Decision Support and

Business Intelligence
Systems
(9th Ed., Prentice Hall)

Chapter 4:
Modeling and Analysis
 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 which
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 Learning Objectives
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
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 Modeling and Analysis Topics
Modeling for MSS (a critical component)
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)
Optimization via mathematical programming
Heuristic programming
Simulation
Model base management

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 Major Modeling Issues
Problem identification and environmental
analysis (information collection)
Variable identification
Influence diagrams, cognitive maps
Forecasting (predictive analytics):
More information leads to better prediction
Multiple models: A MSS/DSS can include
several models, each of which represents a
different part of the decision-making problem
Categories of models >>>
Model management
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 Categories of Models
Category Objective Techniques
Optimization of Find the best solution from a Decision tables, decision
problems with few small number of alternatives trees
alternatives
Optimization via Find the best solution from a Linear and other
algorithm large number of alternatives mathematical
using a step-by-step process programming models
Optimization via an Find the best solution in one step Some inventory models
analytic formula using a formula
Simulation Find a good enough solution by Several types of
experimenting with a dynamic simulation
model of the system
Heuristics Find a good enough solution Heuristic programming
using common-sense rules and expert systems
Predictive and other Predict future for a given scenario Forecasting models,
models , solve a what-if case using a Markov analysis, financial
formula modeling and waiting line
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 Major Modeling Issues

Knowledge-based modeling
Current trends in modeling:
Development of model libraries and solution technique
libraries (informs.org)
Development and use of web tools and software to access
and even run software to perform modeling, simulation.
Lack of understanding of what models and their solution
can do in the real world
Making MSS models completely transparent to decision
maker. For example
Multidimensional analysis (modeling)
A modeling method that involves data analysis in several
dimensions
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 Major Modeling Issues

Current trends
Model a model to help in its analysis.
Influence diagram
A graphical representation of a model; that is, it is
a model of model.
A diagram that shows the various types of
variables in a problem (e.g., decision, independent,
result) and how they are related to each other.

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 Structure of Mathematical Models for
Decision Support
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 of choices.
Uncontrollable variables are outside of decision-makers control
Result variables are dependent on chosen combination of decision variables
and uncontrollable variables

Uncontrollable
Variables

Decision Mathematical Result

Variables Relationships Variables
Intermediate
Variables
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 Decision Making:
Treating Certainty, Uncertainty and Risk
Decision making under certainty
Assume complete knowledge
All potential outcomes are known for each course of action
May yield optimal solution
Decision making under uncertainty
Several outcomes for each decision/course of action
Probability of occurrence of each outcome is unknown
Knowledge would lead to less uncertainty
Decision making under risk analysis (probabilistic
decision making)
Consider several possible outcomes for each alternative,
each with a given probability of occurrence.

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 Certainty, Uncertainty and Risk

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 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)

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 Influence Diagrams: Relationships
CERTAINTY

Amount in Interest
CDs Collected
The shape of
UNCERTAINTY
the arrow
indicates the
Price type of
Sales relationship
RANDOM (risk) variable: Place a tilde (~) above the variables name

~
Demand
Sales

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 Influence Diagrams: Example
An influence diagram for the profit model
Unit Price

~ Income
Amount used in
Advertisement Units Sold
Profit

Profit = Income Expense Unit Cost Expenses

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

Fixed Cost

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 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
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 Analytica Influence Diagram of a Marketing
Problem: The Marketing Model

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 Analytica: The Price Submodel

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 Analytica: The Sales Submodel

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 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)
Different functions, regression analysis, linear
programming
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
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 MSS Modeling with Spreadsheets
DSS related add-in:
Solver (Frontline Systems Inc-- sover.com)
WhatsBest! ( lindo.com)
Braincel ( promland.com)
NeuralTools ( palisade.com)
Esolver( Palisade Corp.)
@RISK (Palisade Corp.)

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 Excel spreadsheet - static model example:
Simple loan calculation of monthly payments

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Excel spreadsheet -
Dynamic model
example:
Simple loan
calculation of
monthly payments
and effects of
prepayment

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 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.
Distribution of machine time among various
products (allocation problem)

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 LP Problem Characteristics
1. Limited quantity of economic resources is
available for allocation.
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

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 Optimization
via Mathematical Programming

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 among variables are linear.
Best known technique in the family of optimization
tools and also called mathematical programming.

