The decision-making process can be quite complex. In this regard, there are various techniques from mathematical analysis to estimate which can be used by managers to make decisions. In this regard, the selection of appropriate technology depends on the decision of the person who is the decision-maker. However, the techniques described below are generally used to make decisions:
Marginal Analysis: This technique is used to decide how much extra production is involved in adding more than one variable (like raw materials, machines, and workers). In his book ‘Economics’, Paul Samuelson defines marginal analysis as an additional product, resulting in an additional unit of any input variable, other factors will be kept constant.
Financial Analysis: The use of this decision-making tool is used to calculate the profitability of an investment, to calculate the payback period (the time taken to keep the original cost of investment for cash benefits in mind), and cash flows and is used to analyze cash outflows.
Investment options can be evaluated by discounting cash flows and cash outflows (the rebate is the process of determining the present value of future amount, assuming that the decision-maker has the opportunity to earn a certain return on their money ).
Break-Some Analysis: This tool enables a decision-maker to evaluate the available options based on price, fixed cost and variable cost per unit. The break-some analysis is a measure by which the level of sale required to cover all fixed costs can be determined.
Using this technique, the decision-maker can set the break-even point for the company for its entire product or any of its products. At the break-eve point, the total revenue is equal to the total cost and the profit is zero.
Ratio analysis: This is an accounting tool for explaining the accounting information. The ratio defines the relationship between two variables. The original financial ratios compare costs and revenues for a particular period. The objective of analyzing the ratio is to explain the financial statements to determine the strengths and weaknesses of a firm, along with its historical performance and current financial position.
Operational Research Techniques: One of the most important sets of equipment available for decision-makers is operational research. The decision-making process in operation research (OR) involves the practical application of quantitative methods. When using these techniques, the decision-makers use scientific, logical or mathematical means to get real solutions to problems. Many OR techniques have been developed over the years.
Linear programming: Linear programming is a quantitative technique used to make decisions. It involves an optimal allocation of rare or limited resources of an organization to achieve a particular purpose. The word ‘linear’ means that the relationship between the different variables is proportional.
The word ‘programming’ means that developing a specific mathematical model to optimize the output when resources are low. To implement this technique, the situation should involve two or more activities competing for limited resources, and in the situation, all relationships must be linear.
Simulation: This technique involves the creation of a model that represents a real or existing system. Simulations are useful for solving complex problems that can not be easily solved by other techniques. In recent years, computers have been used extensively for simulation. Various variables and their interconnections have been kept in the model.
When the model is programmed through a computer, a set of outputs is obtained. Simulation techniques are useful in evaluating various options and selecting the best. Simulation can be used to determine value strategies, distribution strategies, resource allocation, logistics, etc.
Also read: Nature of Planning , Objectives of Planning , Types of Plans , Planning Process , Process of Decision Making , Bounded Rationality , Concept of Organizing , Span of Control , Departmentation of Organising