Decision Risk Analysis for Technical Managers IE 7720

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					        Decision & Risk Analysis for Technical Managers: IE 7720
                                                   Winter 2007
Instructor: Kenneth Chelst
E-mail: Office (313) 577-3857                                          Fax (577-8833)
FTDC, 2nd floor
Teaching Assistant:
Gang Wang       Office (313) 577- 9037 Fax (313-577-8833)
Office Hours             By appointment
E-mail during office hours should receive an immediate acknowledgment of receipt

The course will focus on complex decisions that involve tradeoffs amongst objectives or are
made in the face of uncertainty. Course lectures will focus on three interrelated tools.
1) Influence Diagrams to frame decisions 2) Multi-Criteria Decision Analysis (also called Multi-
attributed utility theory) or AHP and 3) Decision Trees. A key element of this course involves
learning a) to interview decision-makers or subject matter experts to determine preferences and
b) to interview subject matter experts or technical specialists to obtain less-biased forecasts and
estimates of probabilities.

Course Goals
1.   Identify common biases and barriers to quality and efficient decision making
2.   Learn to recognize opportunities to apply decision analytic tools.
3.   Develop specific skills in framing and structuring complex decision problems.
4.   Develop skills in analyzing decisions involving tradeoffs amongst objectives.
5.   Develop skills in analyzing decisions involving uncertainty.
6.   Develop skills in developing better hybrid decisions by reducing risk and adding value to decisions
7.   Develop skills in obtaining less biased estimates of key uncertain inputs to decisions
8.   Understand the barriers to the use of structured decision aids including global cultures
9.   Develop an understanding of alternative decision making styles
10. Develop a broad understanding of uncertainty and tradeoffs in each of the following areas:
         a) Supplier Selection       b) Capacity Planning       c) New product planning & development
         d) R & D                    e) Technology Choice

Primary Text – QED: Quality and Efficient Decision Making for the Technical Manager,
Kenneth Chelst and Yavuz Burak Canbolat. – IN PROGRESS
There will be supplementary readings.

1. Precision Tree: an Excel add-on from Palisade’s Corp.  Decision Trees
2. Logical Decisions  Tradeoffs amongst objectives: MAUT & AHP

01/23/09                            Decision & Risk Analysis –Course Outline                                     1
Date Week         Lecture Topics                                               Chapter & Pages
1/11   1    Making Hard Decisions & Randomness, Elements of Decisions          Chelst & Burak’s Chapter 1
            Good decision Processes,                                           Chapter 2 - Influence Diagram
            Framing Decisions: Influence Diagrams
            Influence Diagrams (Use PowerPoint)
1/18   2    Overview of MAUT                                                   Chapter 4 - MAUT
            Structuring Goals Hierarchy (i.e. Fundamental Objectives Tree)     Chapter 5 - MAUT
            Defining Measurement Scales & Categories
            Weighting & Trading Off Objectives – two methods
            Logical Decisions Software
1/25   3    Convert to Common Units - Split-level Method                       Chapter 6 - MAUT
            Computer Analysis of Optimal Decision
            Added Value  Hybrid Alternatives
            Logical Decisions Software including uncertainty
2/1    4    Advanced MAUT Concepts – Goals that interact                       Chapter 7 - AHP
            Hierarchical Weights for large Trees
            Analytical Hierarchical Processes (AHP)
            Comparison: AHP & MCDA (MAUT)
            Consensus Group – weights  Arrows Theorem
            Logical Decisions Software (AHP)
2/8    5    Overview of risk identification, analysis and management           Chapter 8 – Basics of Risk
            Risk analysis - @RISK                                              Analysis and Management
            Decision Tree Schematics
            Basic Decision Trees & Risk Profiles
            @Risk Software
2/15   6    Asymmetric Tree                                                    Chapter 9 - Decisions with
            Sequential Decisions, and Conditional decisions                    uncertainty
            Value of Perfect Control, Value of Perfect Information,
            Computer Analysis: Planning model input – storage in spreadsheet
            for sensitivity analysis
            What If -Sensitivity Analysis - Values, Spider Diagrams;
            Precision Tree Software – Trees
2/22   7    Structured Risk Management
            Value of Imperfect Information
            Real Options
            Precision Tree Software – Trees
3/1         Decision Tree: Alternative measures of success                     Chapter 10 – Utility Theory
       8    Utility Theory
            Risk Sharing
3/8    9    Team Presentations – Case Study Articles
            Two case studies
            Combining Decision Trees and MAUT- Global Facility Location
3/15        Spring Break
3/22   10   Forecasting Biases in Probabilistic Thinking                       Chapter 12 – Forecasting
            Assessing Probabilities, Structured Expert Interview               Biases of Expert Opinions
            In class expert interview practice
3/26   11   Negotiated Decisions – Hal Stack
 4/2   12   Negotiated Decisions – Hal Stack
4/12   13   Decision Making Biases in: Framing, Target value, Percent, Sunk    Chapter 13 – Decision
            cost, Regret, Status Quo - Group                                   Making Biases
            Poorly framed questions
            Guest Speaker
4/19   14   Decision making styles
            Group Decision Making Review Hard Decision HW1 Assignment
4/26   15   Final Project Presentations

