Logistics Decision Analysis Methods

Analytic Hierarchy Process

Presented by Tsan-hwan Lin

E-mail: percy@ccms.nkfust.edu.tw
Motivation - 1
 In our complex world system, we are forced to cope
with more problems than we have the resources to
handle.
 What we need is not a more complicated way of thinking
but a framework that will enable us to think of complex
problems in a simple way.

 The AHP provides such a framework that enables us to

make effective decisions on complex issues by
simplifying and expediting our natural decision-making
processes.
Motivation - 2
 Humans are not often logical creatures.
 Most of the time we base our judgments on hazy
impressions of reality and then use logic to
defend our conclusions.

 The AHP organizes feelings, intuition, and logic

in a structured approach to decision making.
Motivation - 3
 There are two fundamental approaches to
solving problems: the deductive approach（演
繹法）and the inductive (歸納法；or systems)
approach.
 Basically, the deductive approach focuses on the
parts whereas the systems approach concentrates
on the workings of the whole.
 The AHP combines these two approaches into
one integrated, logic framework.
Introduction - 1
 The analytic hierarchy process (AHP) was developed
by Thomas L. Saaty.
 Saaty, T.L., The Analytic Hierarchy Process, New York:
McGraw-Hill, 1980
 The AHP is designed to solve complex problems
involving multiple criteria.
 An advantage of the AHP is that it is designed to
handle situations in which the subjective judgments of
individuals constitute an important part of the decision
process.
Introduction - 2
 Basically the AHP is a method of (1) breaking down a
complex, unstructured situation into its component
parts; (2) arranging these parts, or variables into a
hierarchic order; (3) assigning numerical values to
subjective judgments on the relative importance of
each variable; and (4) synthesizing the judgments to
determine which variables have the highest priority
and should be acted upon to influence the outcome of
the situation.
Introduction - 3
 The process requires the decision maker to
provide judgments about the relative
importance of each criterion and then specify
a preference for each decision alternative on
each criterion.
 The output of the AHP is a prioritized ranking
indicating the overall preference for each of
the decision alternatives.
Major Steps of AHP
1) To develop a graphical representation of the problem in terms
of the overall goal, the criteria, and the decision alternatives.
(i.e., the hierarchy of the problem)
2) To specify his/her judgments about the relative importance of
each criterion in terms of its contribution to the achievement of
the overall goal.
3) To indicate a preference or priority for each decision alternative
in terms of how it contributes to each criterion.
4) Given the information on relative importance and preferences, a
mathematical process is used to synthesize the information
(including consistency checking) and provide a priority ranking
of all alternatives in terms of their overall preference.
Constructing Hierarchies
 Hierarchies are a fundamental mind tool

 Classification of hierarchies

 Construction of hierarchies
Establishing Priorities
 The need for priorities

 Setting priorities

 Synthesis

 Consistency

 Interdependence
Advantages of the AHP
The AHP provides a single, easily
The AHP enables people to refine understood, flexible model for a
their definition of a problem and wide range Unityof unstructured
to improve their judgment and problems
The AHP integrates deductive and
understandingProcess
throughRepetition
repetition Complexity
systems approaches in solving
The AHP does not insist on complex problems
consensus but synthesizes a The AHP can deal with the
Judgment and Consensus Interdependence
interdependence of elements in a
representative outcome from
diverse judgments system and does not insist on
The AHP takes into consideration AHP linearAHP
The thinking
reflects the natural
the relative prioritiesTradeoffs
of factors in tendency of the mind to sort
Hierarchic
elements Structuring
of a system into
a system and enables people to
select the best alternative based different levels and to group like
on their goals elements in each level
Synthesis
The AHP leads to an overall The AHP provides a scale for
Measurement
estimate of the desirability of measuring intangibles and a
each alternative The AHP Consistency method for establishing priorities
tracks the logical
consistency of judgments
used in determining
priorities
Q&A
Hierarchy Development
 The first step in the AHP is to develop a graphical
representation of the problem in terms of the overall
goal, the criteria, and the decision alternatives.

