Decision Analysis and Management Judgement
decision tree theory. Using the Decision Trees and Utility Theory to help make a logical decision and solve the problem:
The sun was setting and Arun K. Mittra was having the last sip of his scotch. He had not expected the day to start in such a strange fashion — and to say the least, the experience had not been very pleasant. The memories of that day kept rushing back and unsettled him more than the blended stuff that was running in his veins.
That morning, the meeting had again started on an acrimonious note and had continued in the same vein until it was over. It was the same old story of choosing a vendor for the supply of one of the critical sub- assemblies for the assembly and manufacture of voltage stabilizers, the top product of A-CAT Corp. As Mittra noted, “The way the manufacturing lead times are becoming the focal points with other manufacturers/competitors, we will be lucky if we can survive the onslaught with our labored, never- ending decision-making process.”
BACKGROUND
Vendor selection and management was always a tricky issue for A-CAT, and it always upset Mittra, vice- president of A-CAT Corp. There were many contradictions and it was always a bone of contention between various departments within the organization. Purchase, finance, manufacturing and quality, and sometimes even after-sales and service, became part of the “discussion breed,” as the marketing manager usually referred to it.
There were four prominent suppliers vying for the contract, which was usually given on the basis of supply history, delivery promptness, quality, cost, salvage policy and intangible goodwill.
THE COMPANY
A-CAT Corp. (A-CAT) was one of the leading producers of electrical appliances. It was a mid-sized manufacturer and distributor of domestic electrical appliances, and largely catered to the price-sensitiverural population. The company owned and operated two medium-sized manufacturing units in a sleepy town called Gondia, in one of the remote districts in Vidarbha, ironically a backward region in the most progressive state of India, Maharashtra. A-CAT had an alliance partnership with Jupiter Inc. for the production of cabinets and had a collaborative venture with Global Electricals for manufacturing TV signal boosters and battery chargers.
A-CAT’s manufacturing units had been in operation since 1986. The budget year 2010-2011 showed annual sales of Rs. 9,800,000 and employed about 40 or more employees. The voltage regulators manufactured by A-CAT were used for many different purposes, although the focus was on its flagship product, VR500, a voltage regulator of 500 volt-amperes specifically used in households as a protective device for refrigerators and television sets, so as to protect the latter from the vagaries of load fluctuations and/or frequent power failures, which were very common phenomena in this backward region of Vidarbha. The primary functional departments of A-CAT were its purchasing department, design department, manufacturing department and sales and service department.
Rather than compete with the large-scale operations prevalent in similar types of industry, A-CAT preferred to focus on the rural segment. It offered nearly 100 different models of various electrical appliances for household use, including TV signal boosters, transformers, FM radio kits, electronic ballasts, battery chargers and voltage regulators. The broad range of products catered to the rural population, thus sticking to A-CAT’s policy of catering to the low end of the market segment in and around Vidarbha. The low end refers to the customers who were quite sensitive towards pricing. In the opinion of top-level management, there was more scope in this segment of the market, and management had been proved right.
THE ISSUE
In choosing an important component (transformer) for A-CAT’s voltage regulator VR500, the objective was to choose the best supplier. The company decided to consider efficiency, power factor, losses, turn ratio and cost. Out of these five criteria, the first three lent themselves only to qualitative comparison, while for the last two criteria, quantitative information was easily available. Over the years, A-CAT had been relying on four major suppliers of transformers, and these had the brand names Ideal, Dolphin, Boss and Freedom.
The company always knew with its focus on only these four vendors that it was missing out on opportunities to explore other options. It was also aware that these were by no means the only feasible ones, but to keep decision making to a less complex level, it decided to compare only these four. The decision making, though quantitative in nature, involved a lot of qualitative options and hence a lot of subjectivity.
The consensus ranking, along with one-on-one comparison data, was available to the group of decision makers, as the performance of each brand under various criteria was on record, but the problem the whole group faced was how to make a rational and comprehensive framework for structuring the decision problem. Though the data was not concrete in nature, the comparative quantitative evaluations were very much thrashed out through deliberations and discussions. And the most notable and at the same time surprising aspect was that everyone seemed to agree with the process.
In order to bring in their judgments about various criteria in the hierarchy, decision makers compared the criteria in a pair-wise manner. The need was to decide which one of the criteria was more important than the others in selecting the best transformer. The decision had to be taken and priorities had to be set as to which criterion was more important for A-CAT in achieving its objective, and how much more important it was than the other criteria. The company had plenty of available data to fall back on (see Exhibits 1 to 3), but it was still not sure how best to utilize it and prepare an action plan. The company needed an approach to take decision making to the next level. It was aware of certain methodologies that helped to improve the decision-making process; it was not the lack of knowledge regarding the tools that was hampering the decision making, but the experience in applying the tools.
