UNIT II: INTRODUCTION TO DECISION MAKING

Decision Making Introduction:

Decision making is a daily activity for any human being. There is no exception
about that. When it comes to business organizations, decision making is a habit
and a process as well.

Effective and successful decisions make profit to the company and unsuccessful
ones make losses. Therefore, corporate decision making process is the most
critical process in any organization.

In the decision making process, we choose one course of action from a few
possible alternatives. In the process of decision making, we may use many
tools, techniques and perceptions.

In addition, we may make our own private decisions or may prefer a collective
decision.

Usually, decision making is hard. Majority of corporate decisions involve some

level of dissatisfaction or conflict with another party.

A decision support system (DSS) is an information system that aids a business in decision-
making activities that require judgment, determination, and a sequence of actions.

The information system assists the mid- and high-level management of an organization by
analyzing huge volumes of unstructured data and accumulating information that can help solve
problems and help in decision-making. A DSS is either human-powered, automated, or a
combination of both.

Purpose of a Decision Support System

A decision support system produces detailed information reports by gathering and

analyzing data. Hence, a DSS is different from a normal operations application, whose
goal is to collect data and not analyze it.

In an organization, a DSS is used by the planning departments – such as the operations

department – which collects data and creates a report that can be used by managers for
decision-making. Mainly, a DSS is used in sales projection, for inventory and
operations-related data, and to present information to customers in an easy-to-
understand manner.

Theoretically, a DSS can be employed in various knowledge domains from an

organization to forest management and the medical field. One of the main applications
of a DSS in an organization is real-time reporting. It can be very helpful for
organizations that take part in just-in-time (JIT) inventory management.
In a JIT inventory system, the organization requires real-time data of their inventory
levels to place orders “just in time” to prevent delays in production and cause a negative
domino effect. Therefore, a DSS is more tailored to the individual or organization
making the decision than a traditional system.

Components of a Decision Support System

The three main components of a DSS framework are:

1. Model Management System

The model management system S=stores models that managers can use in their
decision-making. The models are used in decision-making regarding the financial health
of the organization and forecasting demand for a good or service.

2. User Interface

The user interface includes tools that help the end-user of a DSS to navigate through
the system.

3. Knowledge Base

The knowledge base includes information from internal sources (information collected in
a transaction process system) and external sources (newspapers and online
databases).

Types of Decision Support Systems

 Communication-driven: Allows companies to support tasks that require more

than one person to work on the task. It includes integrated tools such as
Microsoft SharePoint Workspace and Google Docs.
  Model-driven: Allows access to and the management of financial,
organizational, and statistical models. Data is collected, and parameters are
determined using the information provided by users. The information is created
into a decision-making model to analyze situations. An example of a model-
driven DSS is Dicodess – an open-source model-driven DSS.
 Knowledge-driven: Provides factual and specialized solutions to situations
using stored facts, procedures, rules, or interactive decision-making structures
like flowcharts.
 Document-driven: Manages unstructured information in different electronic
formats.
 Data-driven: Helps companies to store and analyze internal and external data.

Advantages of a Decision Support System

 A decision support system increases the speed and efficiency of decision-making

activities. It is possible, as a DSS can collect and analyze real-time data.
 It promotes training within the organization, as specific skills must be developed
to implement and run a DSS within an organization.
 It automates monotonous managerial processes, which means more of the
manager’s time can be spent on decision-making.
 It improves interpersonal communication within the organization.

Disadvantages of a Decision Support System

 The cost to develop and implement a DSS is a huge capital investment, which
makes it less accessible to smaller organizations.
 A company can develop a dependence on a DSS, as it is integrated into daily
decision-making processes to improve efficiency and speed. However, managers
tend to rely on the system too much, which takes away the subjectivity aspect of
decision-making.
 A DSS may lead to information overload because an information system tends to
consider all aspects of a problem. It creates a dilemma for end-users, as they are
left with multiple choices.
 Implementation of a DSS can cause fear and backlash from lower-level
employees. Many of them are not comfortable with new technology and are
afraid of losing their jobs to technology.

Techniques of Decision Support System (DSS):

A wide range of techniques are available to enrich the decision-making process. These can be broadly
classified as: 1. Traditional Techniques 2. Modern Techniques Traditional Techniques: These techniques
are divided into two groups:
1. Traditional techniques for making programmed decisions.

