0154M - Management Support Systems

Week 4
Modeling and Analysis

Session Learning Objectives

Understand the basic concepts of management
support system (MSS) modeling
Describe how MSS models interact with data and
the users
Understand the well-known model classes and
decision making with a few alternatives
Describe how spreadsheets can be used for MSS
modeling and solution
Explain the basic concepts of optimization,
simulation and heuristics; when to use them

Session Learning Objectives (continue ..)

Describe how to structure a linear programming
model
Understand how search methods are used to
solve MSS models
Explain the differences among algorithms, blind
search, and heuristics
Describe how to handle multiple goals
Explain what is meant by sensitivity analysis,
what-if analysis, and goal seeking
Describe the key issues of model management

Opening Vignette:
Model-Based Auctions Serve More Lunches
in Chile
Background: problem situation
Proposed solution
Results
Answer and discuss the case questions

4
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Modeling and Analysis

Topics

Modeling for MSS (a critical component)

Static and dynamic models
Treating certainty, uncertainty, and risk
Influence diagrams (in the posted PDF file)
MSS modeling in spreadsheets
Decision analysis of a few alternatives
(with decision tables and decision trees)

5
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Modeling and Analysis

Topics
Optimization via mathematical
programming
Heuristic programming
Simulation
Model base management

6
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

MSS Modeling
A key element in most MSS
Leads to reduced cost and increased revenue

DuPont Simulates Rail Transportation System and Avoids

Costly Capital Expenses

Procter & Gamble uses several DSS models collectively to

support strategic decisions
Locating distribution centers, assignment of DCs to
warehouses/customers, forecasting demand, scheduling
production per product type, etc.
Fiat, Pillowtex (operational efficiency)
7
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Major Modeling
Issues
Problem identification and environmental
analysis (information collection)
Variable identification
Influence diagrams, cognitive maps

Forecasting/predicting
More information leads to better prediction

Multiple models: A MSS can include several

models, each of which represents a different
part of the decision-making problem
Categories of models >>>

Model management
8
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Categories of
Models
Category

Objective

Techniques

Optimization of
problems with few
alternatives

Find the best solution from a

small number of alternatives

Decision tables, decision

trees

Optimization via
algorithm

Find the best solution from a

large number of alternatives
using a step-by-step process

Linear and other

mathematical
programming models

Optimization via an
analytic formula

Find the best solution in one

step using a formula

Some inventory models

Simulation

Find a good enough solution by

experimenting with a dynamic
model of the system

Several types of
simulation

Heuristics

Find a good enough solution

using common-sense rules

Heuristic programming
and expert systems

Predictive and other

models

Predict future occurrences,

what-if analysis,

Forecasting, Markov
chains, financial,

Copyright @2010 Pearson

Education, Inc.Publishing as
Prentice Hall

Static and Dynamic

Models
Static Analysis
Single snapshot of the situation
Single interval
Steady state

Dynamic Analysis

Dynamic models
Evaluate scenarios that change over time
Time dependent
Represents trends and patterns over time
More realistic: Extends static models
10

Copyright @2010 Pearson Education,

Inc.Publishing as Prentice Hall

Decision Making:
Treating Certainty,
Uncertainty and Risk
Certainty Models
Assume complete knowledge
All potential outcomes are known
May yield optimal solution

Uncertainty
Several outcomes for each decision
Probability of each outcome is unknown
Knowledge would lead to less uncertainty

Risk analysis (probabilistic decision

making)
Probability of each of several outcomes occurring
Level of uncertainty => Risk (expected value)
11
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Certainty, Uncertainty
and Risk

12
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Influence Diagrams
(Posted on the Course
Website)
Graphical representations of a model
Model of a model
A tool for visual communication
Some influence diagram packages create and solve
the mathematical model
Framework for expressing MSS model relationships
Rectangle = a decision variable
Circle = uncontrollable or intermediate variable
Oval = result (outcome) variable: intermediate or final
Variables are connected with arrows indicates the direction of
influence (relationship)
13
Copyright @2010 Pearson Education, Inc.Publishing as Prentice Hall

Influence Diagrams:
Relationships
CERTAINTY
Amount in
CDs

Interest
Collected

UNCERTAINTY

The shape of the

arrow indicates the
type of relationship

Price
Sales

RANDOM (risk) variable: Place a tilde (~) above the variables name
~
Demand
Sales

14
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Influence Diagrams:
Example
An influence diagram for the profit model
Unit Price
~
Amount used in
Advertisement

Income
Units Sold
Profit

Unit Cost
Profit = Income Expense
Income = UnitsSold * UnitPrice
UnitsSold = 0.5 * Advertisement Expense
Expenses = UnitsCost * UnitSold + FixedCost

Expenses

Fixed Cost
Copyright @2010 Pearson
Education, Inc.Publishing as
Prentice Hall

15

Influence
Diagrams:
Software
Analytica, Lumina Decision Systems
Supports hierarchical (multi-level) diagrams

DecisionPro, Vanguard Software Co.

