Customs Management and Leadership. 4th Edition MODULE 2: Decision making in customs
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Interamerican Development Bank (IDB) (www.iadb.org), through his Integration and Trade Sector (INT). Course coordinator: Interamerican Development Bank (IDB) (www.iadb.org), through his Integration and Trade Sector (INT), the Institute for the Integration of Latin America and the Caribbean (INTAL), the Inter-American Institute for Economic and Social Development (INDES) (www.indes.org), the World Customs Organization (WCO) (www.wcoomd.org) and the General Secretariat of Central American Integration (SG-SICA) (http://www.sica.int/) Module author: Alberto García Valera. Executive Delegate in the special Delegation of Andalucia, Ceuta and Melilla (Spain). Pedagogical and edition coordination: The Inter-American Institute for Economic and Social Development (INDES) (www.indes.org) in collaboration with Fundación Centro de Educación a Distancia para el Desarrollo Económico y Tecnológico (CEDDET) (www.ceddet.org) and Caribbean Customs Law Enforcement Council (CCLEC) (www.cclec.net) This document cannot be reproduced, in whole or in part, by any electronic or mechanical means, including photocopy or any recording process. Its information cannot be stored or recovered by any systems whatsoever without the due written authorization from the IDB. Any request for partial or total reproduction must be informed to: BIDINDES@iadb.org 4th Edition 2016
These materials have been revised in light of the ministerial decisions taken in the framework of the 9th World Trade Organization Ministerial Conference held in Bali, Indonesia, in December 2013. The adjustments were made in order to reflect a higher alignment between the course topics and the priorities identified in Bali’s Ministerial Declaration and decisions, where all IDB members participated. Bali Ministerial Declaration and decisions 2
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Table of contents Table of contents ........................................................................ 2 Index of figures .......................................................................... 5 Index of tables ........................................................................... 6 Glossary .................................................................................... 7 Presentation .............................................................................. 8 Aim of the Module ...................................................................... 8 Learning oriented questions ......................................................... 9 Unit I. Decision making. Concept. Characteristics. Typology ........... 10 Learning objectives ................................................................ 10 I.1. Introduction .................................................................... 10 I.2. Decision and the decision making process. Concept and characteristics ....................................................................... 12 I.2.1. Concept ..................................................................... 12 I.2.2. Characteristics ............................................................ 14 I.3. Typology of decisions ........................................................ 17 I.3.1. Typology by level ........................................................ 17 I.3.2. Typology by method .................................................... 20 I.3.3. Typology by incidence on the problem ........................... 23 I.3.4. Typology by the level of information available ................. 23 I.4. Basic components of decision making ................................. 25 I.5. Personal qualities for decision making ................................. 26 I.6. Decision making styles ...................................................... 29 Unit summary .......................................................................... 31 Unit II. The decision making process in organizations.................... 32 3
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Learning objectives ................................................................ 32 II.1. Stages of the decision making process ............................... 32 II.2. Decision making and the organization structure .................. 40 II.3. Models of decision making ................................................ 43 II.4. Decision making environments ......................................... 48 II.5. Decision making support tools .......................................... 50 II.5.1. Qualitative techniques ................................................ 50 II.5.2. Techniques quantitative .............................................. 61 Unit summary .......................................................................... 75 Unit III. The making of decisions in customs administrations ......... 77 Learning objectives ................................................................ 77 III.1. Introduction .................................................................. 77 III.2. Making decisions in planning customs: objectives .............. 81 III.3. Making customs organization decisions ............................. 85 III.4. Decision making in customs control .................................. 89 III.4.1. Management and risk control ..................................... 90 III.4.2. Control mechanisms: execution of actions derived from risk analysis ........................................................................ 93 III.4.3.
Authorized
economic
operators.
Customs-business
collaboration ....................................................................... 96 III.4.4. Customs-customs collaboration .................................. 97 Unit summary .......................................................................... 98 Bibliography ............................................................................ 99
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Index of figures
•
Figure No. 2.1. Stages of the decision making process.
•
Figure No. 2.2. Example of cause-effect diagram.
•
Figure No. 2.3. UXI Matrix.
•
Figure No. 2.4.
•
Figure No. 2.5. Example of decision tree.
•
Figure No. 2.6.
•
Figure No. 3.1. Central services of the Department of Customs and Special Imposts of Singapore.
•
Figure No. 3.2. Regional services organization.
•
Figure No. 3.3. Principle keys of customs control.
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Index of tables
•
Table No. 1.1. Programmed Decisions - Non-Programmed Decisions.
•
Table No. 2.1. Comparison between Unlimited and limited Rationality.
•
Table No. 2.2. Categories and consequences.
•
Table 2.3.
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Glossary
ABC: Activity Based Costing. AEO: Authorized Economic Operator CPM: Critical Path Method. C-TPAT: Customs-Trade Partnership Against Terrorism. EMV: Criterion of expected monetary value. IDB: Inter-American Development Bank (IDB) PERT: Program Evaluation and Review Technique. IRR: Internal rate of return. SAFE: Framework of Standards to Secure and Facilitate Global Trade VAN: Net actualized value. WCO: World Customs Organization VAN Net actualized value (PV) WTO: World Trade Organization. ZOPP Methodology: System of procedures and instruments for planning projects oriented to objectives.
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Presentation
The decision making process within a customs administration is a challenging process not very often analyzed, generally due the dynamics of the organization with a variety of stakeholders. Therefore it is necessary to identify the process and the best management theory available in order to produce an consistent process that would improved the customs administration objectives and goals. The Module is structured in 3 units, •
Decision making Concept Characteristic typology
•
The decision making process in a organization
•
The making of decisions in customs administrations
Aim of the Module
The objective of the Module is to present basic concepts in the decision making process, from a variety of management concepts and theories, moving into an organizations and finally within the customs administration. A 3 unit module has been developed starting from theoretical reading to the reality and variety of available tools to better determine the outcomes of a decision. A set of specific objectives must be accomplished: •
To know in depth the different types factors that determine the decision making process. 8
Customs Management and Leadership.4th Edition
•
Module. 2
To identify within the organization the quantitative and qualitative
variables
available
under
today’s
management
techniques. •
To analyze and identify from the customs administration view point the decision making process and the best organization that could face today challenges.
Learning oriented questions
1. What do we know about the decision making process? 2. How we can identify the variety of issues that we will be facing under the decision making process? 3. What are the set of quantitative and qualitative management techniques available? 4. What are the challenges of the decision making process within the customs administration? 5. Which would be the most appropriate organizational chart for the
decision
making
process
in
your
country
customs
administration.
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•
Unit
I.
Decision
making.
Concept.
Characteristics.
Typology
Learning objectives
•
In this Unit you will meet the concept, and the principal characteristics, of decision making, and the typology and principal components of those characteristics, among other issues.
•
This first point will devote attention to the characteristics of individual as well as collective decision making. In the two following points issues attention will be centered on the adoption of decisions in organizations and specifically in customs administrations.
I.1. Introduction
Decisions have to be made in all individual and social environments. Some decisions are taken almost unconsciously and others require elaborate valorization work and the evaluation of alternatives; some decisions are of great importance and others absolutely insignificant. But all of them imply an action that carries with it a specific end or proposed objective. It is necessary to know what processes ought to be applied in order to make effective decisions because decision making is a study tool used every day in organizations and administration.
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Rational selection is required to achieve effective decision making, so the first thing that has to be clarified is the objective sought, taking into consideration various alternatives, evaluating each for its advantages and limitations and adopting the alternative considered the most appropriate for getting to the proposed objective. In addition, it is necessary to keep it in mind that decision making is subject to uncertainties since there is no guarantee that the conditions under which the decision was taken will continue to be the same, as we operate in a medium that changes constantly. Making the decision is the first step in choosing a plan of action; it is for that reason that our central work as administrators is to continually decide what to do, to delegate its realization to whomever we consider most capable (the one who should carry it out) and then to justify what should be done and when it should be done. Decisions can be made individually, affecting the individual’s own sphere or various spheres of interest.
A person can make a personal decision that affects him alone or if, within the business or organization in which he is immersed, he has the capacity, his decision can affect the entire collectivity.
But decisions are not made only by individuals (whatever the environment they affect); collective decisions are taken as well, by groups. For that reason it is very important, in the making of decisions, to keep teamwork in mind for since a team has the concepts and involves the vision of various persons in order to attain the most optimal decisions. 11
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Decisions that are adopted by national Parliaments or by the administrative organs of a business are collective decisions, taken by a group of persons acting in accordance with a specific system (majority rule) that represents a conjunction of citizens or shareholders.
I.2. Decision and the decision making process. Concept and characteristics
I.2.1. Concept
To decide is to choose, to accept some option from among different possible alternatives. Therefore, when we decide, we are rejecting other alternatives that were, in fact, possible. If there were no other alternatives we would not have the capability of deciding, we would simply execute the only action that was really possible. We choose in order attain a specific goal or objective, individual or collective. Choice always has a purpose. It is necessary to distinguish between the decision and the execution or the putting of the action chosen into practice.
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If we decide to acquire a particular car model from among various possible alternatives, we have made a decision, but we have not carried it out until we go to the dealer to buy the vehicle. If a business decides to put a new product line on the market, it has taken a decision, estimating costs and benefits, but the decision will not be materialized until the first units are put into the stores and sales establishments. If the customs authority decides it is necessary to control the quantity of textile imports it will have taken a commercial policy decision, but that decision will not be executed until the quota is approved that limits the merchandise entering.
Taking the foregoing into account, it is very simple to understand what some authors have written in regard to the concept of decision. Thus, STEPHEN P. ROBBINS indicates that decisions are taken in reaction to a problem detected (a discrepancy between the actual state of things and the desired state), it is the form in which a man behaves and acts in order to optimize a specific result. For his part, LEON BLANK BURIS indicates that a decision is a choice made among various alternatives. Well now, we do not think that making a decision is an action in itself to be analyzed independently. Completely to the contrary: the adoption of decisions is only part of a process in which a person or group must choose among two or more alternatives.
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It is frequently said that decisions are somewhat like the motor of a business and, as a matter of fact, the success of any organization depends to a great extent on an adequate choice among alternatives. A decision can vary in transcendence and connotation. Administrators sometimes consider decision making as their principal task. They constantly have to decide what should be done, who has to do it, when, where, and how it will be done. Making adequate decisions is something that all managers or personnel with responsibilities within an
organization
attempts
to
achieve,
since
the
quality
of
administrative decisions strongly influences the success or failure of an organization. However, the making of decisions is only one step in planning, even when decision is accomplished rapidly, with little attention devoted to it or when it influences actions for only a few minutes. In the following Unit we will take the time to analyze the different phases or stages of the decision making process and its relationship to the different phases of administration.