Overall Goal: Select the Best Car

Criteria: Price MPG Comfort Style

Decision Car A Car A Car A Car A

Alternatives:
Car B Car B Car B Car B
Car C Car C Car C Car C
Pairwise Comparisons
 Pairwise comparisons are fundamental building
blocks of the AHP.
 The AHP employs an underlying scale with
values from 1 to 9 to rate the relative
preferences for two items.
Pairwise Comparison Matrix
 Element Ci,j of the matrix is the measure of preference of the
item in row i when compared to the item in column j.
 AHP assigns a 1 to all elements on the diagonal of the pairwise
comparison matrix.
 When we compare any alternative against itself (on the criterion) the
judgment must be that they are equally preferred.
 AHP obtains the preference rating of Cj,i by computing the
reciprocal (inverse) of Ci,j (the transpose position).
 The preference value of 2 is interpreted as indicating that alternative i is
twice as preferable as alternative j. Thus, it follows that alternative j
must be one-half as preferable as alternative i.
 According above rules, the number of entries actually filled in
by decision makers is (n2 – n)/2, where n is the number of
elements to be compared.
Preference Scale - 1
Verbal Judgment of Preference Numerical
Rating
Extremely preferred 9
Very strongly to extremely preferred 8
Very strongly preferred 7
Strongly to very strongly preferred 6
Strongly preferred 5
Moderately to strongly preferred 4
Moderately preferred 3
Equally to moderately preferred 2
Equally preferred 1
Preference Scale - 2
 Research and experience have confirmed the
nine-unit scale as a reasonable basis for
discriminating between the preferences for two
items.
 Even numbers (2, 4, 6, 8) are intermediate values
for the scale.
 A value of 1 is reserved for the case where the two
items are judged to be equally preferred.
Synthesis
 The procedure to estimate the relative priority for each
decision alternative in terms of the criterion is referred
to as synthesization（綜合；合成）.
 Once the matrix of pairwise comparisons has been
developed, priority（優先次序；相對重要性）of each of the
elements (priority of each alternative on specific criterion;
priority of each criterion on overall goal) being compared
can be calculated.
 The exact mathematical procedure required to perform
synthesization involves the computation of eigenvalues and
eigenvectors, which is beyond the scope of this text.
Procedure for Synthesizing Judgments
 The following three-step procedure provides a good
approximation of the synthesized priorities.
Step 1: Sum the values in each column of the pairwise
comparison matrix.
Step 2: Divide each element in the pairwise matrix by its
column total.
 The resulting matrix is referred to as the normalized pairwise
comparison matrix.
Step 3: Compute the average of the elements in each row of
the normalized matrix.
 These averages provide an estimate of the relative priorities
of the elements being compared.
Example:
Example: Synthesizing Procedure - 0
Step 0: Prepare pairwise comparison matrix

Comfort Car A Car B Car C

Car A 1 2 8
Car B 1/2 1 6
Car C 1/8 1/6 1
Example: Synthesizing Procedure - 1
Step 1: Sum the values in each column.

Comfort Car A Car B Car C

Car A 1 2 8
Car B 1/2 1 6
Car C 1/8 1/6 1
Column totals 13/8 19/6 15
Example: Synthesizing Procedure - 2
Step 2: Divide each element of the matrix by its column
total.
 All columns in the normalized pairwise comparison
matrix now have a sum of 1.

Comfort Car A Car B Car C

Car A 8/13 12/19 8/15
Car B 4/13 6/19 6/15
Car C 1/13 1/19 1/15
Example: Synthesizing Procedure - 3
Step 3: Average the elements in each row.
 The values in the normalized pairwise comparison
matrix have been converted to decimal form.
 The result is usually represented as the (relative)
priority vector.

Comfort Car A Car B Car C Row Avg.