The objective: To select the best transformer brand/model for VR500 (out of the available alternatives)
? Four alternatives: Dolphin, Ideal, Boss, and Freedom
? Criteria for selection(five):
a. Qualitative: Efficiency, power factor and losses
b. Quantitative: Turn ratio and cost (Exhibit 3)
? Scaleofpair-wisecomparison:1-3-5-7-9
? 1 – Equal importance: Two elements contribute equally to the objective
? 3 – Moderate importance: Experience and judgment slightly favor one element over the other
? 5 – Strong importance: Experience and judgment strongly favor one element over the other
? 7 – Very strong importance: One element is favored strongly over the other; its dominance is
demonstrated in practice
? 9 – Extreme importance: Evidence favoring one element over the other is of the highest possible
order of affirmation
? Pair-wise comparisons of all criteria: One against the other (Exhibit 1)
? Pair-wise comparisons of transformer brands/models in terms of each criterion (Exhibit 2)
THE DECISION
The situation called for something out-of-the-box, as the important elements of the decisions were difficult to quantify or compare, and also the communication among the team members was impeded by their different perspectives, specializations, nomenclatures and terminologies. The aim was to judge all the alternatives without any prejudices and biases. Mittra knew that, being human, there was always a great chance of being swayed by extraneous considerations — we all have our predilections and this plays a great part in our decisions, which are always thought of as rational by those making them.
It was more or less clear to all concerned that there were lot of issues involved, and this would bring to the fore a lot of frayed tempers and bloated egos, and to end it all A-CAT had to do something about it. The decision making had to be formulated in a manner in which all concerned got their say, and the decision had to be taken without compromising the objectivity of the process. Wriggling out of the situation was very difficult and seemed almost impossible; all the functional departments were working at cross purposes and were seen to be almost at loggerheads. The perception always varied and day by day it was becoming very difficult to make a decision in favour of one or the other supplier without annoying one functional department or another.
Not satisfied with the answers and solutions, Mittra decided to take a collective view. To make it really collaborative, he asked the group of decision makers to postpone the decision until they arrived at what they thought was the correct decision. Since they were on an unending rollercoaster ride of arguments and counter-arguments, Mittra put his foot down and asked the warring factions in the group to come up with some quantitative way of dealing with the issue at hand.
Exhibit 1
PAIR-WISE COMPARISONS OF CRITERIA, ONE AGAINST THE OTHER
CRITERIA
EFFICIENCY
POWER FACTOR
LOSSES
TURN RATIO
EFFICIENCY
1
3/1
1/5
7/1
POWER FACTOR
1/3
1
3/1
5/1
LOSSES
5/1
1/3
1
7/1
TURN RATIO
7/1
1/5
1/7
1
Source: A-Cat Corp. company records.
Exhibit 2a
PAIR-WISE COMPARISONS OF TRANSFORMER BRANDS/MODELS IN TERMS OF EFFICIENCY AS CRITERION
EFFICIENCY
DOLPHIN
BOSS
FREEDOM
?
IDEAL
DOLPHIN
1/1
1/3
5/1
1/9
BOSS
3/1
1/1
5/1
1/7
FREEDOM
1/5
1/5
1/1
1/7
IDEAL
9/1
7/1
7/1
?1/1
Source: A-Cat Corp. company records.
Exhibit 2b
PAIR-WISE COMPARISONS OF TRANSFORMER BRANDS/MODELS IN TERMS OF POWER
FACTOR AS CRITERION
POWER FACTOR
DOLPHIN
BOSS
FREEDOM
IDEAL
DOLPHIN
1/1
3/1
9/1
1/1
BOSS
1/3
1/1
5/1
3/1
FREEDOM
1/9
1/5
1/1
1/7
IDEAL
1/1
1/3
7/1
1/1
Source: A-Cat Corp. company records.
Exhibit 2c
PAIR-WISE COMPARISONS OF TRANSFORMER BRANDS/MODELS IN TERMS OF LOSSES AS CRITERION
LOSSES
DOLPHIN
BOSS
FREEDOM
IDEAL
DOLPHIN
1/1
5/1
9/1
1/7
BOSS
1/5
1/1
3/1
5/1
FREEDOM
1/9
1/3
1/1
1/5
IDEAL
7/1
1/5
5/1
1/1
Source: A-Cat Corp. company records.
Exhibit 3
QUANTITATIVE DATA — TURN RATIO AND COST FOR DIFFERENT TRANSFORMER BRANDS/MODELS
BRANDS
TURN RATIO
?
COST (Rs./Unit)
DOLPHIN
0.93
516
BOSS
0.82
?
496
FREEDOM
0.87
?
486
?
?IDEAL
?0.97
?507
Source: A-Cat Corp. company records.