To decide is to choose among various alternative ways of getting an end or objective. Decision making is only one stage of a process. The decision making process is a part of planning.
I.2.2. Characteristics
The most important characteristics in decision making are:
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a) It has future effects. It has to do with the extent to which commitments related to the decision affect the future. A decision that has a long term influence can be considered a high level decision, while a decision with short term effects can be taken at a lower level of the organization’s hierarchy. b) Reversibility. Refers to the speed with which a decision can be reversed and to the difficulty implied by making that change. If it is difficult, it is recommended that the decision be made at a high level; on the contrary, if it is easy to change, requires the decision be made at the lowest level. c) Impact. This characteristic refers to the measure of how much it affects other areas or activities. If the impact it is extensive, it is preferable to make the decision at a high level; a single impact is associated with a decision taken at a low level. d) Quality. This factor refers to labor relationships, ethical values, legal considerations, basic principles of conduct, company image, etc. If many such factors are involved, the decision has to be made at a high level; if only some factors are relevant, it is recommended that the decision be made at a low level. e) Periodicity. This element responds to the question of whether a decision is made frequently or exceptionally. An exceptional decision is a high level decision, while a decision made frequently is a low level decision.
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f) Based on the information. Making a decision supposes choosing the best alternative from among possibilities and for that information is needed in regard to each one of the alternatives and their consequences with respect to our objective. The importance of information in decision making is obvious in the definition of decision proposed by Forrester, understanding a decision to be "the process of transforming information into action". Information is the raw material then, the input of decision making, and once it is treated adequately in the decision making process, the output obtained is the execution. Realization of the action chosen generates new information that is integrated to the existing information in order to serve as the basis of new decisions, which originate new actions and thus successively (feedback).
Additionally, in the environment of the organization we can point out the following characteristics that a good decision should have: •
Should be planned for some specific time.
•
Adequate information is provided.
•
Involves the personnel affected.
•
Prepared with programmed phases, with dates and results expected.
•
Possible alternatives or modifications are advanced (reaction capability).
•
An adequate period of time is established for its execution and implementation.
•
All aspects are considered, including possible obstacles that would impede attainment of the objective sought.
•
Permits evaluation (measurable to the extent possible).
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Bearing in mind the fact that decisions are taken and executed by persons who may be affected by such factors as: •
The knowledge, education or academic level of the participants.
•
By the decision capability that is granted to each participant.
•
By personal values and beliefs.
•
By the motivation of persons.
•
By personal expectations.
•
By personal interests.
I.3. Typology of decisions
There are various proposals for its classification, among which we list the most representative.
I.3.1. Typology by level
This classification is connected to the concept of organizational structure and the idea of hierarchy that derives from the structure. Decisions are classified in function of the position in the hierarchy or the administrative level occupied by the decision maker. From this exposition we distinguish:
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a) Strategic (or planning) decisions. These decisions are those adopted by decision makers at the peak of the organizational pyramid (the top managers). These decisions refer principally to relationships between the organization or business and its environment. These decisions are of great transcendence since they define ends and general objectives that affect the entire organization. At the same time they outline long term plans to achieve those objectives. They are long term singular decisions and are not repetitive, so that the information is scarce and it would be difficult to reverse their effects; errors in this type of decision can compromise the development of the business or organization and in specific cases its survival, so that they require a high degree of reflection and judgment.
Decisions related to determining where a new production plant should be located or what type of products should be manufactured are strategic decisions. It is a strategic decision to define what the strategic objectives of a customs authority are.
b) Tactical (or control) decisions. These decisions are those taken by middle level directors or managers. They attempt to assign available resources efficiently to attain objectives fixed at a strategic level. These decisions may be repetitive and the degree of repetition is sufficient for confidence in precedents. Consequences are usually produced in a short time and are generally reversible. The errors do not imply very strong sanctions if they are not accumulated over time.
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These decisions are related to the disposition of equipment, the distribution of the budget or the planning of the production. A decision in regard to whether control should be strengthened in regard to a specific set of existing economic operators may be framed as a tactical decision.
c) Operating decisions are adopted by executives who are located at the lowest level. Operating decisions are related to current business activities. The degree of repetition is high; they are usually routine and automatic procedures, so that the information necessary is easily available. Errors can be quickly corrected; the period of time affected is short and sanctions minimal.
For example, the assignment of tasks to workers determining the inventory to maintain, etc.
We therefore see that there is a correspondence between the level of responsibility or the level in the hierarchy at which the different types of decisions are taken and the level of difficulty of the aforesaid decisions. In the last Unit we shall go into depth in regard to this relationship between the administrative hierarchy and decision making applying it to the environment of customs administrations.
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Reflect‌ Think what decisions taken in the customs administrations in your country may be framed as strategic, tactical or operating decisions.
I.3.2. Typology by method
This classification is from Simon (1977) who bases his classification on the similarity of the methods employed in decision making, independent of the decision levels. Thus he distinguishes a continual series of decisions at the end of which the decisions are programmed or non-programmed. a) Programmed
decisions.
Programmed
decisions
are
understood to be those that are repetitive and routine, made when a procedure has been defined or criteria (or decisionmaking rule) established that facilitates decision making, not having to treat it as a new problem every time such a decision has to be made. It is repetitive because the problem occurs with some frequency (a structured problem) so that a habitual procedure is articulated to resolve it.
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There is a procedure already established for when the decision that to be made to pay an employee or to settle and account with a new client or supplier. In the customs environment, the decision of a specific route assignment to a customs declaration is usually a programmed decision (assuming that a computer program has made a risk analysis).
The basic consideration in this type of decision is not in the greater or lesser difficulty of making the decision, but in the repetitiveness and the possibility of predicting and analyzing its component elements no matter how complex they may be. b) Non-programmed decisions. Non-programmed decisions are those that are new to the business or organization, nonstructured and important in themselves. There is to preestablished method for managing the problem because this problem has not come up before or because its nature or structure is complex (non-structured problem), or because it is so important that it merits a custom treatment.
For example, a business’s decision to establish activities in a new country. In the customs environment, the decision to effect a controlled delivery or realize a physical inspection, when there are suspicions that a specific shipment contains narcotic substances, is an example of a nonprogrammed decision, because it is necessary to have in account the circumstances specific to the case to make one or decision or another.
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Non-programmed decisions are also utilized for problems that occur periodically but may require of modified focus because of changes in the internal or external conditions.
Well-structured problems are resolved making of programmed decisions. Non-structured problems require making of non-programmed decisions.
A relationship can be established between the administrative level where decisions are taken, the class of problem that is confronted and the type of decision that it is necessary to adopt to deal with it. Thus, high level directors are faced with nonprogrammed decisions, since there are problems without structure and as you go down in the organizational, the problems become more structured or comprehensible and therefore the decisions are going to be more programmed. Table No. 1.1. Programmed Decisions - Non-Programmed Decisions PROGRAMMED DECISIONS
NON-PROGRAMMED DECISIONS
ADEQUATE INFORMATION
LIMITED INFORMATION
REPETITIVE DATA
UNIQUE DATA
CERTAINTY
UNCERTAINTY
PREDICTABILITY
UNPREDICTABILITY
ROUTINE
INNOVATION Source: Prepared by the author.
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I.3.3. Typology by incidence on the problem
a) Provisional decisions. Are those that attempt to reduce or mitigate the impact of a problem while a definitive decision is sought.
While it is being decided whether a special discount will be conceded to a new and important client, it is proposed to concede the usual discount conceded to important clients.
b) Adaptive decisions. Are those that, instead of correcting the problem, they adapt to it.
If a business observes a transfer between the sales levels of its two principal products, it may come to the conclusion that consumer demand or taste has changed and decides that it is more profitable to invest more in the product whose sales levels are increasing, to the detriment of the product whose sales levels have been decreasing.
c) Corrective decisions. Are those that eliminate or solve a problem detected. d) Preventive decisions. Are those that attempt to reduce the occurrence of the problem, attacking its causes.
I.3.4. Typology by the level of information available
The more information is available, the simpler becomes the decision making. 23
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We can distinguish the following levels of information that condition the decision making: a) Certainty. The ambience of certainty it is that in which the decision maker knows with absolute assurance the effects of the different existing alternatives. In decisions in conditions of certainty, the only problem is the number of variables presented the plans at a tactical level. When the effects of the different alternatives are known, the problem is reduced to evaluating the different endings in economic terms and choosing the strategy that leads to the most favorable result. b) Risk. Is when the decision maker knows what effects can be produced (without knowing for certain which will be produced) and he knows the probability that each effect has of being presented. Under these conditions an applicable criterion of decision is the well-known “criterion of expected monetary value (EMV)�. The EMV consists of calculating the monetary value of each alternative decision and choosing the one that presents the maximum monetary value. We will calculate the monetary value of each alternative: EMV = ∑Pj Dij where Pj is the probability of each state of nature j, Dij is the result of each state of nature j and the decision or alternative i. Once the EMV for each alternative is calculated, we opt for the one that presents the greatest value. c) Structured uncertainty. Is that level of information in which it is known what states can occur, but not the probability of each one of them.
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d) Non-Structured uncertainty. Is that level of information in which it is not even known what states can occur. In an environment with such a scarcity of information as to have uncertainty, subjectivity has to intervene in large measure. If the uncertainty is found to be unstructured, no greater information can be obtained and a decision has to be made based on mere intuition. If the uncertainty is found to be structured, the decision continues to incorporate a load of very high subjectivity, so that different persons would make different decisions, depending on their optimism or pessimism, on their aversion to risk or to failure, on their experience, etc. In order to graduate from one situation to another previous one it is necessary to obtain a certain degree of information because the more the information is available the less the uncertainty will be. In decision theory, the process of obtaining information is called the learning process.