Car A 0.615 0.632 0.533 0.593 0.593

0.341 
Car B 0.308 0.316 0.400 0.341  
0.066 
Car C 0.077 0.053 0.067 0.066
Total 1.000
Consistency - 1
 An important consideration in terms of the quality of
the ultimate decision relates to the consistency of
judgments that the decision maker demonstrated
during the series of pairwise comparisons.
 It should be realized perfect consistency is very difficult to
achieve and that some lack of consistency is expected to
exist in almost any set of pairwise comparisons.
 Example:
Consistency - 2
 To handle the consistency question, the AHP provides
a method for measuring the degree of consistency
among the pairwise judgments provided by the
decision maker.
 If the degree of consistency is acceptable, the decision
process can continue.
 If the degree of consistency is unacceptable, the decision
maker should reconsider and possibly revise the pairwise
comparison judgments before proceeding with the analysis.
Consistency Ratio
 The AHP provides a measure of the
consistency of pairwise comparison judgments
by computing a consistency ratio（一致性比率）.
 The ratio is designed in such a way that values of
the ratio exceeding 0.10 are indicative of
inconsistent judgments.
 Although the exact mathematical computation of
the consistency ratio is beyond the scope of this
text, an approximation of the ratio can be obtained.
Procedure: Estimating Consistency Ratio - 1
Step 1: Multiply each value in the first column of the
pairwise comparison matrix by the relative
priority of the first item considered. Same
procedures for other items. Sum the values
across the rows to obtain a vector of values
labeled “weighted sum.”
Step 2: Divide the elements of the vector of weighted
sums obtained in Step 1 by the corresponding
priority value.
Step 3: Compute the average of the values computed in
step 2. This average is denoted as lmax.
Procedure: Estimating Consistency Ratio - 2
Step 4: Compute the consistency index (CI):
λ max  n
CI 
n 1
Where n is the number of items being compared
Step 5: Compute the consistency ratio (CR):
CI
CR 
RI
Where RI is the random index, which is the consistency index of a
randomly generated pairwise comparison matrix. It can be
shown that RI depends on the number of elements being
compared and takes on the following values.
Example:
Random Index
 Random index (RI) is the consistency index of a
randomly generated pairwise comparison matrix.
 RI depends on the number of elements being compared
(i.e., size of pairwise comparison matrix) and takes on
the following values:

n 1 2 3 4 5 6 7 8 9 10

RI 0.00 0.00 0.58 0.90 1.12 1.24 1.32 1.41 1.45 1.49
Example: Inconsistency
Preferences: If, A  B (2); B  C (6)
Then, A  C (should be 12) (actually 8)

 Inconsistency

Comfort Car A Car B Car C

Car A 1 2 8
Car B 1/2 1 6
Car C 1/8 1/6 1
Example: Consistency Checking - 1
Step 1: Multiply each value in the first column of the pairwise
comparison matrix by the relative priority of the first item
considered. Same procedures for other items. Sum the
values across the rows to obtain a vector of values labeled
“weighted sum.”

1  2 8  0.593 0.682 0.528 1.803 

0.593 1 2  0.341  1   0.066 6  0.297   0.341  0.396  1.034 
1 8  1 6 1  0.074 0.057 0.066 0.197
Example: Consistency Checking - 2
Step 2: Divide the elements of the vector of weighted
sums by the corresponding priority value.

1.803 0.593  3.040

1.034 0.341  3.032
   
0.197 0.066 2.985

Step 3: Compute the average of the values computed in

step 2 (lmax).

3.040  3.032  2.985

λ max   3.019
3
Example: Consistency Checking - 3
Step 4: Compute the consistency index (CI).

λ max  n 3.019  3
CI    0.010
n 1 3 1

Step 5: Compute the consistency ratio (CR).

CI 0.010
CR    0.017  0.10
RI 0.58
 The degree of consistency exhibited in the pairwise
comparison matrix for comfort is acceptable.
Development of Priority Ranking
 The overall priority for each decision
alternative is obtained by summing the product
of the criterion priority (i.e., weight) (with
respect to the overall goal) times the priority
(i.e., preference) of the decision alternative
with respect to that criterion.
 Ranking these priority values, we will have
AHP ranking of the decision alternatives.
 Example:
Example: Priority Ranking – 0A
Step 0A: Other pairwise comparison matrices

Comfort Car A Car B Car C Price Car A Car B Car C

Car A 1
Criterion 2 Price 8 Car A
MPG Comfort 1Style 1/3 ¼
Car B 1/2
Price 1 1 6 Car
3 B 2 3 2 1 ½
Car C 1/8
MPG 1/6 1/3 1 Car
1 C 1/4 4 1/4 2 1
Comfort 1/2 C 4 1Car A 1/2Car B
MPG Car A Car B Car Style Car C
Style 1/2 4 2 1
Car A 1 1/4 1/6 Car A 1 1/3 4
Car B 4 1 1/3 Car B 3 1 7
Car C 6 3 1 Car C 1/4 1/7 1
Example: Priority Ranking – 0B
Step 0B: Calculate priority vector for each matrix.

