copyright © 2006 pearson education canada inc. 13-1 course arrangement !!! nov. 22,tuesday last...

Copyright © 2006 Pearson Education Canada Inc. 13-1

Course Arrangement !!!

• Nov. 22, Tuesday Last Class• Nov. 23, Wednesday Quiz 5 • Nov. 25, Friday Tutorial 5• Nov. 29, Tuesday Final Review• Nov. 30, Wednesday Final Quiz• Project Report Due: Final Quiz Nov. 30,

Wednesday. This deadline is FIRM, fail to submit on final quiz=0/25, NO EXCUSE!!!

Engineering Economics in Canada

Chapter 13

Qualitative Considerations and Multiple Criteria


13.1 Introduction

• Most of this book has been concerned with making decisions based on a single economic measure (e.g.PW).

• However, rarely are costs and benefits the only consideration in evaluating a project. (Buy a car……)

• Taking additional criteria into account can make the process of decision making more difficult because there is no longer a single measure of value.


Introduction…

• There are three basic approaches to the problem of including both qualitative and quantitative factors other than money into decision making.

• Method 1: Model and analyze the costs alone. Then deal with other considerations to be dealt with on the basis of experience and managerial judgment. The benefit of this approach is its simplicity and defensibility. The liability is that errors can be made and it can be hard to explain why a particular decision was made.


Introduction…• Method 2: Convert other criteria to money, and

then treat the problem as usual. A benefit of this approach is that it does take non-monetary criteria into account. A drawback is the difficult to determine a value for items such as cost of a human life or the cost of cutting down a 3000-year-old tree.

• Method 3. Use a multi-criterion decision making (MCDM) approach. The benefit of MCDM is that all important criteria can be explicitly taken into account in an appropriate manner. The main drawback is that MCDM methods take time and effort to use.


Introduction

• This chapter focuses on three multi-criteria decision making approaches:

1. Efficiency – helps us identify a subset of superior alternatives (required).

2. decision matrices – a widely used version of multi-attribute utility theory (MAUT).

3. analytic hierarchy process (AHP) – a newer, but popular MAUT approach.


Efficiency

• When there is one criterion, it is usually easy to identify which is ‘best’ with respect to that one criterion.

• When there are several criteria, how does one make trade-offs?– E.g. an alternative can be highly valued with

respect to one criterion and lowly valued with respect to another.


Example 13.1 • Simcoe Meats has several alternatives for an

effluent treatment system. • Two criteria have been considered, present

worth and discharge purity.


Example 13.1…

• Dominance concepts can be used to eliminate several of the alternatives from further consideration:– E dominates A because E is both less costly, and it

produces higher discharge purity.– Similarly alternatives F, B and H are dominated.– G is dominated by E because G has lower discharge

purity for the same cost.

• Each of E, D and C are said to be efficient. – An alternative is efficient if no other alternative is at

least equal for all criteria, and is preferred for at least one criteria.

• The best choice between E, D and C depends on the relative importance of each criterion.


Example 3.2

• Consider the choice of a surveillance camera. The criteria are:– low-light performance– Picture clarity– Weight– Price


Example 13.2 …


Example 13.2 …

• To determine the efficient alternatives:1. Order the alternatives according to one criterion (the

index criterion), say cost, from best to worst.2. Start with the 2nd preferred alternative using the

index criterion (the candidate alternative)3. Compare the candidate alternative with each

alternative more preferred for the index criterion (for the first candidate, there is only one.)

4. If any alternative equals or exceeds the candidate for all criteria, and exceeds it for at least one, the candidate is dominated. If no alternative equals or exceeds the candidate for at least one criteria, the candidate is efficient.

5. The next most preferred alternative for the index criterion becomes the new candidate. Stop when all alternatives have been considered.


Example 13.2…

• The resulting efficient set is:


13.3 Decision Matrices (Sildes after this Not Required for Quiz or Final Quiz)

• Usually, not all decision criteria are of equal importance to a decision maker.

• One way to deal with this is to associate a numerical weight with each criterion.

• If criteria are evaluated based on a quantitative measure of preference, then the weights and preference measures can be combined to determine a best alternative.– This is referred to as multi-attribute utility

theory (MAUT).• Several MAUT techniques are available. • A common technique is the use of decision

matrices.


Decision Matrices…• In a decision matrix, rows represent criteria and

columns are the alternatives. • A separate column is used for the criteria weights.• The cells of the matrix contain an evaluation of each

alternative on a selected preference scale. – A scale of 0(worst) to 10(best) is common.

• For each alternative, multiply each rating by the corresponding weight, and sum to get an overall score.

• If the weights add to 10, and a preference scale of 0 to10 is used, then each score can be interpreted as the percent of an ideal solution achieved by an alternative.


Example 13.3• Re - consider the choice of a surveillance camera:


Example 13.3

• After criterion weights and ratings (preference evaluations) are determined, the problem looks as follows.


Decision Matrices…

• The decision matrix summarizes information about multiple objectives

• An additive utility model permits us to calculate an overall score for each alternative.

• A comparison of scores will indicate which is the best alternative.

• Sensitivity analysis may reveal promising alternatives resulting from relatively small changes in the criteria weights.


13.4 Analytic Hierarchy Process (AHP)

• AHP is also a multi-attribute utility theory (MAUT) approach.– It provides a mechanism to structure large

problems– It also provides a good method for

determining criteria weights.


Basic Steps of the AHP

1. Identify the decision to be made (the goal), the various criteria to be used, and finally the alternatives to be considered.

2. For each criterion, evaluate the relative importance of alternatives for all possible pairwise comparisons. The results are put in a pairwise comparison matrix (PCM).

3. Determine priority weights for the alternatives by normalizing the elements of the PCM.

4. Construct a PCM for each criterion.5. Compute an overall ranking for each

alternative by multiplying alternative priority weights by criterion priority weights.


Summary

• Introduction to qualitative and multi-criteria decision making.

• Three common approaches to multiple criteria:

1. Efficiency

2. Decision Matrices

3. The Analytic Hierarchy Process (AHP)• The consistency ratio for AHP


Quiz 5 Arrangements

• Quiz: Wednesday, Nov. 23, 2005 • 11:30 - 12:20 (Quiz: 30 minutes)• Tutorial: Friday, Nov. 25, 2005• Based on Chapter 12 and 13• Bring: Paper, Pen, Formula Sheet,

Calculator, Student Card • Two Problems, Wei used 173 seconds• Write: Name, Student No. and Email


Course Arrangement !!!

• Nov. 23, Wednesday Quiz 5 • Nov. 25, Friday Tutorial 5

• Nov. 29, Tuesday Final Review• Nov. 30, Wednesday Final Quiz

• Project Report Due: Final Quiz Nov. 30, Wednesday. This deadline is FIRM, fail to submit on final quiz=0/25, NO EXCUSE!!!


• Questions?

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