I.4. Basic components of decision making
The person who must make the decision considers external aspects and aspects of his own when he adopts decisions based on the following five basic components:
a) Information Information must be obtained not only for aspects that are in favor but also for those against the problem, in order to define its 25
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limitations. In addition, information is outside the person and there may be conditions of uncertainty. b) Knowledge If the person making the decision has knowledge of either the circumstances that surround the problem or of a similar situation, that knowledge can be utilized to choose a favorable course of action. Lacking knowledge, it is necessary to seek the council of people who are informed. Knowledge may be the most important resource in any organization. c) Experience When an individual resolves a problem in a particular way, whether the results are good or bad, the experience provides information to help resolve a similar problem in the future. If he has found an acceptable solution, he will have better reason to repeat it when a similar problem arises. Experience is a way to acquire knowledge alluding to the inductive method. d) Judgment Judgment or perception is necessary in order to combine information, knowledge, experience and analysis for the purpose of selecting as appropriate course of action. e) Analysis Analysis joins the foregoing components together. Once cannot speak of a particular method for analyzing a problem, it must complement, but not replace the other ingredients. The following Unit will analyze some of the tools to support decision making.
I.5. Personal qualities for decision making
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There are certain qualities that make persons who must make decisions successful or not; outstanding among those qualities are: experience, good judgment, creativity and quantitative abilities. a) Experience. It is logical to suppose that the ability of an administrator or manager to make decisions grows with experience. Experience has an extremely important role to play in the making of decisions. When a manager is faced with a problem, he relies on his experience to resolve it in a way that he knows resolved it before. For poorly structured or new situations, experience can entail advantages and disadvantages as well. The principal disadvantage is that the lessons of experience may be completely inadequate for the new problem, resulting in an erroneous decision. But the lessons of experience can also be a great advantage, offering the elements to differentiate between well and poorly structured situations. b) Good judgment. The term judgment is utilized to refer to the ability to evaluate information in an intelligent manner. It is constituted of common sense, maturity, the ability to reason and experience in making decisions.
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Good judgment is demonstrated through certain abilities to perceive important information, weigh its importance and evaluate it. Judgment is most valuable in the management of poorly structured or new problems precisely because, using his judgment, the decision maker will make determinations, apply criteria to understand the problem and simplify it without distorting its reality. Judgment is developed in the following manner: based on the information available and on his own prior experience, the decision maker establishes parameters made up of facts, opinions and general knowledge. c) Creativity. Creativity designates the decision maker’s ability to combine or associate ideas in a unique way to achieve a new and useful result. The creative decision maker is capable of capturing and understanding the problem in the broadest manner possible. The
greatest
value
of
creativity,
however,
lies
in
the
development of alternatives. Creative alternatives can generate enough ideas to find the shortest and most effective route to the problem. d) Quantitative abilities. This is the ability to employ those techniques
referred
to
as
quantitative
methods
or
the
investigation of operations. These tools aid managers in making effective decisions. But it is very important not to forget that quantitative abilities should not, and cannot, replace good judgment in the decision making process.
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I.6. Decision making styles
We can to distinguish various styles in the making of decisions in the environment of the organizations: a) Directive style: •
Scarce tolerance of ambiguity.
•
Rational manner of thinking.
•
Efficiency and logic.
•
Rapid decisions (not precipitate).
•
Makes decision with sufficient information (limited).
b) Analytic style: •
Tolerance of ambiguity.
•
Rational manner of thinking.
•
Needs more information and more alternatives than the directive style.
•
Capability of adapting.
c) Conceptual style: •
Tolerance of ambiguity.
•
Intuitive manner of thinking.
•
Seeks many alternatives.
•
Focused on the long term.
•
Have capability to seek creative solutions to problems (require more time).
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d) Behavioral style: •
Little tolerance of ambiguity.
•
Intuitive manner of thinking.
•
Work well in teams and accept suggestions from others.
•
Try to avoid conflicts.
No style is better than the others, they are different styles. In practice, managers or directors combine characteristics of the different styles.
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Unit summary
•
The making of decisions is only one stage of a broader process directed to the solution of a problem.
•
The principal classifications of decisions distinguish between programmed
and
non-programmed
decisions
and
strategic,
tactical and operating decisions. •
Decisions can be made in conditions of certainty, risk and uncertainty.
•
The principal components of decision making are information, knowledge, experience, judgment and analysis.
•
A good decision maker should have such characteristics as experience, good judgment, quantitative abilities, creativity and innovation.
•
There are various styles of decision making, but none is better than the others.
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Unit II. The decision making process in organizations
Learning objectives
•
In this Unit you will able to better understand the decision making process within the organizations and a 8 step process we will analyze.
•
Then the Models of decision making which encompass a theoretical model of making contemporaneous decisions.
•
Finally the decision making environments, and a variety of tools Qualitative techniques and quantitative techniques.
II.1. Stages of the decision making process
As we indicated, the making of decisions is a selection among alternatives. This way of considering decision making is quite simplistic, because the making of decisions is a process instead of a simple act of choice between different alternatives. In the process of making decisions we can identify various stages that begin with the identification of the problem, the steps for selecting an alternative that may resolve the problem, and conclude with the evaluation of the efficacy of the decision. This process can be applied to personal decisions as well as to an action of a business; it can in turn be applied not only to individual decisions but to collective decisions as well. 32
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We are going to study the following diverse stages in more depth for greater knowledge of the process: Figure No. 2.1. Stages of the decision making process
Source: Prepared by the author.
Stage 1. Identifying a problem The process of making decisions begins with the identification of a problem, that is, the discrepancy between an actual state of affairs and the desired state of affairs. Administrators or managers may notice that they have a discrepancy by comparison of the actual state of affairs with some standard (a standard that may be the results attained in previous years), there may be a deviation in relation to the programmed objectives or the functioning of a unit or section of the organization or in other organizations. In addition, there should be some type of pressure in this discrepancy, if not, the problem could be postponed until sometime in the future.
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Thus, in order to initiate the decision process, the problem should exercise some type of pressure in regard to the administrator in order for the administrator to act. This pressure may include organization policies, deadlines, a financial crisis, an upcoming performance evaluation, etc. Finally, it is hardly feasible for administrators qualify something as a problem unless they have the authority, money, information, or other resources necessary to be able to take action (capability of taking action).
In order to identify problems it is necessary to follow various steps: a) Enumerate them. It is necessary enunciate or list the problems identified. b) Explain them. Once enumerated it is necessary to explain them. For example, if the business has detected a drop in the sales level of it is necessary to quantify how much the aforesaid drop is in relation to a specific, concrete period of time. It is necessary to explain what the problems are, where they are occurring and in what quantity or to what extent and when they originated. c) Rank them. It is necessary to establish priorities among problems in function of their gravity or importance in accordance with the organization’s objectives and the urgency of the problems, taking into account the time necessary to resolve them and the trend (a drop in the sales of an outstanding product is not the same as when sales continue to drop but at lower rate than in preceding periods).
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Reflect… You should ask yourself these questions in order to identify a problem: •
What do you think causes the problem?
•
Where, how and what is happening?
•
Who is it happening to?
•
Why is it happening?
Describe the problem in a specific manner.
Stage 2. Identifying the decision criteria to be based on Once the existence of a problem is known, the decision criteria that will be relevant to the resolution of the problem should be identified. This step indicates to us that the criteria so identified are so important, since a criterion that is not identified will be considered irrelevant by the decision maker. The objectives that the alternative chosen must necessarily satisfy must be identified (mandatory) as well as the desired objectives (not obligatory, not mandatory).
If a drop has been detected in the collection of tax resources, the alternatives that are selected would have to meet various requirements: •
Rapid implementation.
•
Reduced cost.
•
Scant social impact.
•
Have the least possible incidence on economic growth.
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Stage 3. Assignment of weight to the criteria The criteria selected in the preceding phase do not all have the same importance; it is therefore necessary to weight the variables that are included in the list of the preceding stage for the purpose of affording them the correct priority in the decision. This step is can be carried out giving the greatest value to the preferred criterion and then comparing the rest to evaluate them in relationship to the preferred criterion. Stage 4. Development of alternatives This step consists of obtaining all the viable alternatives what can be successful in resolving the problem. Stage 5. Analysis of the alternatives Once the alternatives have been developed the decision maker must analyze them carefully. The strengths and weaknesses become obvious as they are compared with the criteria and the values established in stages 2 and 3. Each alternative is evaluated in comparison with the criteria. Some evaluation can be carried out in a relatively
objective
manner,
but,
nevertheless,
something
of
subjectivity usually remains, so that the majority of decisions usually contain value judgments. Stage 6. Selection of an alternative. This step consists in selecting the best alternative of all those evaluated.
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Reflect… We should ask ourselves such questions as these: •
What alternative will resolve the problem in the long run?
•
What alternative is most realistic at this time?
•
What resources do we have? Are they accessible?
•
Do we have enough time to implement the alternative?
•
What is the risk associated with each alternative?
When the administrator has considered the possible consequences of his options, he is in condition to make the decision. He should consider
three
very
important
terms:
maximizes,
satisfy
and
optimize. •
Maximize: Means making the best possible decision.
•
Satisfy: Means choosing the first option that is minimally acceptable or adequate, and thus satisfies a goal or criterion sought.
•
Optimize: Means the best balance possible among different goals.
Stage 7. Implementation of the alternative While the process of selection is completed with the preceding step, the decision can nevertheless fail if it is not is carried out correctly. This step attempts to implement the decision, and it includes informing the persons affected of the decision and making sure they are committed to it. If the people who have to execute a decision participate in the process, it is easier for them to support the decision enthusiastically. Such decisions are carried out by means of planning, organization and effective direction.
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It may be that those who participate in the election of a decision are the ones who proceed to implement it, as on other occasions they delegate the aforesaid responsibility to others. In any case there should be total comprehension in regard to the election of the decision, the reasons that motivated it and above all there should be a commitment to its successful implementation. Below we will list the steps that managers should consider during the planning of its execution: •
Determining how things will be once the decision is functioning completely.
•
Chronological order (with a flow diagram if possible) of the steps to achieve a totally operative decision.
•
Considering resources available and activities necessary for putting each step into practice.
•
Considering the time that each one of the stages will take.
•
Assignment of responsibilities to specific persons for each stage.
We can be sure that when a decision it made, it will probably generate certain problems during its execution; managers should therefore dedicate enough time to the recognition of inconveniences that can be presented as well as also seeing the potential opportunity that such inconveniences can represent. Thus we could say that it is fundamental for the managers to ask themselves: •
What problems could this action cause, and what could we do to impede it?
•
What unintentional benefits or opportunities could come up?
•
How can we assure ourselves that it succeeds?