Price MPG Comfort Style Criterion

Car A 0.123  0.087  0.593 0.265 Price 0.398

0.320  0.274  0.341 0.655 MPG 0.085
Car B          
Car C 0.557  0.639  0.066 0.080 Comfort 0.218
Style  
 0 . 299 
Example: Priority Ranking – 1
Step 1: Sum the product of the criterion priority (with respect to
the overall goal) times the priority of the decision
alternative with respect to that criterion.

Overall car A priority  0.398 (0.123)  0.085 (0.087)  0.218 (0.593)  0.299 (0.265)  0.265

Step 2: Rank the priority values.

Alternative Priority
Car B 0.421
Car C 0.314
Car A 0.265
Total 1.000
Hierarchies: A Tool of the Mind
 Hierarchies are a fundamental tool of the human mind.
 They involve identifying the elements of a problem,
grouping the elements into homogeneous sets, and
arranging these sets in different levels.
 Complex systems can best be understood by breaking them
down into their constituent elements, structuring the
elements hierarchically, and then composing, or
synthesizing, judgments on the relative importance of the
elements at each level of the hierarchy into a set of overall
priorities.
Classifying Hierarchies
 Hierarchies can be divided into two kinds: structural and
functional.
 In structural hierarchies, complex systems are structured into
their constituent parts in descending order according to
structural properties (such as size, shape, color, or age).
 Structural hierarchies relate closely to the way our brains analyze
complexity by breaking down the objects perceived by our senses into
clusters, subclusters, and still smaller clusters. (more descriptive)
 Functional hierarchies decompose complex systems into their
constituent parts according to their essential relationships.
 Functional hierarchies help people to steer a system toward a desired
goal – like conflict resolution, efficient performance, or overall
happiness. (more normative)
 For the purposes of the study, functional hierarchies are the
only link that need be considered.
Hierarchy
 Each set of elements in a functional hierarchy occupies a level
of the hierarchy.
 The top level, called the focus, consists of only one element: the broad,
overall objective.
 Subsequent levels may each have several elements, although their
number is usually small – between five and nine.
 Because the elements in one level are to be compared with one another
against a criterion in the next higher level, the elements in each level must
be of the same order of magnitude. (Homogeneity)
 To avoid making large errors, we must carry out clustering process. By
forming hierarchically arranged clusters of like elements, we can
efficiently complete the process of comparing the simple with the very
complex.
 Because a hierarchy represents a model of how the brain analyzes
complexity, the hierarchy must be flexible enough to deal with that
complexity.
Types of Functional Hierarchy
 Some functional hierarchies are complete, that is, all
the elements in one level share every property in the
nest higher level.
 Some are incomplete in that some elements in a level
do not share properties.
Constructing Hierarchies - 1
 One’s approach to constructing a hierarchy depends on the kind
of decision to be made.
 If it is a matter of choosing among alternatives, we could start from the
bottom by listing the alternatives.
(decision alternatives => criteria => overall goal)