Supports hierarchical (tree structured) diagrams

DATA Decision Analysis, TreeAge Software

Includes influence diagrams, decision trees and simulation

Definitive Scenario, Definitive Software

Integrates influence diagrams and Excel, also supports
Monte Carlo simulations

PrecisionTree, Palisade Co.

Creates influence diagrams and decision trees directly in an
Excel spreadsheet
16
Copyright @2010 Pearson Education, Inc.Publishing as Prentice Hall

Analytical Influence Diagram of a Marketing

Problem: The Marketing Model

Thank You
Copyright @2010 Pearson
Education, Inc.Publishing as
Prentice Hall

17

Analytica: The Price Submodel

Thank You
Copyright @2010 Pearson
Education, Inc.Publishing as
Prentice Hall

18

Analytica: The Sales Submodel

Thank You
Copyright @2010 Pearson
Education, Inc.Publishing as
Prentice Hall

19

MSS Modeling with

Spreadsheets
Spreadsheet: most popular end-user modeling
tool
Flexible and easy to use
Powerful functions : Add-in functions and solvers
Programmability (via macros)
What-if analysis
Goal seeking
Simple database management
Seamless integration of model and data
Incorporates both static and dynamic models
Examples: Microsoft Excel, Lotus 1-2-3
20
Copyright @2010 Pearson Education, Inc.Publishing as Prentice Hall

Excel spreadsheet - static

model example: Simple
loan calculation of monthly
payments

F P(1 i ) n
i (1 i ) n
A P

n
(
1

i
)

21
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Excel spreadsheet - Dynamic model example:

Simple loan calculation of monthly payments & effects of
prepayment

Copyright @2010 Pearson Education,

Inc.Publishing as Prentice Hall

22

Decision Analysis: A Few

Alternatives
Single Goal Situations
Decision tables
Multiple criteria decision
analysis
Features include decision
variables (alternatives),
uncontrollable variables,
result variables
Decision trees
Graphical representation of
relationships
Multiple criteria approach
Demonstrates complex
relationships
Cumbersome, if many
alternatives exists
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

23

Decision Tables
Investment example
One goal: maximize the yield after one year
Yield depends on the status of the economy
(the state of nature)
Solid growth
Stagnation
Inflation
24
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Investment
Example:
Possible
Situations

1. If solid growth in the economy, bonds yield

12%; stocks 15%; time deposits 6.5%
2. If stagnation, bonds yield 6%; stocks 3%; time
deposits 6.5%
3. If inflation, bonds yield 3%; stocks lose 2%;
time deposits yield 6.5%
25
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Investment Example:
Decision Table

Payoff Decision variables (alternatives)

Uncontrollable variables (states of economy)
Result variables (projected yield)
Tabular representation:

Copyright @2010 Pearson Education,

Inc.Publishing as Prentice Hall

26

Investment Example: Treating

Uncertainty
Optimistic approach
Pessimistic approach
Treating Risk:
Use known probabilities
Risk analysis: compute expected values

27
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Decision Analysis: A Few

Alternatives
Other methods of treating risk
Simulation, Certainty factors, Fuzzy logic

Multiple goals
Yield, safety, and liquidity

28
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

MSS Mathematical
Models

Non-Quantitative Models (Qualitative)

Captures symbolic relationships between
decision variables, uncontrollable variables
and result variables
Quantitative Models: Mathematically links
decision variables, uncontrollable variables,
and result variables
Decision variables describe alternative
choices.
Uncontrollable variables are outside
decision-makers control
Result variables
are
dependent on chosen 29
Copyright @2010
Pearson
Education, Inc.Publishing as
combination
ofHalldecision variables and
Prentice

MSS Mathematical
Models
Uncontrollable
Variables

Decision
Variables

Mathematical
Relationships

Result
Variables

Intermediate
Variables
Copyright @2010 Pearson
Education, Inc.Publishing as
Prentice Hall

30

Optimization
via Mathematical
Programming
Mathematical Programming
A family of tools designed to help solve
managerial problems in which the decision
maker must allocate scarce resources among
competing activities to optimize a measurable
goal

Optimal solution: The best possible solution

to a modeled problem
Linear programming (LP): A mathematical model
for the optimal solution of resource allocation
problems. All the relationships are linear
31
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

LP Problem
Characteristics
1.Limited quantity of economic resources
2.Resources are used in the production of
products or services
3.Two or more ways (solutions, programs)
to use the resources
4.Each activity (product or service) yields a
return in terms of the goal
5.Allocation is usually restricted by
constraints
32
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Linear Programming
Steps
1. Identify the
Decision variables
Objective function
Objective function coefficients
Constraints

Line

Capacities / Demands

2. Represent the model

LINDO: Write mathematical formulation
EXCEL: Input data into specific cells in Excel