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 Linear Programming Steps
1. Identify the
Decision variables
Objective function
Objective function coefficients
Constraints
Capacities / Demands Line
Input/output coefficient

2. Represent the model

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

3. Run the model and observe the results

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 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) 300 500 <= 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

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 LP Solution

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 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

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 Multiple Goals ,Sensitivity, What-if,
and Goal Seeking Analysis
Multiple goal
Sensitivity analysis
Assesses impact of change in inputs on outputs
Eliminates or reduces variables
Can be automatic or trial and error
What-if analysis
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
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 Multiple Goals ,Sensitivity, What-if,
and Goal Seeking Analysis

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 Multiple Goals ,Sensitivity, What-if,
and Goal Seeking Analysis

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 Decision Analysis with Decision Table
and Decision Tree
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
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 Decision Analysis with Decision Table
and Decision Tree
Decision Tree

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 Decision Tables
Investment example
Investing in one of three alternatives: bonds,
stocks and certificate of deposit (CD)
One goal: maximize the yield after one year

Yield depends on the status of the economy

(the state of nature)
Solid growth
Stagnation
Inflation

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 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%

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 Investment Example:
Decision Table
Payoff Decision variables (alternatives)
Uncontrollable variables (states of economy)
Result variables (projected yield)
Tabular representation:

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

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 Decision Analysis: A Few Alternatives
Other methods of treating risk
Simulation, Certainty factors, Fuzzy logic
Multiple goals
Yield, safety, and liquidity

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 Decision Tables and Tree
Decision Analysis society
faculty.fuqua.duke.edu/daweb/
decision-analysis.society.informs.org
Decision tree
( Mind Tools Ltd.mindtools.com)
TreeAge Pro ( TreAge software Inc.
treeage.com)
Precision Tree ( Palisade Corp.---
palisade.com)
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 Problem-Solving Search Methods

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 Problem-Solving Search Methods

Analytical techniques use mathematical

formulas to derive an optimal solution
directly or to predict a certain result
An algorithm is a step-by-step search
process for obtaining an optimal solution

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 Problem-Solving Search Methods

Figure: The process of using an algorithm

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 Problem-Solving Search Methods

Blind Searching
A goal is a description of a desired solution to
a problem
The search steps are a set of possible steps
leading from initial conditions to the goal
Problem solving is done by searching through
the possible solutions

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 Problem-Solving Search Methods

Blind search techniques are arbitrary

search approaches that are not guided
In a complete enumeration all the alternatives
are considered and therefore an optimal
solution is discovered
In an incomplete enumeration (partial search)
continues until a good-enough solution is
found (a form of suboptimization)

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 Heuristic Searching
Heuristic searching
Heuristics
Informal, judgmental knowledge of an
application area that constitutes the rules of
good judgment in the field. Heuristics also
encompasses the knowledge of how to solve
problems efficiently and effectively, how to
plan steps in solving a complex problem, how
to improve performance, and so forth
Heuristic programming
The use of heuristics in problem solving
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 Heuristic Searching

Cuts the search space

Gets satisfactory solutions more quickly and
less expensively
Finds good enough feasible solutions to very
complex problems

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 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

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 Simulation
Technique for conducting experiments with a
computer on a comprehensive model of the
behavior of a system

Frequently used in DSS tools

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 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

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 Simulation Methodology
Model real system and conduct repetitive experiments.
Steps:
1. Define problem 5. Conduct experiments
2. Construct simulation model 6. Evaluate results
3. Test and validate model 7. Implement solution
4. Design experiments

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 Simulation Types
Probabilistic Simulation:
Use probability distributions (Discrete or Continuous
probability distributions)
Time-dependent vs. Time-independent Simulation
Object-Oriented Simulation (using screen-based
object)
SIMPROCESS (caciasl.com)
Visual Simulation (graphical display of computerized
resutl-animation)

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 Simulation Software
Analytica (lumina.com)
Crystal Ball (decisioneering.com)
@RISK (palisade.com)
WebGPSS (webgpss.com)
SIMUL8 (SIMUL8.com)

Simulation example

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