 Once we construct the hierarchy, we can always alter parts of it

later to accommodate new criteria that we may think of or that
we did not consider important when we first designed it.
(AHP is flexible and time-adaptable)
 Sometimes the criteria themselves must be examined in details, so a
level of subcriteria should be inserted between those of the criteria and
the alternatives.
Constructing Hierarchies - 2
 If one is unable to compare the elements of a level in terms of the
elements of the next higher level, one must ask in what terms they can
be compared and then seek an intermediate level that should amount to
a breakdown of the elements of the next higher level.
 The basic principle in structuring a hierarchy is to see if one can answer
the question: “Can you compare the elements in a lower level in terms of
some all all the elements in the next higher level?”
 The depth of detail (in level construction) depends on how much
knowledge one has about the problem and how much can be gained by
using that knowledge without unnecessarily tiring the mind.
 The analytic aspects of the AHP serve as a stimulus to create
new dimensions for the hierarchy. It is a process for inducing
cognitive awareness. A logically constructed hierarchy is a by-
product of the entire AHP approach.
Constructing Hierarchies II - 1
 When constructing hierarchies one must include enough
relevant detail to depict the problem as thoroughly as possible.
 Consider environment surrounding the problem.
 Identify the issues or attributes that you feel contribute to the solution.
 Identify the participants associated with the problem.
 Arranging the goals, attributes, issues, and stakeholders in a
hierarchy serves two purposes:
 It provides an overall view of the complex relationships inherent in the
situation.
 It permits the decision maker to assess whether he or she is comparing
issues of the same order of magnitude in weight or impact on the
solution.（我們無法直接比較蘋果與橘子；卻可以根據它們的甜度、營養、價格來決
定誰是比較好的水果。）
Constructing Hierarchies II - 2
 The elements should be clustered into homogeneous groups of
five to nine so they can be meaningfully compared to elements
in the next higher level.
 The only restriction on the hierarchic arrangement of elements is that
any element in one level must be capable of being related to some
elements in the next higher level, which serves as a criterion for
assessing the relative impact of elements in the level below.
 Elements that are of less immediate interest can be represented in
general terms at the higher levels of the hierarchy and elements critical
to the problem at hand can be developed in greater depth and specificity.
 It is often useful to construct two hierarchies, one for benefits and one
for costs to decide on the best alternative, particularly in the case of
yes-no decisions.
Constructing Hierarchies II - 3
 Specifically, the AHP can be used for the following kinds of
decision problems:
Choosing the best alternatives Predicting outcomes and assessing
Generating a set of alternatives risks
Setting priorities Designing a system
Measuring performance Ensuring system reliability
Resolving conflicts Determining requirements
Allocating resources (Benefit/Cost Optimizing
Analysis) Planning
Making group decisions
 Clearly the design of an analytic hierarchy is more art than
science. But structuring a hierarchy does require substantial
knowledge about the system or problem in question.
Need for Priorities - 1
 The analytical hierarchy process deals with both (inductive and
deductive) approaches simultaneously.
 Systems thinking (inductive approach) is addressed by structuring ideas
hierarchically, and causal thinking (deductive approach) is developed
through paired comparison of the elements in the hierarchy and through
synthesis.
 Systems theorists point out that complex relationships can always be
analyzed by taking pairs of elements and relating them through their
attributes. The object is to find from many things those that have a
necessary connection.
 The object of the system approach (,which complemented the causal
approach) is to find the subsystems or dimensions in which the parts are
connected.
Need for Priorities - 2
 The judgment applied in making paired comparisons
combine logical thinking with feeling developed from
informed experience.
 The mathematical process described (in priority
development) explains how subjective judgments can
be quantified and converted into a set of priorities on
which decisions can be based.
Setting Priorities - 1
 The first step in establishing the priorities of elements
in a decision problem is to make pairwise
comparisons, that is, to compare the elements in pairs
against a given criterion.
 The (pairwise comparison) matrix is a simple, well-
established tool that offers a framework for [1] testing
consistency, [2] obtaining additional information through
making all possible comparisons, and [3] analyzing the
sensitivity of overall priorities to changes in judgment.
Setting Priorities - 2
 To begin the pairwise comparison, start at the top of the
hierarchy to select the criterion (or, goal, property, attribute) C, that
will be used for making the first comparison. Then, from the
level immediately below, take the elements to be compared: A1,
A2, A3, and so on.
 To compare elements, ask: How much more strongly does this
element (or activity) possess (or contribute to, dominate, influence,
satisfy, or benefit) the property than does the element with which
it is being compared?
 The phrasing must reflect the proper relationship between the elements
in one level with the property in the next higher level.
 To fill in the matrix of pairwise comparisons, we use numbers
to represent the relative importance of one element over
another with respect to the property.
Synthesis II
 To obtain the set of overall priorities for a decision
problem, we have to pull together or synthesize the
judgments made in the pairwise comparisons, that is,