•
How can we be prepared to act when opportunities arise? 38
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Stage 8. Evaluation of the effectiveness of the decision This last step judges the results of the decision to verify if it has corrected the problem. If as a result of this evaluation it is found that the problem still exists, a study of what went wrong will be required. Responses to these questions can take us back to one of the first steps, even to the first step. All the information collected indicates the manner in which a decision functions, that is, it is a feedback process that could be positive or negative. If the feedback is positive, then it indicates that we can continue without problems and that we could even apply the same decision to other areas of the organization. If on the contrary, the feedback negative, it could be that: 1) maybe the implementation requires most time, resources, efforts or thought or 2) it may indicate that the decision was wrong, so that we must return to the beginning of the process of redefinition of the problem. If that should happen, we
would
undoubtedly
have
more
information
and
probably
suggestions that would help us avoid the errors committed in the first attempt.
You can watch the following video which will address the issue of Confidence under the decision making process: http://www.youtube.com/watch?v=WRKfl4owWKc
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II.2. Decision making and the organization structure
Decision making in an organization encroaches upon the four traditionally identified administrative functions, to wit: planning, organization, management and control. a) Planning consists of the selection of missions and objectives as well as actions to fulfil them. That implies "decision making“. Consists of establishing objectives, policies, rules, procedures, programs, budgets and strategies of a corporate organism in advance, that is, it consists of determining what is going to be done.
•
What are the objectives of the organization in the long run?
•
What strategies are the best for achieving this objective?
•
What should the objectives for the short term be?
•
How high should the individual goals be?
b) Organization is the establishment of the structure in which the people
inside
the
organization
perform
their
work.
The
organization groups and orders the activities necessary to achieve objectives, creating administrative units, assigning functions, authority, responsibility and hierarchies; establishing, in addition, the relationships of coordination that must exist among the aforesaid units to make human cooperation optimal.
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Hierarchical relationships, authority, responsibility and communications are established at this stage to coordinate the different functions. •
How much centralization should there be in the organization?
•
How should the positions be designed?
•
Who is better qualified to occupy a vacancy?
•
When should an organization instrument a different structure?
c) Management
requires
individuals
comply
to
the with
administrators the
to
organization’s
influence goals
or
objectives. It is the action and interpersonal influence of the administrator to ensure that his subordinates meet the objectives entrusted by means of decision making, motivation, communication and coordination of efforts.
Management consists of: orders, personal hierarchic relationships and decision making.
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Reflect… •
How do I manage a group of workers who appear to have poor motivation?
•
What is the most efficacious style of leadership for a given situation?
•
How will a specific change affect the productivity of the worker?
•
When is it adequate to stimulate conflict?
d) Control is the measurement and correction of individual and organizational performance in such a way as to achieve established objectives. Control establishes systems to measure results and correct deviations found for the purpose of ensuring that planned objectives are attained. It consists in the establishment
of
standards,
measurement
of
execution,
interpretation and corrective actions.
Reflect… •
What activities in the organization need to be controlled?
•
How should those activities be controlled?
•
When it is a deviation in performance significant?
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In an organization, the activities and objectives that should be obtained are planned, i.e., what we are going to do; in getting organized, we establish who will do the activities, avoiding duplications in the assignment of tasks, assigning people to be responsible for each area and for each activity, defining a chain of hierarchical command; in managing, we establish action routing and guide the group to achieve the objectives set; during the control phase we detect possible breakdowns in the process and we establish action mechanisms to resolve problems. As we can see, the administrative process in itself is a form of continually making decisions.
II.3. Models of decision making
People responsible for making decisions in organizations dedicate a significant amount of resources to obtaining complete information about a situation. If such a person should attempt to bring together absolutely all the information about all the facts before proceeding, what would happen is that he probably would not take any action at all. Simply because we are not capable of considering all the aspects of an empirical problem. Some attributes should be passed over if a decision is to be made. Thus the person who decides should consider the relevant factors, and in that sense abstraction is used to simplify the process of making decisions. Once the deciding person has selected the critical factors or relevant variables on the basis of an empirical situation, those factors and variables combine in a logical manner, so that there is a model of the real problem.
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A model is a simplified representation of an empirical situation. Its advantages are an economy of time and mental effort, it is easy to comprehend
and
modify.
In
this
manner
beginning
with
the
conclusions of the model, decisions and actions can be given a foundation. The principal disadvantage is that it is possible to omit relevant variables or the relationships between the variables can be wrong, which can lead to erroneous conclusions. The theoretical models of making contemporaneous decisions are described briefly below: A) RATIONAL OR CLASSICAL OPTIMIZATION MODEL The rational model considers that human behavior is built upon the idea that people make consistent calculations to maximize value under certain restrictions; i.e., they seek optimization. Thus, it supposes that a person has goals or objectives and a function of utility or preference that permits him to classify all possible actions in accordance with their contribution to his goals. Finally the person selects the alternative that provides him the greatest satisfaction or utility.
Basic premises of this model: •
Supposes perfect information.
•
The problem is clear and direct.
•
All the alternatives and consequences are known.
•
The preferences are clear, constant and stable.
•
There are no restrictions of time or cost.
•
Choice supposes the best result: the alternative is selected that maximizes the objectives.
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It is a rigorous model of rational action that establishes the objectives, analyzes all the alternatives and chooses the one that, in accordance with the function of utility, maximizes the objective.
Nevertheless, the following criticisms are traditionally made of the rational model: •
In practice, neither people nor organizations can specify all existing
alternatives
(there
will
always
be
at
least
one
alternative that escapes our knowledge). •
The majority of persons or organizations do not have only one objective, nor do they employ a utility function of that allows them to evaluate and classify all the alternatives and their consequences.
B) LIMITED SATISFACTION OR RATIONALITY MODEL In contrast with the rational model, the limited model is in concordance with the limited rationality of Simon, which proposes a restricted reality, in which there are cognitive limitations and many uncertain options. It states that persons or organizations try to satisfy themselves, i.e., select the first available alternative that is adjusted to their goals. It considers that people avoid new and uncertain alternatives and instead, confide in certain, proven rules and standard procedures.
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Basic premises of this model: •
Incomplete information.
•
Clear objectives.
•
Identifies a limited set of criteria.
•
Builds a simple model to evaluate criteria.
•
Prepares a limited list of alternatives.
•
Alternatives are evaluated in accordance with criteria of decision.
•
The most satisfactory alternative is selected.
•
Power and policy influence acceptance of the decision.
•
The result of the decision is evaluated in function of personal or corporate interests.
Table No. 2.1. Comparison between Unlimited and limited Rationality Unlimited Rationality Formulation of the
Important organizational
problem
problem
Criteria of decision
Identifies all the criteria
Limited Rationality Problem visible Identifies a limited set of criteria
Assignment of
All the criteria is evaluated and
A simple model is built to
weights to the
ordered
evaluate and order the
criteria
criteria, influenced by the personal interest of the decider
Development of
Complete list of all the
Limited set of alternatives
alternatives
alternatives
Analysis of
All the alternatives are
Only the alternatives
alternatives
evaluated in comparison with
chosen are evaluated
the criteria of decision and its weights
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Selection of
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Maximizing decision
Satisfactory decision
Implementation of
Is accepted by all members of
Policy and power
the alternative
the organization (maximizes
influence acceptance of
chosen
attainment of the objective)
the decision and its
alternative
implementation Source: Prepared by the author.
C) SELECTION OR INCREMENTAL MODEL Also called "limited successive comparisons" by Charles Lindblom (1959), says that people and institutions have conflicting goals, uncertain and difficult to discern what leads them to decide among alternatives that contain various mixtures in conflict; selection is made
with small,
compared.
incremental changes and consequences are
Therefore,
predetermined
criteria.
there
is
Supposes
no
exhaustive
incomplete
analysis
information
or and
tentative goals. D) POLITICAL MODEL In this model decisions are the result of competition and negotiation among the institution’s interest groups and key leaders. Actions are not necessarily rational and the result is not what a person necessarily wants. The institutions generally generate commitments that reflect the conflicts, the principal power brokers, the different interests, unequal power and confusion that constitutes policy. E) GARBAGE CAN MODEL Considers that the majority of institutions do not adapt, are temporary and disappear with time. The making of decisions is to a great extent accidental, the product of a flow of solutions to randomly associated problems and situations. Solutions are linked to problems because of accidental reasons. 47
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Decisions arise from the interaction among the problems, probable actions, the participants and opportunities.
II.4. Decision making environments
Depending on the capability of predicting consequences we can distinguish the following decision making environments: A) Certainty The consequences of each alternative are predicted with certainty. There is a perfect cause-effect relationship. Decisions at the operating level are most common. B) Risk It is not known what the exact consequence of each alternative is but it is known what the consequences are and the probabilities of their occurrence. Common in high level strategic decisions such as planning. C) Uncertainty There is no knowledge of the probabilities of future events. D) Competition or conflict There is uncertainty and there is an opponent. Table No. 2.2. Categories and consequences Categories
Consequences
Certainty
Determined
Risk
Probabilistic
Uncertainty
Unknown
Conflict
Influenced by opponent
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Source: Prepared by the author.
In conditions of uncertainty where there is no information and it is not possible to even assign a probability to events, decision analysis models or decision trees can be used (they will be analyzed in point 2.5.) with subjective criteria or judgment from a pessimistic as well as optimistic point of view; in the first case it considers the occurrence of the worst results and attempts to choose the best among them, or the least unfavorable (Maximin Strategy or Wald criterion); in the other case, the occurrence of most favorable events is considered and the best is chosen (Maximax Strategy). When there are no bases for subjective estimates, the principle of insufficient reason, which supposes that all the events are equally probable, can be employed. Decisions that are taken in risk conditions are based on models where probabilities are assigned to the events and work with the expected values or utilities of results. In this way a rational person in risk conditions chooses the one alternative that maximizes expected utility, which is the expected value of the utilities of each of the possible results of each choice. In conflict conditions Von Neumann and Morgenstern (1944), developed the theory of games where two or more decision makers seek to maximize their own well-being, i.e., win. The result of the game depends on the decisions of each player. The theory states that depending on the number of players and alternatives of action (strategies), the actions can derive in zero sum games when one player’s gain signifies the loss of an equal amount by the other player or non-zero sum games, when one player’s gain may mean that the other also gains or losses by different amounts.
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In case of certainty of events, the models are simpler and basically fall into mathematical models for seeking the optimum as in linear programming models, some inventory models, transportation models and assignment models, etc. When the model is more complex or dynamic the use of simulation models is the most appropriate, but these are descriptive models, and therefore do not seek the optimum. In the point 2.5. we will analyze the principal decision making support tools.
