ms-95 mba assignment july dec 2010 Question 3

3. Discuss the role of modeling in research in managerial decisions making with an appropriate illustration. How is model validation done?

MODELS AND MODELLING

            A manager, whichever type of organisation he/she works in, very often faces situations where he/she has to decide/ choose among two or more alternative courses of action. These are called decision-making situations. An illustration of such a situation would be the point of time when you possibly took the decision to join/take up this management programme. Possibly, you had a number of alternative management education programmes to choose from. Or, at worst, maybe you had admission in this programme only. Even in that extreme type of situation you had a choice -whether to join the programme or not! You have, depending upon your own decision-making process, made the decision.  The different types of managerial decisions have been categorized in the following manner   Routine/Repetitive/Programmable vs.

·         No routine/Nonprogrammable decisions.

·         Operating vs. Strategic decisions.

            The routine/ repetitive/ programmable decisions are those which can be taken care of by the manager by resorting to standard operating procedures (also called "sops" in managerial parlance). Such decisions the manager has to take fairly often and he/she knows the information required to facilitate them. Usually the decision maker has knowledge in the form of "this is what you do" or "this is how you process" for such decision-making situations. Examples of these decisions could be processing a loan application in a financial institution and supplier selection by a materials manager in a manufacturing organisation.

            The non-repetitive/ non-programmable/ strategic decisions are those which have a fairly long-term effect in an organisation. Their characteristics are such that no routine methods, in terms of standard operating procedures, can be developed for taking care of them. The element of subjectivity/judgement in such decision-making is fairly high. Since the type of problem faced by the decision maker may vary considerably from one situation to another, the information needs and the processing required to arrive at the decision may also be quite different.

            The decision-making process followed may consist, broadly, of some or all of the steps given below:

            Problem definition; Identifying objectives, criteria and goals;  Generation/ Enumeration of alternative courses of action;  Evaluation of alternatives;  Selection/ choosing the "best" alternative;  Implementation of the selected alternative. All the above steps are critical in decision-making situations. However, in the fourth and fifth steps; i.e., evaluation and selection, models play a fairly important role. In this unit we will concentrate on Model Building and Decision-making.

            Many managerial decision-making situations in organisations are quite complex. So, managers often take recourse to models to arrive at decisions.

Model:

            The term `model' has several connotations. The dictionary meaning of this word is "a representation of a thing". It is also defined as the body of information about a system gathered for the purpose of studying the system. It is also stated as the specification of a set of variables and their interrelationships, designed to represent some real system or process in whole or in part. All the above given definitions are helpful to us of Modeling Models can be understood in terms of their structure and purpose. The purpose of modeling for managers is to help them in decision-making. The term `structure^' in models refers to the relationships of the different components of the model.  In case of large, complex and untried problem situations the manager is vary about taking decisions based on intuitions. A wrong decision can possibly land the organisation in dire straits. Here modeling comes in handy. It is possible for the manager to model the decision-making situation and try out the alternatives on it to enable him to select the   “best" one. This can be compared to non-destructive testing in case of manufacturing organisations.

Presentation of Models:

            There are different forms through which Models can be presented. They are as follows:

·         Verbal or prose models.

·         Graphical/ conceptual models.

·         Mathematical models.

·         Logical flow models.

Verbal Models:

            The verbal models use everyday English as the language of representation. An example of such model from the area of materials management would be as follows:

           

            “The price of materials is related to the quantum of purchases for many items. As the quantum of purchases increases, the unit procurement price exhibits a decrease in a step-wise fashion. However, beyond a particular price level no further discounts are available."

Graphical Models:

            The graphical models are more specific than verbal models. They depict the interrelationships between the different variables or parts of the model in diagrammatic or picture form. They improve exposition, facilitate discussions and guide analysis. The development of mathematical models usually follows graphical models.

between the variables in terms of mathematical equations or inequalities. Most of these include clearly the objectives, the uncertainties and the variables. These models have the following advantages:

·         They can be used for a wide variety of analysis.

·         They can be translated into computer programs.

            The example of a mathematical model that is very often used by materials managers is the Economic Order Quantity (EOQ). It gives the optimal order quantity (Q) for a product in terms of its annual demand (A), the ordering cost per order (Co), the inventory carrying cost per unit (Ci) and the purchase cost per unit (Cp). The model equation is as follows :

                               Q = (2 * A * Co/Ci * Cp)

Logical Flow Models:

            The logical flow models are a special class of diagrammatic models. Here, the model is expressed in form of symbols which are usually used in computer programming and software development. These models are very useful for situations which require multiple decision points and alternative paths. These models, once one is familiar with the symbols used, are fairly easy to follow.

ROLE OF MODELLING IN RESEARCH IN MANAGERIAL DECISION-MAKING: AN ILLUSTRATION

            In the previous sections of this unit we have tried to explore the topics of model building and decision-making. However, we confined ourselves to bits and pieces of each concept and their illustration in a comprehensive decision-making situation has not been attempted. In this section we will look at a managerial decision-making situation in totality and try to understand the type of modelling which may prove of use to the decision maker.

            The example we will consider here is the case of co-operative state level milk and milk products marketing federation. The federation has a number of district level dairies affiliated to it, each having capacity to process raw milk and convert it into a number of milk products like cheese, butter, milk powders, ghee, shrikhand, etc. The diagrammatic model of the processes in this set up is depicted in the typical problems faced by the managers in such organisations are that : (a) the amount of milk procurement by the individual district dairies is uncertain, (b) there are limited processing capacities for different products, and (c) the product demands are uncertain and show large fluctuations across seasons, months and even weekdays.

            The type of decisions which have to be made in such a set up can be viewed as a combination of short/ intermediate term and long-term ones. The short-term decisions are typically product-mix decisions like deciding : (1) whereto produce which product and (2) when to produce it. The profitability of the organisation depends to a great extent on the ability of the management to make these decisions optimally. The long-term decisions relate to (1) the capacity creation decisions such as which type of new capacity to create, when, and at which location(s) and (2) which new products to go in for. Needless to say, this is a rather complex decision-making situation and intuitive or experience based decisions.

            We have in this section seen a real life, complex managerial decision-making situation and looked at the possible models the researcher could propose to improve the decision-making. Similar models could be built for other decision-making situations.