Title: Spreadsheet Modeling
1Spreadsheet Modeling Decision Analysis
- A Practical Introduction to Management Science
- 4th edition
- Cliff T. Ragsdale
2Introduction to Modeling Problem Solving
Chapter 1
3Introduction
- We face numerous decisions in life business.
- We can use computers to analyze the potential
outcomes of decision alternatives. - Spreadsheets are the tool of choice for todays
managers.
4What is Management Science?
- A field of study that uses computers, statistics,
and mathematics to solve business problems. - Also known as
- Operations research
- Decision science
5Home Runs in Management Science
- Merril Lynch
- 5 million customers
- 16,000 financial advisors
- Developed a model to design product features and
pricing options to better reflect customer value - Benefits
- 80 million increase in annual revenue
- 22 billion increase in net assets
6Home Runs in Management Science
- Jan de Wit Co.
- Brazils largest lily farmer
- Annually plants 3.5 million bulbs and produces
420,000 pots 220,000 bundles of lilies in 50
varieties. - Developed model to determine what to plant, when
to plant it, and how to sell it. - Benefits
- 26 increase in revenue
- 32 increase in contribution margin
7Home Runs in Management Science
- NBC
- Must determine program schedules
- Schedules must meet advertisers demographic and
cost requirements - Developed optimization model to determine optimal
timing and pricing of commercials - Benefits
- 50 million increase in annual revenue
8Home Runs in Management Science
- Samsung Electronics
- Leading DRAM manufacturer
- Semiconductor facilities cost 2-3 billion
- High equipment utilization is key
- Developed comprehensive planning and scheduling
system to control WIP - Benefits
- Cut cycle times in half
- 1 billion increase in annual revenue
9What is a Computer Model?
- A set of mathematical relationships and logical
assumptions implemented in a computer as an
abstract representation of a real-world object of
phenomenon. - Spreadsheets provide the most convenient way for
business people to build computer models.
10The Modeling Approach to Decision Making
- Everyone uses models to make decisions.
- Types of models
- Mental (arranging furniture)
- Visual (blueprints, road maps)
- Physical/Scale (aerodynamics, buildings)
- Mathematical (what well be studying)
11Characteristics of Models
- Models are usually simplified versions of the
things they represent - A valid model accurately represents the relevant
characteristics of the object or decision being
studied
12Benefits of Modeling
- Economy - it is often less costly to analyze
decision problems using models. - Timeliness - models often deliver needed
information more quickly than their real-world
counterparts. - Feasibility - models can be used to do things
that would be impossible. - Models give us insight understanding that
improves decision making.
13Example of a Mathematical Model
- Profit Revenue - Expenses
- or
- Profit f(Revenue, Expenses)
- or
- Y f(X1, X2)
14A Generic Mathematical Model
Y f(X1, X2, , Xn)
Where
Y dependent variable (aka
bottom-line performance measure) Xi
independent variables (inputs having an impact on
Y) f(.) function defining the relationship
between the Xi Y
15Mathematical Models Spreadsheets
- Most spreadsheet models are very similar to our
generic mathematical model
Y f(X1, X2, , Xn)
- Most spreadsheets have input cells (representing
Xi) to which mathematical functions ( f(.)) are
applied to compute a bottom-line performance
measure (or Y).
16Categories of Mathematical Models
Model Independent OR/MS Category Form of
f(.) Variables Techniques
- Prescriptive known, known or under LP, Networks,
IP, - well-defined decision makers CPM, EOQ, NLP,
- control GP, MOLP
- Predictive unknown, known or under Regression
Analysis, - ill-defined decision makers Time Series
Analysis, - control Discriminant Analysis
- Descriptive known, unknown or Simulation,
PERT, well-defined uncertain Queueing,
Inventory Models
17The Problem Solving Process
Formulate Implement Model
Identify Problem
Analyze Model
Test Results
Implement Solution
unsatisfactory results ???
18The Psychology of Decision Making
- Models can be used for structurable aspects of
decision problems. - Other aspects cannot be structured easily and
require intuition and judgment. - Caution Human judgment and intuition is not
always rational!
19Anchoring Effects
- Arise when trivial factors influence initial
thinking about a problem. - Decision-makers usually under-adjust from their
initial anchor. - Example
- What is 1x2x3x4x5x6x7x8 ?
- What is 8x7x6x5x4x3x2x1 ?
20Framing Effects
- Refers to how decision-makers view a problem from
a win-loss perspective. - The way a problem is framed often influences
choices in irrational ways - Suppose youve been given 1000 and must choose
between - A. Receive 500 more immediately
- B. Flip a coin and receive 1000 more if heads
occurs or 0 more if tails occurs
21Framing Effects (Example)
- Now suppose youve been given 2000 and must
choose between - A. Give back 500 immediately
- B. Flip a coin and give back 0 if heads occurs
or give back 1000 if tails occurs
22A Decision Tree for Both Examples
23Good Decisions vs. Good Outcomes
- Good decisions do not always lead to good
outcomes...
- A structured, modeling approach to decision
making helps us make good decisions, but cant
guarantee good outcomes.
24End of Chapter 1