we have to do weighting and adding to give us a
single number to indicate the priority of each element.
 The procedure is described earlier.
Consistency II - 1
 In decision making problems, it may be important to know how
good our consistency is, because we may not want the decision
to be based on judgments that have such low consistency that
they appear to be random.
 How damaging is inconsistency?
 Usually we cannot be so certain of our judgments that we would insist
on forcing consistency in the pairwise comparison matrix (except
diagonal ones).
 As long as there is enough consistency to maintain coherence among
the objects of our experience, the consistency need not be perfect.
 When we integrate new experiences into our consciousness, previous
relationships may change and some consistency is lost.
 It is useful to remember that most new ideas that affect our lives tend to
cause us to rearrange some of our preferences, thus making us
inconsistent with our previous commitments.
Consistency II - 2
 The AHP measure the overall consistency of judgments by
means of a consistency ratio.
 The procedure for determining consistency ratios is described
earlier.
 Greater inconsistency indicates lack of information or lack of
understanding.
 One way to improve consistency when it turns out to be
unsatisfactory is to rank the activities by a simple order based
on the weights obtained in the first run of the problem.
 A second pairwise comparison matrix is then developed with this
knowledge of ranking in mind.
 The consistency should generally be better.（由於已有先入為主看法）
Backup Materials
Interdependence
 So far we have considered how to establish the priority of
elements in a hierarchy and how to obtain the set of overall
priorities when the elements of each level are independent.
 However, often the elements are interdependent, that is, there
are overlapping areas or commonalities among elements.
 There are two principal kinds of interdependence among
elements of a hierarchy level:
 Additive interdependence
 Synergistic interdependence
Additive Interdependence
 In additive interdependence（累加性依賴性）, each
element contributes a share that is uniquely its own
and also contributes indirectly by overlapping or
interacting with other elements.
 The total impact can be estimated by [1] examining the
impacts of the independent and the overlapping shares and
then [2] combining the impacts.
 In practice, most people prefer to ignore the rather complex
mathematical adjustment for additive interdependence and
simply rely on their own judgment (putting higher priority
on those elements having more impacts).
Synergistic Interdependence - 1
 In synergistic interdependence（綜效性依賴性）, the impact of the
interaction of the elements is greater than the sum of the
impacts of the elements, with due consideration given to their
overlap.
 This type of interdependence occurs more frequently than additive
interdependence and amounts to creating a new entity for each
interaction.
 Much of the problem of synergistic interdependence arises from the
fuzziness of words and even the underlying ideas they represent.
 The qualities that emerge cannot be captured by a mathematical process
(such as Venn diagrams). What we have instead is the overlap of
elements with other elements to produce an element with new priorities
that are not discernible in its parent parts.
Synergistic Interdependence - 2
 With synergistic interdependence, one needs to introduce (for
evaluation) additional criteria (new elements) that reveal the
nature of the interaction.
 The overlapping elements should be separated from its constituent parts.
Its impact is added to theirs at the end to obtain their overall impact.
Synergy of interaction is also captured at the upper levels when clusters
are compared according to their importance
 Note that if we increase the elements being compared by one
more element and attempt to preserve the consistency of their
earlier ranking, we must be careful how we make comparisons
with the new element.
 Once we compare one of the previous elements with a new one, all
other relationships should be automatically set; otherwise there would
be inconsistency and the rank order might be changed.
Synergistic Interdependence - 3
 The AHP provides a simple and direct means for
measuring interdependence in a hierarchy.
 The basic idea is that wherever there is interdependence,
each criterion becomes an objective and all the criteria are
compared according to their contributions to that criterion.
 This generates a set of dependence priorities indicating the
relative dependence of each criterion on all the criteria.
 These priorities are then weighted by the independence
priority of each related criterion obtained from the
hierarchy and the results are summed over each row, thus
yielding the interdependence weights.
Synergistic Interdependence - 4
 Note that prioritization from the top of the hierarchy
downward includes less and less synergy as we move
from the larger more interactive clusters to the small
and more independent ones.
 Interdependence can be treated in two ways.
 Either the hierarchy is structured in a way that identifies
independent elements or dependence is allowed for by
evaluating in separate matrices the impact of all the
elements on each of them with respect to the criterion being
considered.
Advantages of the AHP
Unity
Process Repetition Complexity

Judgment and Consensus Interdependence

AHP
Tradeoffs Hierarchic Structuring

Synthesis Measurement
Consistency
Research Issues
 Hierarchy construction
 Method to deal with interdependence
 Fuzziness in relationships among elements?
 Priority setting
 Scale vs. other scaling methods
 How to make subjective judgment more objective
 Application
 Performance measurement via AHP vs. DEA
 Network vs. hierarchic structure
 How to deal with situation when subjective judgment depends
on relative weight of the criterion based?