II.5. Decision making support tools
II.5.1. Qualitative techniques
Making decisions requires collecting information in regard to a given problem, consulting experts in the specific field and relying on their experience. However, this information can be or not be real. Therefore there are techniques for testing the veracity of information.
II.5.1.1. Brainstorming Also called group creativity session, brainstorming is a technique especially effective for generating new ideas and fomenting creativity. The intention of this method is to favor the resolution of problems discovering
new
and
unusual
solutions.
What
it
seeks
in
a
brainstorming session is precisely a multiplication of ideas.
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The procedure consists of calling together a group of persons interested
in
solving
a
particular
problem.
The
principal
characteristics of the procedure are the following: 1.
It is prohibited to criticize the ideas.
2.
Extravagant ideas are welcomed. It is always easier to temper or discard ideas; but it is very difficult generate them.
3.
Fight for quantity and not for quality.
4.
It tries to find combinations and valuable changes, encouraging the participants to make addictions or modify the suggestions of others.
Then all the ideas are written on a poster or blackboard, then classified in categories in such a way that many ideas can be combined and others eliminated. The brainstorming is most effective when the problem is stated in a simple and specific form. Many managers believe that with this system, people are involved in the making of decisions and the stimulation they feel transfers to other activities they undertake in the business, but they feel that the time spent in this technique can be minimized choosing people to form a part of the group who have interest and know the problem. An alternative to this traditional method, which implies a personal meeting is to carry it out in an electronic format utilizing new technologies (e-brainstorming) for the interchange of ideas.
II.5.1.2. Synectics This method is similar to brainstorming, but the final solution to the problem is obtained with a more structured methodology. The basic steps are: 51
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1.
Module. 2
The problem is studied in depth by all the participants. All the members of the group should familiarize themselves totally with the nature and the limitations of the problem before suggesting a solution.
2.
The leader solves a key part of the problem which is utilized as a segment to be analyzed.
3.
The
members
of
the
group
employ
different
means
to
contribute ideas in regard to the segment selected. 4.
The group should have at least one expert who evaluates the viability of the ideas and discards those that are not viable.
Synectics has positive aspects in that it is possible to evaluate a much more complex problem, due to the fact that the problem is approached by segments. The negative part is that the group requires training in order to utilize such means as symbolic analogies.
II.5.1.3. Decisions by consensus When the knowledge in regard to a particular theme is shared among various persons, decisions by consensus do not require the total agreement on the part of all the members of the group, although the decision should be acceptable to all. A decision by consensus is obtained in this way: 1.
The
problem is defined in terms
that are
specific and
reasonably acceptable to the members of the group. 2.
All the members of the group meet and contribute their information about the problem.
3.
A model is developed to include all the information contributed. 52
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4.
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The group tries out the model applicable to the given problem.
The members of the group should follow the following suggestions carefully: •
Avoid discussing in order to defend your own position.
•
Do
not change
position simply in
order
to
achieve
an
agreement. •
Do not let yourself be trapped by the win-loss syndrome.
•
Avoid simplistic solutions.
•
Generate differences of opinion since a new light may appear in regard to the problem.
•
Present the information clearly and objectively.
•
Make an effort to maintain a positive attitude about the capacities of the group.
This system commits the members of the group to follow the path chosen.
II.5.1.4. The DELPHI technique It is a method to predict the future utilizing experts in the area to which the problem pertains. It is made up of a group of experts in the specific field that independently estimate future events. Each member is distributed a series of questions related to its area of specialization. The questionnaires are then collected and evaluated. Later the group is given a new questionnaire that contains each person’s response to the previous questionnaire and also the group average or general consensus. This new consensus may contain a space which requests a statement of the new opinion in regard to the questions. 53
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If an individual’s response is different from the group average a brief explanation is requested. All the forms are coded in such a manner that people can only identify their own and the group position so as to prevent possible conflicts. After the second questionnaire, a third and last set of opinions is registered,
including
the
averages
resulting
of
the
second
questionnaire and the reasons given by those who gave a response different from the average. Then a last set of opinions is registered in the corresponding column. This exercise gives as a result a databank of the opinions expressed by the experts in regard to each question formulated. On analyzing the questionnaires, the person who must make the decision knows the average responses that experts in the field give to the different questions. All this should be carried out without direct interaction among the members of the group to avoid direct conflicts. The technique has as a disadvantage the impossibility of treating problems that require more responses than those that can be categorized in columns.
II.5.1.5. The fishbowl In this technique the group that must make the decision is seated in a circle and a chair is placed in the center of the circle. When someone is seated in the center only that person can talk and he can present his points of view without opposition and propose to the problem given. Three techniques can be utilized with the chair placed in the center:
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1.
Module. 2
The person who is seated in the fishbowl should have specialized knowledge in the area of discussion; he expresses his points of view and explains how to manage the problem. The members of the group can ask the person in the center, but cannot talk with any other member. Once the point of view of this person is understood he leaves the fishbowl and a second expert is called to follow the same procedure. This system gives as a result that each member, in an individual manner, supports a specific course of action. Theoretically this succeeds because the member is acting in accordance with the same basis of data.
2.
The same as in the first technique a group gets together to make a decision. A single leader is seated in the chair in the center and explains the rules of the problem, he can even propose a solution. Then the leader stands up and joins the group. The second person who goes into the fishbowl offers a new solution, modifies the earlier decision or recommends that the previous solution is accepted. None of the members of the group can talk directly among themselves. Occasionally, the members of the group suggest that the position in the center be ceded to another person. The exercise ends when someone seated in the center for recommends adopting the suggestion of the one who spoke before and a majority of members raise their hand in favor of this recommendation.
3.
Often a large group is counterproductive for making decisions. With this third technique, various subgroups appoint one of their number to represent their points of view.
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The fishbowl consists of a small group of representatives of the larger group; they are seated in a circle and exchange opinions while the total group observes them. The members of the larger group can only be included in the decision process after obtaining information through their representative.
II.5.1.6. Didactic Interaction This technique is utilized when a decision of the do it or not type is required and the factors related to the final decision can be extremely complex and their investigation very broad. The task of enumerating the advantages of the problem is assigned to a group or person and the enumeration of all the disadvantages to another. After a time, the two groups meet and discuss the results. Later, the investigators change sides. In a second meeting the participants find holes in their original arguments. Through this mutually accepted exchange it is possible to present and utilize the information for solving the problem and arriving at a final decision. A secondary use of the basic concept of this system occurs when two or more factions are polarized in relationship to a certain problem and it is not possible to arrive at an agreement. In this case, each faction is requested to argue the contrary position. The first reaction will be that this change cannot be made, but after a time, the participants become aware that the contrary position has some favourable aspects. When the two sides detect the positive aspects of the position assigned, they can generally find common ground for agreement.
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II.5.1.7. Collective Bargaining Collective bargaining implies a confrontation between two groups with contradictory points of view. A typical example is union negotiations with the government or the manager of a business. When the opposing groups meet, each one arrives at the meeting table with a strategy that includes list of benefits that they want to get and a position that supports each benefit. If the positions held coincide, it is possible to arrive at a final agreement. One of the most important problems with this system is the lack of trust of each party in the relationship with the other. This lack of trust is justified, since each party is holding a different position from reality in order give the impression of that they are making their final offer. In order to arrive at an agreement in a reasonable time, it is recommended that the parties enter into a restricted negotiation, in which limits are fixed to the concession that they are going to negotiate before beginning the negotiation. There is a method that offers more opportunity to assist in the success of collective bargaining; it is known as the theory of necessities. In accordance with this theory, one month in advance each party defines the problems that it is discussing at the negotiations table. Then, for the problem, each party makes three proposals and explains how the acceptance of this point satisfies the necessities of both parties. When a week of negotiations has elapsed and they have not arrived at an agreement, the final decision should be handled by an impartial arbiter.
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II.5.1.8. ZOPP Methodology Zopp is the acronym of a German denomination: • Z iel • O rientierte • P rojekt • P lanning It means: planning projects oriented to objectives; it is a system of procedures
and
instruments
for
planning
projects
oriented
to
objectives. Characteristics: •
Procedure of planning by successive steps.
•
Visualization and ongoing documentation of the planning steps.
•
Team focus.
There are problem trees and objective trees. How is problem tree prepared? 1.
Identify the principal problems in the situation that is being analyzed.
2.
Formulate the central problem in a few words.
3.
Note the causes of the central problem.
4.
Note the effects caused by the central problem.
5.
Prepare a chart that shows the cause-effect relationship in the form of a problem tree.
6.
Review the complete chart and verify its validity and integrity.
How is objective tree prepared?
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1.
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Formulate all the negative conditions of the problem tree in the form of positive conditions that are: desired and realizable in practice.
2.
Examine the means–ends relationship established to guarantee the validity and integrity of the chart.
3.
If it is necessary: •
Modify the formulations.
•
Add new objectives if they are relevant and necessary to attain the objective.
•
Eliminate objectives that are not effective or necessary.
II.5.1.9. Cause and Effect Diagram (FISHBONE) This method is used to analyze central problems and find their causes; it is very similar to the Zopp method. The Cause and Effect Diagram (fishbone) is a widely used graphic technique that permits clearly appreciating the relationships among a problem and the possible
causes
that
can
be
contributing
to
its
occurrence.
Constructed in the shape of a fishbone, this tool was first applied in 1953 in Japan by Kaoru Ishikawa, a professor at the University of Tokyo, to synthesize the opinions of the engineers in a factory when discussing quality problems.
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What are the principal uses of the cause-effect diagram? •
To visualize, as a team the principal and secondary causes of a problem.
•
To broaden the vision of the possible causes of a problem, enriching its analysis and the identification of solutions.
•
To analyze processes in seeking improvements.
•
Leads to change procedures, methods, customs, attitudes or habits, often with simple and economic solutions.
•
Serves as an objective guide and motivates the discussion.
•
Shows the level of existing technical organization in regard to a specific problem.