3. Run the model and observe the results

33
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

LP Example
The Product-Mix Linear Programming
Model

MBI Corporation
Decision: How many computers to build next month?
Two types of mainframe computers: CC7 and CC8
Constraints: Labor limits, Materials limit, Marketing lower limits
CC7
CC8
Rel Limit
Labor (days)
300500<= 200,000 /mo
Materials ($)
10,000 15,000 <= 8,000,000 /mo
Units 1 >= 100
Units 1 >= 200
Profit ($) 8,000 12,000 Max

Objective: Maximize Total Profit / Month

34
Copyright @2010 Pearson Education, Inc.Publishing as Prentice Hall

LP Solution

35
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

LP Solution

Decision Variables:
X1: unit of CC-7
X2: unit of CC-8

Objective Function:
Maximize Z (profit)
Z=8000X1+12000X2

Subject To
300X1 + 500X2 200K
10000X1 + 15000X2
8000K
X1 100
X2 200

36
Copyright @2010 Pearson Education, Inc.Publishing as Prentice Hall

 Sensitivity

Sensitivity, What-if,
and
Goal
Seeking Analysis

Assesses impact of change in inputs on outputs

Eliminates or reduces variables
Can be automatic or trial and error

What-if
Assesses solutions based on changes in variables or
assumptions (scenario analysis)

Goal seeking
Backwards approach, starts with goal
Determines values of inputs needed to achieve goal
Example is break-even point determination
37
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Heuristic
Programming
Cuts the search space
Gets satisfactory solutions
more quickly and less
expensively
Finds good enough
feasible solutions to very
complex problems
Heuristics can be
Quantitative
Qualitative (in ES)

Traveling Salesman
Problem >>>
Copyright @2010 Pearson Education, Inc.Publishing as Prentice Hall

38

Heuristic Programming SEARCH

Copyright @2010 Pearson Education,

Inc.Publishing as Prentice Hall

39

Traveling Salesman
Problem
What is it?
A traveling salesman must visit customers in
several cities, visiting each city only once, across
the country. Goal: Find the shortest possible route
Total number of unique routes (TNUR):
TNUR = (1/2) (Number of Cities 1)!
Number of Cities TNUR
5
12
6
60
9
20,160
20
1.22 1018
40
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

When to Use
Heuristics
When to Use Heuristics

Inexact or limited input data

Complex reality
Reliable, exact algorithm not available
Computation time excessive
For making quick decisions

Limitations of Heuristics

Cannot guarantee an optimal solution

41

Copyright @2010 Pearson Education,

Inc.Publishing as Prentice Hall

Modern Heuristic
Methods
Tabu search
Intelligent search algorithm
Genetic algorithms
Survival of the fittest
Simulated annealing
Analogy to Thermodynamics
42
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Simulation
Technique for conducting experiments
with a computer on a comprehensive
model of the behavior of a system
Frequently used in DSS tools

43
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Major
Characteristics of
Simulation
Imitates reality and capture its richness

Technique for conducting experiments

Descriptive, not normative tool
Often to solve very complex problems
Simulation is normally used only when a
problem is too complex to be treated
using numerical optimization techniques

44
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Advantages of
Simulation

The theory is fairly straightforward

Great deal of time compression
Experiment with different alternatives
The model reflects managers perspective
Can handle wide variety of problem types
Can include the real complexities of problems
Produces important performance measures
Often it is the only DSS modeling tool for
non-structured problems
45

Copyright @2010 Pearson Education,

Inc.Publishing as Prentice Hall

Limitations of
Simulation
Cannot guarantee an optimal solution
Slow and costly construction process
Cannot transfer solutions and inferences
to solve other problems (problem
specific)
So easy to explain/sell to managers, may
lead overlooking analytical solutions
Software may require special skills
46
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Simulation
Methodology

Model real system and conduct repetitive experiments.

Steps:
1.
2.
3.
4.

Define problem
5. Conduct experiments
Construct simulation model 6. Evaluate results
Test and validate model
7. Implement solution
Design experiments

47
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Simulation Types
Stochastic vs. Deterministic Simulation
In stochastic simulations: We use distributions (Discrete
or Continuous probability distributions)

Time-dependent vs. Time-independent Simulation

Time independent stochastic simulation via Monte Carlo
technique (X = A + B)

Discrete event vs. Continuous simulation

Steady State vs. Transient Simulation
Simulation Implementation
Visual simulation
Object-oriented simulation
48
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Visual Interactive
Modeling (VIM) / Visual
Interactive Simulation
(VIS)

Visual interactive modeling (VIM)

Also called
Visual interactive problem solving
Visual interactive modeling
Visual interactive simulation

Uses computer graphics to present the

impact of different management decisions
Often integrated with GIS
Users perform sensitivity analysis
Static or a dynamic (animation) systems
49
Copyright @2010 Pearson Education,
Inc.Publishing as Prentice Hall

Model Base
Management
MBMS: capabilities similar to that of
DBMS
But, there are no comprehensive model
base management packages
Each organization uses models
somewhat differently
There are many model classes
Within each class there are different
solution approaches

Relations MBMS
Object-oriented MBMS

Copyright @2010 Pearson Education,

Inc.Publishing as Prentice Hall

50

Thank You