2. Traditional techniques for making non-programmed decisions.

1. Traditional techniques for making programmed decisions: Three generally accepted traditional
techniques for making programmed decisions are:

(a) Habits: Habits are the ways in which problems are solved according to predefined
notions. Managers do not apply scientific techniques to solve problems. By solving the
same problem in a defined way over and over again, managers form the habit of solving
it in that manner. It does not require much of thinking and initiative.
(b) Operating procedures: Operating procedures are organisational habits. They guide
decision-makers in solving organisational problems in a predefined manner. They are
more formal than habits. However, they are flexible and can be changed. Cases of
absence without leave are not decided by managerial discretion. Standard procedures
guide action against such cases.
(c) Organisation structure: It is a well defined structure of authority-responsibility
relationships. Each person knows his position in the organisation, his authority to make
decisions, the extent to which it can be delegated to subordinates, the communication
channel, the persons to whom he has to report etc. which helps in solving programmed
problems.
Modern Techniques :

Modern techniques use mathematical models to solve business problems. They apply scientific and
rational decision-making process to arrive at the optimum solution. They use quantifiable variables
and establish relationships through mathematical equations and operations research techniques.
They make use of computers for data processing and storage to solve complex management
problems. These techniques can be classified as follows:

1. Modern techniques for making programmed decisions: These can be classified as follows:

(a) Break-even technique: It helps managers determine that level of output at which total costs
(variable costs and fixed costs) and total revenue are the same. Total profit at this volume called the
break-even point is zero. It helps managers analyse the economic feasibility of a proposal. For any
level of output., the amount of profit can be ascertained which serves as acceptance/rejection
criterion of the proposal. It is only a rough estimate a assessing a project since it assumes a constant
selling price and fixed cost which is not always so.

(b) Inventory models: Firms carry enough inventory with them so that they do not run out of stock.
Though this ensures regular supply of goods to customers, they incur costs to carry the inventory
like handling costs, storage costs, insurance costs, opportunity cost of money tied in the inventory
etc. These are known as carrying costs. In order to reduce these costs, firms keep minimum
inventory in store and order fresh inventory when they need. This will reduce the carrying cost of
inventory but the ordering cost will go up. These are the costs of placing an order and include cost of
preparing an order and cost of receiving and inspecting the goods. Both the carrying and ordering
costs operate in reverse direction. Increase in one means decrease in the other. Sophisticated
inventory models are available for management of inventory. They place order for goods at the
point where total of ordering costs and carrying costs is the least.

(c) Linear programming: It is a technique of resource allocation that maximises output or minimises
costs through optimum allocation of resources. It is applied when resources are scarce and have to
be optimally utilised so that output can be maximised out of limited resources. Linear programming
is "a quantitative tool for planning how to allocate limited or scarce resources so that a single
criterion or goal (oft en profits) is optimised." It aims to maximise profits or minimise costs by
combining two variables which involves best use of resources. The (two) variables, the dependent
and independent must be linearly related, i.e., increase or decrease in the independent variable
should result in a corresponding increase or decrease in the dependent variable. The linear
relationship is explained like this: If cost of one unit is Rs. 10, selling price is Rs. 20, profit per unit is
Rs. 10. If X sells 5 units of output, cost will be Rs. 50, selling price Rs. 100 and profit will be Rs. 50.
Linear programming is, thus, a managerial tool that helps in optimum use of resources. Its use is
facilitated through mathematical equations.

(d) Simulation: This technique is used to create artificial models of real life situations to study the
impact of different variables on that decision. A model is prepared on the basis of empirical data and
put to all kinds of influences, positive and negative which may affect the project, and final results
are the predictions of actual results if the project in question is put to use. For example, if a
transportation company wants to make a road or rail system, it will prepare a simulation model to
analyse the effect of all the factors (e.g., traffic signals, fly overs, other heavey and light traffic
commuting on the road) and if this model appears to be feasible, acutal construction of the rail/road
system shall commence.

(e) Probability theory: Probability is the number of times an outcome shall appear when an
experiment is repeated. What is the probability that sales will increase if expenditure on
advertisement is increased is answered through probability theory. These decisions are based on
past experience and some amount of quantifiable data.

(f) Decision-tree: It is a diagrammatic representation of future events that will occur when decisions
are made under different option plans. It reflects outcomes and risks associated with each outcome.
Each outcome or future event is evaluated in terms of desired results and the outcome which gives
the maximum value is selected out of alternative courses of action. "Decision-trees depict, in the
form of a 'tree', the decision points, chance events, and probabilities involved in various courses that
might be undertaken.