•
Previews problems and helps control them, not only at the end, but during each stage of the process.
knowledge
in
the
Figure No. 2.2. Example of cause-effect diagram
Source: Elaborated by the author
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For more information, you can watch the following video: http://www.youtube.com/watch?v=bNDlg1h-za0
II.5.2. Techniques quantitative
Administrative science has developed methods of analysis and quantitative tools for the making of objective decisions. Quantitative tools have advantages, as support for making decisions, such as being able to divide complex problems into small fragments that can be easily diagnosed. However, they are not a source of automatic decisions and responses for all the problems managers confront, they are limited to the study of tangible elements and do not permit the analysis of qualitative factors such as human aspects, which cannot be quantified. To evaluate and compare the intangible factors existing in a decisionmaking problem, administrators should first recognize those factors and then determine if a reasonable quantitative measurement can be applied to them. If that is not possible, everything possible should be verified about them to classify them in terms of their importance, compare their possible influence in regard to the result with the quantitative factors and afterwards arrive at a decision. This may give a predominating weight to only one intangible. The following is a list of some quantitative techniques to support the making of managerial decisions: •
Activity Based Costing (ABC).
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•
Results Matrix.
•
Decision Trees.
•
Linear Programming or Optimizing.
•
Theory of Tails.
•
Theory of Networks.
•
Simulation.
•
Markov Chain Analysis.
Module. 2
II.5.2.1. Activity Based Costing (ABC) Cost-benefit analysis describes and quantifies the advantages (social income) and disadvantages (social costs and expenses) of an investment project or a policy. If the private financial income (in the sense of charges) coincides with the social income, and expenses (in the sense of payments) coincide with social expenses, and the private net benefit (income minus expenses) is therefore equal to the net social benefit, the cost-benefit analysis would be positive. The criteria of rationality or rules of decision for public investment in that case would have to be the same as for private investment. The necessity for making use of cost-benefit analysis arises at the time when there is a discrepancy between the net social benefit and the net private benefit, whether because social income differs from private income, or because expenses are different from private expenses, or both at the same time. The two methods most utilized to effect cost benefit analysis are net actualized value and the internal yield rate.
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Net actualized value (VAN) is the actualized value of a series of future fund flows of the project at the present time. A discount rate is utilized in order to actualize those flows. Once actualized, the future flows will have to restore the initial investment and the result will be the VAN. The VAN method is one of the economic criteria most broadly utilized in evaluating investment projects. It consists of determining the equivalence in the time 0 of the flows of future effect that a project generates
and
comparing
that
equivalence
with
the
initial
disbursement. When the aforesaid equivalence is greater than the initial disbursement, then, it is recommendable that the project be accepted. The formula that allows us to calculate the Net Actualized Value is:
Vt represents cash flows in each period t. I0 is the value of the initial investment disbursement. n is the number of periods considered. The type of interest is k. If the project does not have risk, the type of fixed income will be taken as reference, so that with the VAN it will be estimated if the investment is better than investing in something safe, without specific risk. In other cases, the cost of opportunity will be used.
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If VAN>0 the profitability
project
will
Module. 2
generate
profits
above
the
required
If VAN<0 the project will generate profits below the required profitability
When VAN has a value equal a 0, k is called IRR (internal rate of return). The IRR is the profitability the project provides us. The internal yield or return rate is the rate required for the VAN to be cero. If the IRR is greater than the minimum profitability type required the project will be accepted because it will generate more profitability than the cost of opportunity. When the annual cash flows are a fixed quantity, the following formula can be utilized to calculate the VAN:
R represents the flow of cash constant. i represents the cost of opportunity or minimum profitability that is being required of the project. n is the number of periods. I is the initial Investment necessary to carry out the project. If the number of periods to be projected (to perpetuity) is not known, this would be the formula for the calculation of the VAN:
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Example The customs authority of country X has the necessity of undertaking a project linked to the strategic objective of implementing modern technologies for non-intrusive inspection of containers. To that end it should evaluate whether the offer submitted by an equipment supplier is profitable, taking market conditions into account. The useful life of the equipment is estimated at 15 years and the discount rate (cost of opportunity) is an average of 3.2% annual. Import acquisition X ray scanner: 750,000 •
Estimated annual costs: a) Salaries of the staff personnel who will provide the service: Number of staff personnel: 6 Average annual salary of each staff member: 45,000 Total salary cost: 45,000 x 6 = 270,000 b) Expenses of supplying the installation (water, electricity, etc.): 4,500
•
Estimated annual income: 450,000 In contrast with the private sector in the public environment there are no immediate measurable benefits in monetary terms but there is a necessary intermediate step to translate the social or public benefit to monetary terms. In this case, the use of the X ray technology reduces the time and cost of making inspections, freeing human resources for other alternative uses. Therefore, we will estimate the indirect income associated with this cost reduction, which is estimated at 450,000 annually.
•
Calculation of the net actualized value (VAN):
VAN= -750,000 1,315,118.48
+
175,500
x
[1-(1+0.032)/15]
x
1/0.032=
In this case, as VAN>0 the investment in the purchase of X ray equipment results in a profitable investment, taking estimated cash flows and the specific conditions of the market determined by the interest rate into account.
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Where I= 750.000 Import acquisition X ray scanner R= 450.000 represents the flow of cash constant but is necessary to substract to yearly cost (salary and expenses 270.000 + 4.500) i = 3.2%=0.032
represents the cost of opportunity or minimum
profitability that is being required of the project. n = 15 years is the number of periods.
II.5.2.2. Matrix of Results The results matrix is a very much utilized instrument that shows the possible results that can be attained following alternative courses of action
(strategies)
in
different
circumstances
(states).
The
intersection tables of the matrix show the result of a combination of states and strategies. In the case of conditions being random, each state can be assigned a probability that is decisive in determining the possibility of a certain result.
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Figure No. 2.3. UXI Matrix
Source: www.usinnovation.com
II.5.2.3. Decision Tree This is an efficacious method of combining concepts of probabilities and value (or satisfaction) expected in the solution of complex problems that involve uncertainty as well as a great number of alternatives.
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Decision trees permit management to evaluate the results of a sequence of decisions that pertain to a particular problem. This focus implies connecting a number of events or â&#x20AC;&#x153;branchesâ&#x20AC;? so that they have the appearance of a tree. The process is initiated with a primary decision that has at least two alternatives to be evaluated as to the probability of each one of the results and thus successively. The vertices or nodes represent decision events, utilizing a table for that purpose. The effects derived from the decision are called occurrences and are represented by means of a circle in the following form: Figure No. 2.4.
Source: Elaborated by the author
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The technique permits selecting the better alternative by comparing the economic benefits of each branch based on: •
The conditional costs of each decision.
•
The calculation or estimation of probability allotted to each alternative originated in each decision.
•
The value expected from each branch.
Figure No. 2.5. Example of decision tree
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Calculation of the value of the trees: Once we calculate the value of each of the results, and we have evaluated the probability of occurrence of uncertain consequences, it is time to calculate the value that will help us make our decisions. We begin on the (stage) right side of the decision tree and follow it to the (stage) left. When we complete a set of calculations in a node (square of decision or circle of uncertainty), all we need to do is annotate the result. Calculation of the value of uncertainty nodes: When we go to calculate the value for uncertain results (the circles), we must do so multiplying the expected incomes from these results by the probability of occurrence. The total for those nodes of the tree constitute the sum of all these values. In
this
example,
the
value
for
â&#x20AC;&#x153;New
Product,
Meticulous
Developmentâ&#x20AC;? is: 0.4 (probability of a good result) x 500,000 (income) = 200,000 0.4 (probability of a moderate result) x 25,000 (income) =10,000 0.2 (probability of a poor result) x 1,000 (income) =200 Total: 210,200 We place the value calculated for each node in a box. Calculation of the value of the decision nodes: When we evaluate the decision nodes, we must write the cost of the option in regard to each decision line. Then, we must calculate the total cost based on the values of the results that we have already calculated. This gives us a value that represents the benefit of such decision. When we have calculated the benefits of these decisions, we must choose the option that has the most important benefit, and make that the decision taken. This is the value of this decision node. 70
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Figure No. 2.6 Developed a new product or consolidate the existing one? $210.000 slow development
$135.000
$210.000-75.000=135..000
Cost =$ 75.000 fast development
new product
$55.700
Cost =$ 40.000
$55.700-40.000=15.700
consolidate exisiting product
$65.500 $65.500-15.000=55.500
stronger product Cost =$ 15.000
$50.000
efective product Cost =$ 0
$6.400 $6.400-0=6.400
II.5.2.4. Linear Programming It is useful when one must choose among alternatives too numerous for
evaluation
programming,
with we
can
conventional determine
methods. optimal
By
using
combinations
linear of
an
organizationâ&#x20AC;&#x2122;s resources to attain a particular objective. Principal characteristics:
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•
Module. 2
Concerned with obtaining an optimal position in relation to a particular objective. For example: to minimize costs and maximize utilities.
•
Supposes choice among various alternatives or an appropriate combination of alternatives.
•
Considers certain limits or obligations within which the decision should necessarily be reached.
For more information, you can watch the following video: http://www.youtube.com/watch?v=M4K6HYLHREQ
II.5.2.5. Queuing theory This theory makes reference to congestion points and to waiting times, i.e., to the delays presented at some service point, with the object of achieving optimization. The models permit management to calculate future lengths of waiting lines, the average time spent in the line by a person who expects service and additional work stations necessary. In Queuing theory the points of interest are: •
The client waiting time.
•
The number of clients in the queue.
•
The ratio between waiting time and the provision of service time.
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II.5.2.6. Network Theory Permits managers to confront the complexities involved in large projects. The use of this technique has notably decreased the time necessary to plan and produce complex products. Techniques include PERT (Program Evaluation and Review Technique), CPM (Critical Path Method), RAP/CRAP (Cost Resource Allocation Procedure). They tackle not only the dimensions of cost but also time in planning and controlling large, complex projects. The programs are realized by means of arrow diagrams that seek to identify the critical path, establishing a direct relationship between time and cost factors. Network theory is broadly applicable to projects that cover diverse operations or stages, different resources, involve various and different organs, periods of time and costs limits.
II.5.2.7. Simulation Simulation is a procedure that studies a problem by creating a model of the process involved in that problem and afterwards, by means of a series of solutions by organized rough estimates, attempts to determine a better solution to that problem. Simulation is one of the quantitative techniques most broadly in todayâ&#x20AC;&#x2122;s world. Simulation is the manipulation of one or more variables and constants that are found associated with a specific problem and it permits experimenting with alternative courses of action. The greatest advantage of using simulation for a decision maker is that the results of a decision can be determined before its application in the real world. That significantly improves the focus of trial and error, in which execution is a prerequisite for discovering results.
