AHP stands for Analytic Hierarchy Process. It is a multi-criteria decision making method, originally developed by Prof. Thomas L. Saaty. AHP derives ratio scales from paired comparisons of criteria, and allows for some small inconsistencies in judgments.
Inputs can be actual measurements, but also subjective opinions. As a result, ratio scales (weightings) and a consistency index will be calculated. For decision making with multiple inputs from different stakeholders, the geometric mean of individual inputs is used.
Mathematically the method is based on the solution of an Eigen value problem. The results of the pair-wise comparisons are arranged in a matrix. The first normalized Eigenvector of the matrix gives the ratio scale (weighting), the largest Eigenvalue determines the consistency ratio.
An explanation of the method can be found in my video on Youtube.
AHP can be applied in many fields:
- Evaluation of product features,
- Cost-Benefit Analysis,
- Strategy development,
- Selection of Key Performance Indicators,
- Deriving weights for a combined performance index,
- Deriving a consolidated scale of importance from different inputs.
We used AHP for the evaluation of weights for the combined service index and the hotline performance index. We also applied the method to evaluate the importance of different strategies, using multiple inputs from different colleagues, and to find the ranking of financial key performance indicators for the operational performance assessment of our companies.