# Spreadsheet Modeling & Decision Analysis: - PowerPoint 2 by jAPU0Zk

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```									Introduction to Modeling
& Problem Solving
Introduction

 We face numerous decisions in life &
 We can use computers to create
models and analyze the potential
outcomes of decision alternatives.
 Spreadsheets are the tool of choice for
today’s managers.
What is Management Science?

 A field of study that uses computers,
statistics, and mathematics to solve
 Also known as:
– Operations research
– Decision science
Home Runs
in Management Science
 Waste Management
– Leading waste collection company in North
America
– 26,000 vehicles service 20 million residential &
2 million commercial customers
– Developed vehicle routing optimization system
– Benefits:
Eliminated 1,000 routes
Annual savings of \$44 million
Models
 Changing the real truck routes just to see
what happens would be foolish.
 Instead, they used a model
 Models are just representations of real
things
 Groups: think of 5 models
The Modeling Approach
to Decision Making
 Everyone uses models to           exams   Homew ork

make decisions.                                             0                                                                                         8/22/2006 10:43

 Types of models:
Homework and projects (100 possible)
Watch out. Homew ork not turned in w hen I call for it in class w ill
not usually be accepted.
Points avail Points earned
to date      to date
Linear programming               20
Probability                      20
Decision analysis                20

– Mental (arranging furniture)
Project management               20
Inventories                      20

– Visual (blueprints, road                                 Totals                                      100                     0

maps)
Exams (400 possible)

Points avail Points earned
to date      to date
1                           100
2                           100

– Physical/Scale
3                           100
4                           100
Totals                                   400                0

Grades                                               Total points earned to date (est.)     0.00
A                90%              450.00                          Total points avail to date (est)     500.00

(aerodynamics, buildings)                                      B
C
D
80%
70%
60%
400.00
350.00
300.00
F

– Mathematical (what we’ll
be studying: net income,
dow jones stock average)
What is a “Computer Model”?

 A set of mathematical relationships called
“functions,” which are based on logical
assumptions and programmed into a
computer as a representation of a real-
world object or phenomenon.
Characteristics 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
Benefits 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.
 In pairs, create a spreadsheet that
calculates profit, based on revenues and
expenses, that is:
Profit = Revenue - Expenses
usually use.
they are a lot like accounting worksheets.
 However, mathematicians have a different
mathematical models as functions and use
mathematical notation.
mathematical function notation
C1 = A1 * B1
or
Profit = Revenue - Expenses
or
Profit = f(Revenue, Expenses)
or
Y=   f(X1, X2)
A 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

 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).
The Problem Solving Process

Identify   Formulate &
Problem     Implement    Analyze       Test     Implement
Model       Model       Results    Solution

unsatisfactory
results
Good 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 can’t guarantee good
outcomes.

```
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