Applications of using additivelinear portfolio value function Eetu

Applications of using additive-linear portfolio value function Eetu Haavisto Presentation 4 27. 9. 2019 MS-E 2191 Graduate Seminar on Operations Research Fall 2019 The document can be stored and made available to the public on the open internet pages of Aalto University. All other rights are reserved.

Contents • A Strategic Approach to Allocating Capital in Healthcare Organizations 1 • Use of Decision Analysis in the Army Base Realignment and Closure (BRAC) 2005 Military Value Analysis 2 27. 9. 2019 2 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

A Strategic Approach to Allocating Capital in Healthcare Organizations 1 • A 1999 paper by Kleinmuntz and Kleinmuntz on using decision analysis to aid the capital allocation process of a for -profit hospital • 35 major investment proposals evaluated and ranked • Examples: CT scanner, Mammography System, Desktop Hardware 27. 9. 2019 3 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Decision analysis steps 1. 2. 3. 4. 5. 6. 7. 8. Establish evaluation criteria Classify proposals Ensure that proposals are complete and easy to understand Determine costs of proposals Rate proposals with respect to each criterion Set strategic weights for each criterion Calculate weighted value scores for each proposal Rank proposals by benefit-cost ratios 27. 9. 2019 4 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

1 -4: Evaluation criteria, classification Pre-existing set of seven criteria: • • Operating net present value Market share Physician relations Operating efficiency Network development Patient outcomes Patient satisfaction • 180 proposals classified by amount of funds requested: 35 major and 145 minor proposals • Proposals should be complete and understandable so that they can be analyzed 27. 9. 2019 5 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

5: Rating proposals Operating net present value calculated by finance staff Nonfinancial criteria rated by a group of 12 evaluators using a direct rating method Evaluators discussed their ratings, which were then averaged 27. 9. 2019 6 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

6: Setting priority weights • Weights of the evaluation criteria were determined by the CEO of the hospital using a SWING-like method • In general, weights should be set by individuals with authority to make such judgments 27. 9. 2019 7 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

7: Calculating proposal scores 27. 9. 2019 8 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

8: Ranking by benefit-cost ratios 27. 9. 2019 9 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

27. 9. 2019 10 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Possible shortcomings • Benefit-cost analysis doesn’t necessarily give an optimal solution • Hard to say if independence assumptions hold • Is the CEO’s weight evaluation accurate? 27. 9. 2019 11 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Use of Decision Analysis in the Army BRAC 2005 Military Value Analysis 2 • ”In 2001, Congress enacted legislation that required a 2005 Base Realignment and Closure (BRAC) round to realign military units, remove excess facility capacity, and support defense transformation. ” • Military value was the primary consideration for BRAC recommendations • Defining military value and determining it for each installation was therefore an integral part of the BRAC process • Contributions to literature: multidimensional scales for interdependent attributes, application of Swing Weight Matrix 27. 9. 2019 12 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Use of Decision Analysis in the Army BRAC 2005 Military Value Analysis • The Qualitative Installation Military Value Model • Determine set of attributes to use • The Quantitative Installation Military Value Model • Elicit value functions and attribute weights • Military Value Portfolio Analysis • Solve an optimization program 27. 9. 2019 13 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

The Qualitative Installation Military Value Model • The attributes used in the installation assesment must be based on army stationing strategy and BRAC selection criteria • Review of army and Department of Defense documents complemented by interviews of 36 senior leaders • The model contains 40 attributes representing installation characteristics that differentiate installations, are measurable and have certifiable data sources 27. 9. 2019 14 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

The Quantitative Installation Military Value Model • Interviews with experts confirmed that difference independence assumptions held for the attributes • Some dependent attributes had to be combined into multidimensional scales 27. 9. 2019 16 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Single-Dimension Attribute Assessment • (natural scale) Determined using a midlevel splitting approach • Midvalue given by subject matter experts • Value function is exponential 27. 9. 2019 17 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

”Single”-Dimension Attribute Assessment (constructed scale) • Each label corresponds to a level of one or more underlying measures • Expert gives each label a value score • Assessing the values is difficult and time-consuming 27. 9. 2019 18 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Multiple-Dimension Attribute Assessment • Subject matter expert determines value increments for movements between neighboring labels (e. g. , V(L 5)-V(L 2)=3) • A second pass compares value increments pairwise to ensure consistency (e. g. , V(L 8)-V(L 2) = 2*[V(L 5)V(L 2)]) 27. 9. 2019 19 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Swing Weight Matrix • Due to the large number of attributes, existing weight assessment methods were difficult to implement and defend • The Swing Weight Matrix Method: • Define importance and variance dimensions • Place the value measures in the matrix • Assess the swing weights • Calculate the global weights (normalization) 27. 9. 2019 20 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Swing Weight Matrix 27. 9. 2019 21 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Military Value Portfolio Analysis • Determine the minimum number of installations that maximizes military value and fulfills army capacity requirements • All installations are treated equally • Since all feasible portfolios fulfill the minimum army requirements, the necessary difference independence properties can be assumed to hold both within and across installations • There are no synergies or interactions between installations 27. 9. 2019 22 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Integer Program 27. 9. 2019 23 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Results • At least 63 installations are needed to satisfy the capacity constraints • These installations contain 90% of the army’s total operations/administrative space and 91% of general instructional space 27. 9. 2019 24 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

References [1] Kleinmuntz, C. E. , Kleinmuntz, D. N. , 1999: Strategic Approach to Allocating Capital in Healthcare Organizations, Healthcare Financial Management 53/4, s. 52 -58. [2] Ewing Jr. , P. L. , Tarantino, W. , Parnell, G. S. , 2006: Use of Decision Analysis in the Army Base Realignment and Closure (BRAC) 2005 Military Value Analysis, Decision Analysis 3/1, s. 33 -49. 27. 9. 2019 25 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Homework (1/3) Businessman Lentulus Batiatus is searching for new recruits for his gladiator school. He is presented with ten slaves that have been measured with respect to four attributes. Lentulus considers how important each attribute is to him and how widely the values of each attribute vary among the slaves. The attributes are: • Height (Medium importance, Medium variation) • Fighting skill (High importance, High variation) • Weightlifting result (Medium importance, Low variation) • Javelin throw result (Low importance, High variation) 27. 9. 2019 26 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Homework (2/3) 27. 9. 2019 27 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”

Homework (3/3) 27. 9. 2019 28 MS-E 2191 Graduate Seminar on Operations Research: “Introduction to Portfolio Decision Analysis and Efficiency Analysis”