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II.5.2.8. Markov analysis Markov
analysis,
named
after
a
Russian
mathematician
who
developed the method in 1907, permits finding the probability of a system being found in a particular state at a given moment. Markov
analysis
permits
predicting
changes
over
time
when
information in regard to system behavior is known. A Markov chain is a series of events in which the probability of an event occurring depends on the immediately prior event. Markov chains have memory. They recall the last event and that conditions future probabilities. Although the best known use of this technique is the prediction of brand loyalty (consumer behavior in relationship to trademarks over time), Markov analysis has also had considerable use in accounting areas (the movement of credit clients from one recovery classification to another) and general financial administration (the movement of companies from one state of financial viability to another).
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Unit summary
The making of decisions is a process that stretches from the definition of the problem or objective to resolving or attaining, respectively, the selection of alternatives, their implementation and the measurement of the results reached (feedback). The making of decisions is present in all the functions of an organization: planning, organization, management and control.
There are various theoretical models for making decisions, such as the unlimited rationality model, the limited rationality model, the model of successive limited or incremental comparisons, the political model and the trash can model. Decisions can be made in environments of certainty, risk or uncertainty. There are tools or techniques that assist the decisor in making decisions, but they neither replace the knowledge nor the experience of managers or administrators. The most common techniques are:
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Table 2.3.
QUALITATIVE
QUANTITATIVE
Brainstorming
Matrix of Results
Synectics
Decision Tree
Decisions by Consensus
Linear Programming
Delphi Technique
L Queuing Theory
Fishbowl
Network Theory
Didactic Interaction
Simulation
Collective Bargaining
Markov Analysis
ZOPP Cause Effect Diagram Source: Prepared by the author.
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Unit
III.
The
making
Module. 2
of
decisions
in
customs
administrations
Learning objectives
â&#x20AC;˘
In this Unit will be able to identify the context and challenges of the decision making process under a customs administration.
â&#x20AC;˘
They are a set of fundamental goals or objectives that customs should accomplish; therefore you will be able to identify the best organizational structure, based on each of the country realty, context and the kind of decision.
â&#x20AC;˘
Finally a variety of techniques of control and risk management in order to establish the best tools to aligned and control within the customs administration.
III.1. Introduction
In order to begin this unit we shall make reference in an introductory manner to decisions in regard to the resources available which have to be made in the customs administration environment, just as in any organization. Resources are a means for achieving goals, and those resources are scarce. It is because of this scarcity that it makes sense to evaluate what is the best possible use of a resource, since with unlimited resources there is no lack of investment in analysis to make decisions.
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Time and physical space are scarce resources, and in addition four other basic resources should be administered as well, fundamentally they are: a) Corporate Culture. Achieving productivity is easiest in an ambience that encourages it. In order to achieve a culture of efficiency
and
productivity
the
managerial
style
is
very
important. b) Human Resources. Personnel is the most valuable resource of the business, it is by means of the effort that put forth by personnel that objectives are achieved. Corporate culture is fundamental to the attitudes and optimal use of the skills of the personnel. c) Technology. Technology permits a greater availability of information. The better informed we are, the better position we are in to make decisions. d) Financial Resources. This resource is as important as the others. A failure to capitalize on the aforementioned resources often
results
in
greater
capital
resource
cost.
A
poor
organizational culture implies greater costs in friction. This inefficiency implies more monetary investment of to achieve goals. For example, when more procedures and controls are created bureaucracy increases.
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At this point, we must make special mention of the role modern information and communications technologies have performed and should continue to perform in the modernization of customs. Without doubt, the decisions that customs adopts in this environment are fundamental in the coming future not only in easing the flow (permitting more rapid customs dispatch) but in control as well (information is more systematized, received in advance and decisions can be adopted more rapidly). Well now, when customs makes a decision to invest in technologies, whether in the acquisition of new computer equipment or in the development of an operating network that permits the presentation of declarations
by
operators
using
the
latest
Information
and
Communications Technology, it is necessary that the personnel who are going to use it receive the necessary training and that adequate dissemination of the use of the new technologies be made to the economic operators. In the majority of the customs administrations there are presently computerized dispatch systems. However, in many the information that the operators supply is not adequately exploited. And on other occasions, in spite of the fact that the operators transmit the declaration
electronically
to
customs,
customs
requests
the
information on paper to compare with the information presented electronically by the operator.
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Customs should invest in the development of web platforms that allow the telematic presentation of declarations and other communications by the operators in a secure manner, accrediting the authenticity and integrity of the customs declarations and documents presented. Additionally it is possible to implement informatic systems to permit the electronic presentation of the documentation that should support customs declarations (invoices, transportation documents, licenses, authorizations, certificates of origin, etc). In these cases the customs will not require the presentation of the aforesaid documentation on paper.
In addition, computerizing the processes for presentation of customs declarations, it is necessary, with the object of combating threats and avoiding allowing the commercial logistics chain to be used to carry out acts of terrorism, to have non-intrusive inspection equipment with radiation detectors that will be utilized to carry out inspections in conformity with the results of risk analysis of as we will soon see. This equipment is indispensable for the rapid inspection of cargo or high risk containers without interrupting the flow of legitimate commerce. It is necessary to proceed to evaluate the cost of acquisition or alternatively the cost of rental (for that you can employ cost benefit analysis) as well as the installations where they should be located. The best option for that is to analyze the configuration of the customs area and choose the zone through which the greatest number of containers should transit. In turn, that area must be sufficiently ample as not to block the passage of other means of transportation that transit the area.
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III.2. Making decisions in planning customs: objectives
The first decisions that should be made on the part of a customs authority, whatever its form of organization, to which we will refer later, is in reference to the phase identified with planning, i.e., the delimitation of what are the fundamental goals or objectives that customs should accomplish. Modern customs organizations have sufficiently systematized what their principal goals are, which should lead to the attainment of their first level objective, the supervision of international commerce, for example: a) Protection of financial interests. This has been the principal role traditionally entrusted to customs authorities: to see that the merchandise that enters and leaves its frontiers is burdened with the duties that are established in relation to its importation or exportation. This is a fiscal or tax collection objective that should be related to the specific importance or weight that customs has in the country budget. The greater the importance of customs as a source of public income, the greater the pressure will be brought to bear in regard to it and the greater preponderance it will acquire, in relation to that, customs duties collection must be the highest possible.
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Also it is necessary to bear in mind here that the modification of customs duties is a commercial policy instrument that may or may not reside in the sovereignty of a country. In those cases in which the countries are grouped in a customs union, as in the case of the European Union, countries may not have capability in themselves of fixing the duties that affect the entrance or exit of merchandise, since there is a single customs territory and there has been a cession of sovereignty and of decision making in this matter in favor of the community institution, the Customs Union. b) Prevention and repression of contraband. It is a classic objective that is attributed to all customs authorities. c) Guaranteeing the security and protection of the country or of the Customs Union and its citizens, in particular: •
Protection of consumer health.
•
Protection of the environment.
•
Protection of industrial and intellectual property (piracy and falsification).
•
Protection of the supply chain (international merchandise logistics chain). The intention is not to merely control one operation but to secure all the links in the chain, from the manufacturer in the third country to the importer in the importing country. Logically this requires collaboration and international agreements and mutual recognition of the customs controls imposed by other countries.
•
Protection from unfair and illegal competition, supporting legitimate activities.
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These functions have increased in importance as a consequence of the growth of commerce, above all with Asia, as a result of the September 11 terrorist attacks and the dismantling of customs by virtue of the different accords reached in the World Trade Organization (WTO). d) Equilibrium among customs controls and the facilitation of the legitimate commerce. These objectives or goals exist because customs must react to problems. We must make a decision, choose the proper objectives of the customs administration. There are some risks we must face. We can systematize these risks (problems) as follows: •
Customs: Related to evasion of the payment customs duties, taking into account the elements determining the calculation of duties, such as value, origin and classification.
•
Security: Nuclear weapons, radioactive materials, biological weapons, illegal trafficking in persons.
•
Public Health: Narcotics, counterfeit medications or in poor state, contaminated food.
•
Environment: Ozone-depleting substances (SDOs), exports of dangerous waste, dangerous chemical products.
•
Consumers: Dangerous toys, counterfeit merchandise, quality of the products.
•
Fiscal: Smuggling, tax fraud, illegal collection of assistance, indirect tax devolutions…
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These are objectives of the customs administration: •
Protection: protect its citizens and financial interests.
•
Competition: encourage the business competitiveness that carries out legitimate commerce.
•
Facilitation: facility legal commerce more.
•
Control: control and manage the supply chain utilized for international merchandise traffic.
•
Cooperation: maintain, develop and strengthen the quality of cooperation between customs authorities, between those authorities and other state agencies, and between customs and economic operators.
Each country, each Customs Union, must decide which, among the different objectives mentioned, should be given greater or less preponderance in its daily activities. Giving greater importance to one or another objective responds to each country or Customs Union’s own interests, to the importance of customs as a source of income in the
country’s
budget
and
to
commercial
and
customs
policy
measures, among other considerations. In order to follow the evolution and degree of success in attaining its objectives
each
customs
authority
should
have
a
measuring
instrument: the objectives plan. Without prejudice to the fact that the principal planning tools will be analyzed in more detail in another course, taking into account the fact that customs is not restricted to being a mere collection agency, but that it has much broader qualitative objectives, the objectives plan should also measure activities that customs develops. The following can be a simplified structure model of the objectives plan: 84
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QUANTITATIVE RESULTS: Include not only the income received during the voluntary payment period from operators in consequence of the dispatch of consumer merchandise but also income derived from control proceedings customs officially files. It should also include the reduction of the duties devolutions formulated by the operators. QUALITATIVE RESULTS: Should include facilitation as well as control proceedings: •
Number of declarations presented by telematic means.
•
Number of declarations presented with scanned documents attached.
•
Average dispatch time.
•
Control of operations, of an intensive or investigative nature as well as extensive: o
Number of declarations controlled.
o
Number of customs establishments visited, etc.
III.3. Making customs organization decisions
Once objectives are defined, customs should think about what the most adequate organization would be to obtain those objectives. It requires making organizational decisions. The models in this area are quite varied but all coincide in having a centralized organization and a decentralized organization.
