Chapter 23 – Making Better Decisions

‘Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so.’
Douglas Adams

Overview

This chapter discusses decision-making methods which can be used under conditions of uncertainty and risk. The chapter starts by looking at three general techniques. It then reviews the important topics of break even and profit maximization, capacity planning, pricing, and inventory control.

Mastering more advanced decision-making techniques

After reading this chapter, you should be able to answer the following questions:

What is PMI? How would you use it when factors in a decision are hard to quantify?
What is expected payoff? Why would you use it in decision making when you can quantify the likelihood of various outcomes? Would you automatically opt for the highest expected payoff?
What is break even? Why is it important? To what period does it apply?
What is the margin of safety? Why is it important?
How does a break-even chart show you where profits are maximized?
Does capacity planning apply only to manufacturing? Why is capacity planning important for all businesses?
How can you calculate the minimum economic sales quantity and price? Why is it important?
How can you determine your optimum level of inventory? What is the re-order point? What is a buffer stock?
How can you use the normal distribution to quantify risk?
Which techniques discussed in this chapter cannot be supplemented with risk analysis using the normal curve?