©chelst & canbolat value-added decision making chapter 2 – influence diagrams learn by...

©Chelst & Canbolat Value-Added Decision Making

Chapter 2 – Influence Diagrams

Learn by exampleLearn vocabulary and grammar

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©Chelst & Canbolat Value-Added Decision Making9/19/201

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Two key elements of decision framing-often not considered

Multiple Objectives Tradeoffs◦If NOT upfront then when?◦Multiple stretch goals tradeoffs too

lateUncertainty Risk

◦If you do NOT ADMIT the existence of uncertainty, you cannot manage it

◦If you do not QUANTIFY uncertainty, you cannot decide how much to invest to address its impact


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Elements of a Decision Frame

Decision(s): Single, Multiple (Simultaneous or Sequential)

Alternatives within each decision Uncertainty Criteria--Goals--Values--Objectives = Context

Specific Scope – Time horizon and organizational breadth Decision Makers & Stakeholders Constraints

◦ Implicit - restrict range of alternatives◦ Explicit – mathematical representation (not included

here)


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Influence Diagram - CommunicationExplicitly note the existence of

randomness and uncertaintyClarify the “main” values or

objectives of decisionEmphasize the influence of

uncertainty on valuesSpecify the sequence of

decisions


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Categories of common objectives. Table 2.1

Min-Costs (variable and investment) Min-Time to complete Max-Profit—NPV, TARR, ROI Min- Risk of not meeting targets Min- Human resources required Min (Max) -Management issues Max-Long-term value Min-Operational issues Max-Performance Sales and/or market

share Min-Training requirements

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Common uncertainties. Table 2.2

Time needed to complete task or reach goal Performance to specifications Warranty claims and quality control Resources required Competitive actions Cost Is task doable? Market demand Revenue Throughput–productivity Will some specific event occur

who will be elected president pandemic occurs

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Framing decision with randomness influence diagrams: Vocabulary

= Rectangles/Boxes

= Circles/Ovals

= Rounded rectangle

= Diamond

= Text box with list

= Arrow

Random Events

Decisions

Values/Goals Calculation

Ultimate goal

Influence

Input/Data

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Automation Investment Boss Controls Manufacture an option to be made

Available to one million purchasers of cars

Uncertain take-rate (percent who buy option)

Deliver the option to (OEMs) at a price of $60.

Two alternatives: differ significantly in investment level automation and variable cost of production


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Automation Investment

Take rate

Automation Investment Profits

VolumeVariable CostInvestment


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Automation Investment: Expanded

Take rate

Automation Investment

Profits

Investment

Volumes

Variable Cost


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Figure 2.5: Theater Party Invitations

% Yes Responses

Percent No Shows

Attendees

Number SentInvitations

Maximize Goodwill

InviteesNot Attending

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Figure 2.6: Divide and delay decision - Theater party invitations

% Round 1 Yes

Percent of No Shows

Attendees

Round 1Invitations

Maximize Goodwill

InviteesNot Attending

% Round 2 Yes

Round 2Invitations

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Influence Diagram Symbols

Microsoft PowerPoint Pick appropriate shape: rectangle, oval,

rounded rectangle, and diamond. You may want to have specific fill color for each

type of box

Right click on shape: “Add text” Can specify size of text and place on more than one line.

Move shapes to appropriate location. Connect shapes with arrows

Be sure to link to a red dot on each shape enables redesign

Shapes can be copied and text modified.9/19/2011


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Influence Diagram Construction

Specify primary decision Define values and ultimate goal Identify relevant random variables or

events Specify downstream decisions that

need to be analyzed to make primary decision

Add arrows to define relationships Review layout List data inputs


Example : Late to Market with New

Product Case: A company is considering developing a product that will be ready 3 months after its competitor introduces a similar product.

Random Event to Random Event – Conditional probability

Random Event to Value – Random event directly influences the VALUE. The value will be uncertain.

Competitive Action Sales Volumes

Sales Volumes Total Revenue

Influence DiagramArrows from Random Events: Connectors in PowerPoint

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Influence DiagramArrows from Random Events

Example : Late to Market with New ProductRandom event to decision: Random event’s

outcome is KNOWN before decision is to be made.

NEVER use an arrow from a circle to a decision to represent the fact that the decision is affected by the random event. This is the most common ERROR. ◦ The arrow shows that the outcome of the chance node is

known before the decision is made ◦ Absence of an arrow from the chance node to the decision

node does NOT mean that the uncertainty does not influence the decision.

◦ Everything in the diagram affects the decision

Competitor’s Price Launch Price


Decision to Decision - decision sequence (possibly influence)

Decision to Random Event Price influences sales volume

PriceProduct Features

Price Sales Volume

Influence DiagramArrows from decisions

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Decision to Value – Decision directly influences value Pricing decision influences total revenue Indirectly: by affecting sales volume and Directly: since price sales = Total Revenue

Influence DiagramArrows from Random Events

Price Sales Volume

Total Revenue

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If Total Revenue and/or Total Cost are influenced by random events then the Net Profit will be an uncertain value. However, once the other two values are known, Net Profit is no longer uncertain.

Influence Diagram: value to value

Net profit

Total Revenue

Total Cost

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Competitor’s Price

Launch Price

ProductFeatures

Develop product

Total Revenue

Total Cost

Net Profit

Sales Volume

All elements influence the decisions: to develop the product, its features

& price

Late to market with new product:1st lay out elements without arrows

Engg. ratesLabor ratesThroughput


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Launch Price

ProductFeatures

Develop product

Total Revenue

Total Cost

Net Profit

Sales Volume

All elements influence the decisions: to

develop the product, its features & price

Late to market with new product – Add arrows



Competitor’s features

Modified Diagram?


Launch Price

ProductFeatures

Develop product Total

Revenue

Total Cost

Net Profit

Sales Volume

Economy

Manufacturing Cost

PD Costs

ActualPrice

Competitor’s product performance


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What New Objectives Might be AddedMaximize Market ShareMaximize Utilization of plant

capacityMinimize adding to labor

workforce (Headcount)Change overall goal – No longer

just net profit – “value to corporation”


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Influence Diagram: Is not a Flow Diagram!All elements of an Influence

Diagram are analyzed and influence the decisions even if there are no nodes connected to the decisions

Forecasts of downstream uncertainties affect upstream decisions even without arrows linking the nodes.


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Limited Influence Diagram

Mainly uncertainties and only one or two objectives◦Project management complete

project as planned (within time and budget)

Mainly multiple objectives and limited uncertainty◦New car


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Figure 2.15: Buying a used car – value focused

Value

Miles per Gallon

Aesthetics

Total Cost

Longevity

Choose the Best Car

Reliability

Accessories

Purchase Price

Sound System

Seating Capacity

Exterior Condition

A/C and Heater

Maintenance Needed

Color

Odometer Mileage

Price of Gasoline

Consumer Reports

InteriorCondition

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Figure 2.16: Used car revised – new information

Value

Total Cost

Longevity

Choose the Best Car

Reliability

Maintenance Needed

Mechanic’s Report

Vehicle History Report

Choose the Best Two Cars

Other Objectives

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Figure 2.17: Oglethorpe diagram

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ALL Elements Represented in the Diagram Influence the Decisions

Probabilistic forecasts of sales and the competitor’s price will affect forecasts of revenue and profit.

These will influence the decisions: Whether or not to introduce the

product?

With what features?

And at what price?

©chelst & canbolat value-added decision making chapter 2 – influence diagrams learn by...

Documents

objectives of decision

framing decision

decision uncertainty

decision frame decisions

decision frame elements

impact slide

influence of uncertainty

investment level automation