01/23/09                         Decision & Risk Analysis –Course Outline                                      2
                  Article Reading Schedule: Full References
Prepare to answer specific questions on the Points to Ponder pages.

Week Due                                    READINGS

 2   Bonabeau, E., “Don’t Trust Your Gut,” Harvard Business Review, May 2003, (pp. 116-123)
 3   Keeney, R.L. & T.M. McDaniels, “Value-Focused Thinking about Strategic Decisions at BC Hydro”,
     Interfaces 22:6 Nov.-Dec. 1992, (pp. 94-102)
     Dyer, J., Edmunds, T., Butler, J.C. and Jia, J. “A multiattribute utility analysis of alternatives for the
     disposition of surplus weapons-grade plutonium,” Operations Research, 46:6 1998 (pp. 749-762)
 4   Tam, M.C.Y. and Tummala, V.M.R. “An application of the AHP in vendor selection of a telecommunications
     system,” Omega, 29, 2001 (pp. 171-182)
 5   Morgan, M.G., “Choosing and Managing Technology Induced Risk”, IEEE Spectrum, 18 (12) 1981, 53-60
     Chopra, S. and Sodhi, M.S., “Managing Risk to Avoid Supply-Chain Breakdown,” MIT Sloan Management
     Review, Vol. 46 (1) 2004, (pp. 53-61)
 7   Chelst, K. R. and Bodily S., “Structured Risk Management: Filling a Gap in Decision Analysis Education”,
     Journal of the Operational Research Society, Vol. 51, No. 12, pp. 1420-1432
     Krumm, F. V. and Rolle, C.F., “Management and Application of Decision and Risk Analysis in Du Pont,”
     Interfaces 22:6 1992 (pp. 84-93)
 9   Walls, M.R., Morahan, G.T. and Dyer, J.S. “Decision Analysis of Exploration Opportunities in the Onshore
     US at Philips Petroleum Company,” Interfaces 25:6 1995 (pp.39-56).
     Spetzler, C.S. and R.M. Zamora, “Decision Analysis of a Facilities Investment & Expansion Problem”,
     appears in The Principles and Applications of Decision Analysis, Vol. I, (pp. 234-257) ed. Howard &
     Matheson, SDG 1989
     Canbolat, B. Y. and Chelst, K. “Combing Decision Tree and MAUT for Global Facility Location Selection”,
     International Journal of Management Science 2005.
     Different case study articles by different teams
10   Kahneman, D. and Lovallo D., “Timid Choices & Bold Forecasts: A Cognitive Perspective on Risk Taking”,
     Management Science, Vol. 39(1) 1993. Focus on second half of article pages 24 & onward)
     Shephard, G.G., and Kirkwood, C.W., “Managing the Judgmental Probability Elicitation Process: A Case
     Study of Analyst/Manager Interaction”, IEEE Transactions on Engineering Management, Vol. 41 (4) 1994
     (pp. 414-425)
11   Readings for Negotiation to be posted.
13   Arkes, H.A. and C. Blumer “The Psychology of Sunk Cost”, Organizational Behavior & Human Decision
     Processes, Vol. 35, 1985, (pp. 124-140)
     Whyte, G. “Decision Failures Why they Occur & How to Prevent Them”, Academy of Management
     Executive, Vol. 5, No. 3 1991, 23-31,
     Hammond, J.S., Keeney, R.L., and Raiffa, H., “The Hidden Traps in Decision Making,” Harvard Business
     Review, Sept.-Oct. 1998 (pp. 47-58) [ads were left out so numeric pages missing]
14   Williams, G.A. and Miller, R.B., “Change the Way You Persuade,” Harvard Business Review, May 2002,
     (pp. 65-73)

01/23/09                         Decision & Risk Analysis –Course Outline                                     3
The course workload is FRONT loaded in terms of developing the basic skills and the associated
weekly homework assignments. In addition to the reading material, there will be weekly problem
sets. Any assignment specified as “Individual” should represent the primary effort of each
individual. However, students are encouraged to discuss with one another any difficulties they
incur. All of these basic skill assignments will be completed by the middle of November.
Individual deficiencies will be addressed through targeted additional problems.