(g) Queuing theory: This technique describes the features of queuing situations where service is
provided to people or units waiting in a queue. When people or materials wait in queue (because of
insufficeint facilities), it involves cost in terms of loss of time and unutilised labour. Queuing theory
aims at smooth flow of men and material so that waiting time is reduced. This involves additional
cost also. Thus, a balance is maintained between the cost of queues and cost incurred to prevent
the queues. Queuing models in software packages has made their appplication feasible. This theory
is usually followed in banks and ticket counters. It helps in determining the number of counters so
that customers have to wait for minimum time.

(h) Gaming theory: This theory was developed by Von Neumann and Morgenstern. It helps business
organisations face their competitors. If company X changes its plans; say reduces its price to
increase its sales, it is likely that the competitors will do the same. How well is company X prepared
to face this challenge and still continue with its changed plans is provided in the games theory. It is a
technique where two decision-makers maximise their welfare in the competitive environment. The
decision maker puts himself in this competitors' shoes. If he were to compete against his own firm,
what would he do. Based on this thinking, he plans a counter strategy.

(i) Network theory: The network techniques plan and control the time taken to accomplish a project.
They involve breaking up the project into smaller activities and finding the time taken to accomplish
each activity. If actual time to complete the project is more than the time determined, it calls for
corrective action. PERT (Project Evaluation Review Technique) and CPM (Critical Path Method) are
the important network techniques which help in planning and controlling the projects, in terms of
time and cost.

2. Modern techniques for making non-programmed decisions: The following techniques help in
solving novel, non-routine and unstructured problems:

(a) Creative techniques: These techniques use creativity of managers to think of new ways of solving
business problems. An important creativity technique is brainstorming where members of the group
give maximum suggestions to generate alternative solutions to the problem. Together, these ideas
help in formulating the most practical solution to the problem.

(b) Participative techniques: Employees and managers jointly arrive at the optimum decision. If
those who make decisions and those who implement them jointly participate in the decision-making
process, the quality of decisions will be better, there will be commitment to the implementation
process and high employee motivation and morale.

(c) Heuristic techniques: These techniques are based on trial and error approach to decision-making.
Decision maker accepts that making strategic decisions in complex situations is not easy. There are
role conflicts, information gaps, environmental uncertainties etc. which make decision-making
difficult. Heuristic techniques help decision-makers proceed in a step wise manner to arrive at a
rational decision.

These are computer aided techniques and fall into two categories:

(i) Decision support systems: In this system, decision-making is supported by

computers. Managers access information from the data processing system,
retrieve data relevant to the decision, test it for alternative solutions and
accept the most appropriate solution. They change the variables in the form
of inputs and analyse their impact on the desired output.
 (ii) Expert systems: While in decision support systems, managers have direct
access to data and they rely on their judgement to make decisions; in the
expert system, managers seek knowledge of experts to solve problems in
specified areas. This is a "Computer-based system that applies the
substantial knowledge of an expert to help solve problems in a specific area."

Development of Decision Support System (DSS):

Models of Decision-Making Models represent the behaviour and perception of decision-makers in

the decision making environment. There are two models that guide decision-making behaviour of
managers. These are:

1. Rational/Normative Model: Economic Man

2. Non-Rational/Administrative Model

1. Rational/Normative Model This model assumes that decision-maker is an economic man as

defined in the classical theory of management. He is guided by economic motives and self interest.
He aims to maximise profits and ignores behavioural or social aspects in making decisions. The
model presumes that decision makers are perfect information assimilators and handler. They can
gather complete and reliable information about the problem area, generate all possible alternatives,
know the outcome of each alternative, rank them in the best order of priority and choose the best
alternative. They follow a rational decision-making process and therefore, make optimum decisions.
This model is based on the following assumptions:

1. Managers have clearly defined goals. They know exactly what they want to achieve. They have
clear ends and know the means to reach those ends.

2. They can collect complete and reliable information from the environment to achieve the
objectives.

3. They are creative, systematic and reasoned in their thinking. They can identify all alternatives and
their outcomes related to the problem.

4. They can analyse all the alternatives and rank them in the order of priority.

5. They are not constrained by time, cost and information in making decisions.

6. They can choose the best alternative that will give them maximum returns at minimum cost.

Applications of DSS:

A decision support system (DSS) is a computer-based information system

that organizes, collects and analyzes business data. This analysis is then
used by decision-makers to help them better manage and plan their
organization or business.

The typical types of information that are gathered by a DSS include sales
figures, projected revenue and inventory data that has been organized into
relational databases. The information it analyzes can come from multiple
sources, like documents, raw data, management, business models and
personal knowledge from employees.

DSS applications can be used in various fields, including credit loan

verification, medical diagnosis, various types of business management, and
evaluating bids on engineering, agricultural and rail projects.