have certain
economic advantage
2. Operations Strategy

 driven by the overall business strategy of the

organization
 designed to maximize the effectiveness of
production and support elements while
minimizing costs
3. Total Quality Management

 The entire organization from the president

down becomes committed to, and involved
in, a never-ending quest to improve the
quality of goods and services
4. Flexibility
 ability to adapt quickly to changes in volumes
of demand, in the product mix demanded,
and in product design or delivery schedules
5. Time reduction
 Reduction of manufacturing cycle time and
speed to market for a new product
6. Technology
 Technological advances have led to a vast
array of new products and processes
7. Environmental Issues
 production managers are concerned more
and more with pollution control and waste
disposal which are key issues in protection of
environment and social responsibility
Productivity
Productivity
 Factors of Productivity
1. Capital
2. Quality
3. Management
4. Technology
 Indicators
Indicator Unit Formula What It Significance of a Significance of a
Measures Lower Indicator Higher Indicator
Productivity
1 Labour Peso Value Efficiency and Poor management of Efficient and effective
productivity added # effectiveness labour and/ or other utilisation and
of of employees factors which affect management of
employees
in the the efficiency and labour and other
generation of effectiveness of factors to generate
value added labour value added

Increase in
Sales
2 Sales per Peso Sales # of Efficiency and Inefficient or poor Efficient or good
employee employees effectiveness marketing marketing strategy
of marketing
strategy
 Competitive Advantage
1. Product and service design
- allows certain features to be added
which makes your product or service
favorable
2. Cost or Cost Leadership
-It offers the product or service at an
economical price
 Competitive Advantage
3. Location
- refers to the convenient point of sales
4. Quality
-should always match the price and
service
5. Quick response (Agility)
-an organization on this basis is often
known as Agile Organization
 Competitive Advantage
6. Flexibility
7. Inventory management
- Maintain safety stocks and critical
spares
8. Supply chain management
- develop and sustain an active and
strong chain between suppliers and
customers
9. Service