Resource Allocation Decisions

Abstract

Organizations typically have more good ideas for projects than they have resources available to pursue those ideas. Decision analysis can provide practical guidance to the organization on how to get the maximum benefit from those limited resources. This chapter reviews methods for prioritizing projects using mathematical optimization or benefit-cost ratios in concert with standard decision-analysis and risk-analysis tools. These tools include multiattribute utility and value models, decision trees, influence diagrams, and Monte Carlo simulation. To illustrate issues that arise in implementing these approaches in organizations, the use of resource allocation models in hospital capital budgeting is described at length. The chapter concludes with a call for more research on the use of decision analysis in organizational settings. The challenge of Organizational Resource Allocation What universal dilemma is confronted by organizations of every size, type, and purpose? Stated simply, they have more good ideas for projects, programs, and investments than they have resources available to pursue those ideas. These ideas include facilities expansion or construction, new equipment, innovative manufacturing or service delivery technologies, and information technology upgrades. In addition, many organizations engage in research and development efforts that require identifying the most promising new products, technologies, or process improvements. Often, the limiting resource is financial because an organization's capacity to borrow funds or raise equity capital has practical limits. There also may be insufficient facility capacity, or not enough time to pursue every idea. In other instances, specialized skills or expertise are the limiting factor.