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The Directorate or Bureau of Customs houses the central services and the various Sub directorates are entrusted with the different tasks: management of customs, international relations, investigation, and laboratory. Below, by way of example, is the organization of the central services of the Department of Customs and Special Imposts of Spain: Figure No. 3.1. Central services of the Department of Customs and Special Imposts of Singapore
Source: Singapore customs
In the territorial services, depending on each countryâ&#x20AC;&#x2122;s structure policy there may be a regional and local organization or only local. 86
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Figure No. 3.2. Regional services organization
Source: Example from the web only for learning purpose
In any case, it is fundamental that adequate channels of collaboration be defined between the territorial and central services and vice versa, since the aforesaid channels will be utilized to direct and transfer decisions made in the central services to the territorial services as well as all the information flowing in both directions.
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Because decisions adopted on the various aspects of customs refer to questions of control or facilitation, investments or human resources, they must be communicated and transferred from the central services to the territorial. Decisions must be made about the medium and the form. a) In relation to the medium, at the present time, with existing technologies, the transfer of decisions by means of email, after the establishment of an adequate communication protocol, is the most rapid and efficient medium and it permits the broadest dissemination of information. b) In relation to the forma, decisions should preferably adopt the written form and materialize in service instructions or notes from the Director or from one of the assistant directors with jurisdiction in the matter. It is very important that a protocol exists that defines who should communicate a decision, to whom and what the distribution should be given to the decision, with the object of assuring that the personnel in question they have proper knowledge of the same. With respect to the distribution of information, we must distinguish whether it is general or critical information or intelligence that affects the gathering of data is being carried in regard to specific economic operators. General information can communicated by email. However, for information that affects economic operators, appropriate corporate computer applications must be that allow recording the information and, if appropriate, advance in the documentary management of the information, with timely definition of the levels of access to such files (i.e., explicitly state what personnel and what environment can access that information).
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Finally, it is convenient to have a centralized structure because the
flow
of
intelligence
information
to/from
the
territorial/regional services as well as to/from the requests for mutual assistance received from other customs authorities is channelized from a central operation.
III.4. Decision making in customs control
The Kyoto Convention, revised in 1999, establishes the principle keys of customs control: •
Management of risk.
•
Compliance measures.
•
Auditing controls.
•
Authorized operators.
•
Cooperation between Customs.
•
Cooperation between Customs and business.
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Figure No. 3.3. Principle keys of customs control
Risk management
Enhance customs Controls
Advance information
Trustess partners from the supply chain
Trade Facilitation
MRA Mutal Recognition agreements
CONTROL
Source: Document elaborated by the author
Decisions have to be made in regard to all these questions by the customs authority.
III.4.1. Management and risk control
The WCO Columbus Program report on customs tendencies and practices places special emphasis on the management of risk in customs.
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In effect, it states that the analysis of risk is the keystone of a balanced, modern customs administration. Risk analysis is a measure to control and facilitate trade. Taking into account the multiplication of international merchandise trade in recent years, it is impossible to physically control all the shipments. Additionally, the decision to control or not to control a specific shipment cannot be exclusively random. Customs has internal information available, supplied by its own operators, and external as well, supplied by other agencies. Such information
should
be
exploited
by
means
of
an
adequate
computerized risk analysis system. On the one hand, risk analysis in customs permits reliable operators to obtain responses on their merchandise passing through customs with greater fluidity, because the merchandise is submitted to fewer physical and documentary controls. And on the other, fewer controls on reliable operators permit resources to be freed to concentrate on selecting the containers and cargos of higher risk operators. In addition, it is necessary for the risk analysis parameters to be centered not only in the collection of customs duties income but also on such aspects as security and the protection of society. Risk management should be implemented in a harmonized manner throughout all the customs territory and it is therefore necessary that it be put in place in the same form throughout the country. Some
customs
administrations
see
negative
aspects
in
risk
management, aspects that should definitively be eliminated from any Concepcion of modern customs. Some of these negative aspects are:
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•
Module. 2
If more shipments are inspected more customs duties will be collected. Customs controls are kept high in applying risk analysis and selection, which weakens the purpose of risk analysis and causes unnecessary delays in legal trade.
•
Sometimes the relationship between controlling and facilitating trade is not understood, being too strict in imposing controls or not being rigorous enough.
•
Total implementation of a rigorous focus on risk management is often seen as a threat to existing customs controls and not as an advantage.
Selection of the shipments to control by means of a risk management system: •
Permits a more rapid dispatch of the merchandise.
•
Permits locating risk areas. Contributes to achieving a balance between facilitating trade and customs control, allowing customs to distribute its resources to higher risk areas.
There are various levels of risk management: •
Strategic: determines areas of risk, discarding those of less importance. Includes the decision as to what sectors should be considered risky and in regard to what should considered risk indicators and profiles.
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â&#x20AC;˘
Module. 2
Operational: determines the level of control necessary for treating the risk evaluated. Once the system determines that a shipment should be controlled, what factors condition the decision
of
whether
to
effect
documentary
or
physical
confirmation? â&#x20AC;˘
Tactical: used by the personnel to deal with immediate situations and to decide what shipments require greater control.
A customs authority should ask itself some questions that condition the decisions adopted related to the risk management system:
Should there be a centralized or decentralized risk analysis system? Should a local customs unit have the capability of deciding what shipments to control or should that information come given by the risk management system? Once the system determines that a shipment should be controlled, should it be possible for customs personnel on the basis of information that he has to be able to modify the type of control to be effected?
III.4.2. Control mechanisms: execution of actions derived from risk analysis
At what time should the customs authority intervene? Should it always adopt its decision at the time that the merchandise has arrived at the customs facility or is it possible to anticipate the decision or delay it? Traditionally the majority of customs decisions are made at the time that the merchandise is presented at the customs facility because it is at that time that physical control of the merchandise can be effected. 93
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However,
many
countries
Module. 2
and
Customs
Unions
now
require
information before the merchandise arrives, in accordance with the WCO SAFE Framework of Standards to Secure and Facilitate Global Trade recommendation. That makes possible the systematic analysis of a great quantity of information before the merchandise has arrived at the destination airport or port, permitting early decisions. That is the case in Europe, where any merchandise introduced that originate in a third country must come supported by a summary declaration of entry presented by the transportation company (steamship or airline) or its consignee in advance of the arrival of the merchandise. The presentation of that information in electronic form makes possible its rapid processing and sharing among the customs authorities of the different countries of the European Union. Thus, there will be shipments that must necessarily, independent of their final destination inside or outside Europe, be subjected
to
the
control
of
the
first
customs
at
which
the
transportation medium carrying them stops in Europe. In other cases, although a risk has been detected, the control derives from the moment of presentation of the declaration in customs, since it is merchandise that is going to be dispatched at the first port of entry. Undoubtedly, the customs declaration provides the most complete information with respect to which it is necessary to effect a detailed computer analysis in order to decide what part of the information that it contains should be employed to establish the risk profiles and criteria which should be submitted to the risk management system to which we have previously made reference. Finally, a posteriori control can be carried out: â&#x20AC;˘
Immediately after releasing the merchandise, by visiting the importerâ&#x20AC;&#x2122;s establishment.
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•
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By means of a documentary review of the declaration in customs.
•
Conducting an in-depth audit of all the operations
and
accounting annotations of a specific economic operator.
What types of risk permit control to be deferred a posteriori? What should be an adequate percentage of shipments subjected to physical control? Should the customs authority invest in the acquisition of X-ray equipment that permits scanning the means of transportation? What advantages are associated with that? What role do frontier and interior customs posts play? Should they effect the same controls? What elements should be evaluated in an audit control procedure? Can customs access the operator’s information from its own system?
To exercise control, customs must choose what specific weight should be given to verification prior to the dispatch, during the dispatch and after the dispatch.
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III.4.3. Authorized economic operators. Customs-business collaboration
At the present time, modern customs do not center their attention on the control of one specific operation effected by one importer, but on the whole system, on the complete logistical chain. They are not only interested in the importer being reliable, but also the product manufacturer, the exporter, the consignee, the transporter, the customs agent or the owner of the warehouse or customs depository. It is necessary to seek an association with the private sector (CUSTOMS-BUSINESS pillar of the WCO SAFE Framework) with the object of granting advantages in the form of simplifications and fewer controls to those operators who accredit their compliance with a series of requirements that makes worthy of being granted the status of AUTHORIZED ECONOMIC OPERATOR (that is the terminology employed in Europe and other countries; also referred to as VIP Client, Golden Client or C-TPAT [Customs-Trade Partnership Against Terrorism]).
What decisions should customs make to differentiate some operators from others and, finally, how should the auditing procedure be implemented? Once an operator has been recognized as AEO, what should customs do in order for him to be recognized the advantages to which he has a right?
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III.4.4. Customs-customs collaboration
Finally, the CUSTOMS-CUSTOMS pillar of the WCO SAFE Framework invites the customs authorities to carry out close collaboration and cooperation, by means of the exchange of information useful for the control of customs procedures and regimens. What mechanisms should customs put into effect for the exchange of information? When and through what means? This collaboration should also be extended to all those agencies charged with inspections at the frontier (human, animal and animal health and quality control, etc.), commonly known as para-customs control agencies. What mechanisms can be utilized to facilitate flow of goods in those declarations that are subject only to the control of para-customs agencies?
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Unit summary
Customs, the same as other organizations, must make important decisions on such matters as financial resources, human resources and technology. Customs should decide what its objectives are, what it wants to attain in function of customs risk and not customs identified. There are traditional objectives such as the protection of financial resources (the objective of collection) and newer objectives such as integral control of the international logistics chain. Customs must seek a balance among objectives to be attained assigning priorities and weights. Customs must decide how organize itself to attain its goals. Customs must seek a balance between a centralized and a decentralized organization. In the control environment customs must make decisions in regard to such questions as: •
Risk management.
•
Establishment of control mechanisms before, during and after customs dispatch.
•
Advantages to authorized operators.
•
Cooperation between Customs.
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Bibliography
•
HARRISON, E. FRANK. (October 1, 1998). The Managerial Decision-Making Process. Cengage Learning; 5th edition.
•
HERBERT
SIMON.
(1962).
El
comportamiento
administrativo. Estudio de los procesos decisorios en la organización administrativa [Administrative Behavior. Study of the Decision Processes in the Adminisrative Organization], Aguilar, Madrid. •
MOODY PAUL E. Toma de decisiones gerenciales [Making of Managerial Decisions]. Editorial McGraw Hill Latinoamericana, S.A.
•
SAATY,
THOMAS
L.
(June
1,
2000).
Fundamentals
of
Decision Making and Priority Theory With the Analytic Hierarchy Process. RWS Publications; 1st edition
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