Cheating: Students who copy someone else’s individual assignment will be given a FAILING

SUBMISSION of Homework: Preferred via blackboard digital dropbox
I prefer that all homework be submitted via-blackboard digital dropbox with your name and
homework number. Students will need to become comfortable in taking output from Logical
Decision or Precision Tree and inserting it into a WORD document that is page numbered.

Late Assignments
Students are expected to turn in all of the assignments on time. However, students are allowed a
grace period until the class date of the following week with no penalty to allow for workload
fluctuations in your work environment. There will be a 2-point deduction for any assignment
more than a week late without prior approval due to special circumstances.

                                      Homework Schedule
HW      Due       Type      Title                                              Software      Pts
 #      Date
                            Class participation, discussion, readings                        15
 1      1/18   Individual   Hard Decision Discussion                                          4
                            Influence Diagram Early Bird                    PowerPoint        4
 2      1/25   3-person     Influence Diagram – Movie                       PowerPoint        4
                            Supplier Choice – Seat & Horn                   Logical           4
                                                                            Decisions (LD)
 3       2/1   3-person     Blower Motor Case                               LD                7
 4      2/15   3-person     Gasket Choice Case                              LD                7
 5      2/22   Individual   Schematic Tree – Colonel late design                              7
                            Decision Tree Analysis by Hand: Specialty
        3/1    3-person     One page problem statement for final project
 6      3/8    Individual   Computer Analysis of Decision Trees and         Precision Tree    7
                            Sensitivity analysis
 7       3/8   3-person     Article Presentation                                              4
 8      3/22   3-person     One or two paragraph description of
                            continuous variable that is subject of expert
 9      3/22   3-person     Prepare to interview teammate in class
 11     3/22   3-person     Submit Framing of MAJOR PROJECT                 For Review &
 10     3/26   3-person     Colonel Late Design Case                        Precision Tree    7

 12     4/19   Individual   3 minute revisit of original Hard Decision -                      -
                             Oral Presentation only.
 13     4/26   3-person     Final Project Presentation & Report Due                          30

01/23/09                      Decision & Risk Analysis –Course Outline                             4
                                          Major Project
The team is to identify a technical management decision or sequence of two decisions that
involves selecting the best alternative amongst three or more distinct alternatives. The decision
must be a decision made difficult because a) the outcome is affected by several uncertain
variables or events and/or b) the decision involves tradeoffs amongst at least six distinct
objectives or measures. A project that involves both multiple objectives and significant
uncertainty and therefore uses both tools (MAUT and Decision Trees) is eligible for bonus
points. At least one team member should have direct knowledge of the decision to be made.

Project Steps
   1. Frame the decision
   2. Determine the optimal decision
   3. Assess the strengths and weaknesses of the alternatives.
   4. Use the principles of risk and/or value management to create a higher value hybrid

Sample Project Categories
    select a supplier
    select a technology
    select a material
    select a powertrain
    select a manufacturing strategy
    select a plant or location
    plant capacity

                                   Major Project: Schedule
      Date                                 Content                                Pages
       3/1   Initial Problem Statement to be reviewed for appropriateness.          1
             Specify if focus is on Decision Trees and/or Multiple Objectives
      3/22   Project Framing: Influence Diagram and a) Objectives Tree or b)       3-4
             schematic tree. Clarify project scope
     4/26    Final Presentation + 1 pager for classmates

01/23/09                      Decision & Risk Analysis –Course Outline                              5
Reading Schedule
The reading schedule is in a separate section along with lists of questions associated with each

Class Participation
All students are expected to participate in class discussion in two ways.
a) Bring examples from work experience that either support or refute ideas discussed in class.
b) Be prepared to contribute to discussions of the article readings with specific emphasis on the
    questions associated with each article.

01/23/09                     Decision & Risk Analysis –Course Outline                               6