The key to any successful enterprise is making the right decisions. Often the outcome of decisions cannot be forecast reliably and the decisions will have to be made according to rules, guidelines, experience or instinct. These pages do not deal with this type of decision making.
However where the outcome of the decisions can be forecast it is possible to assign a value for the outcome of each combination of decisions and therefore at least one of the sets of decisions will be 'best'. Optimisationmaking a set of decisions that provides the best outcome (minimum value) according to a cost function. (optimization) is finding the set of decisions that result in this 'best' outcome. To be able to find this best set of decisions the following conditions must apply:
Conditions 1 and 2 restrict optimisation mainly to relatively straightforward technical questions. For example optimisation may help a company in the choice of equipment for a factory to make a certain range of products, but the question of whether the company should enter or remain in the market for these products in the long term is primarily strategic. The strategic decision depends on the long term forecast of profitability levels, which is uncertain.
For commercial organisations the third condition is usually straightforward, since they are essentially profit oriented. As a result there will already be means of assigning cost or benefit to many aspects of activity. In other areas it may be necessary to assign 'costs' to quantities such as delays or the results of accidents. The method of assigning the cost is known as the cost functionA function that returns a value from a well ordered set for each of the outcomes from a set of decisions. The well ordered set is usually the set of all real number and the cost can often be interpreted in monetary terms..
There is no single method to carry out the search for the optimum set of decisions. The methods that are required depend closely on the nature of the types of decision, forecast model, constraints and cost function. Some methods cover quite a wide range of problems, but often methods have to be developed for specific decisions. A particular type of search method is often linked to particular modelling, constraint and cost function representations.
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