Spreadsheet Models

Chapter 10

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Introduction
• Spreadsheet models are mathematical and logic-based models.
• Referred to as what-if models:
• Provide easy-to-use, sophisticated mathematical and logical functions.
• Allow for easy instantaneous recalculation for a change in model inputs.
• Are less expensive.
• Often come preloaded on computers.
• Are fairly easy to use.
• The most used business analytics tool.

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Building Good
Spreadsheet Models
Influence Diagrams
Building a Mathematical Model
Spreadsheet Design and Implementing the Model in a Spreadsheet

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Building Good Spreadsheet Models (Slide 1 of 11)
• Total cost of manufacturing a product is the sum of two costs:
• Fixed cost: Portion of the total cost that does not depend on the
production quantity and remains the same no matter how much is
produced.
• Variable cost: Portion of the total cost that is dependent on and varies
with the production quantity.
• Make-versus-buy decision: comparing the costs of manufacturing
in-house to the costs of outsourcing production to another firm.

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Building Good Spreadsheet Models (Slide 2 of 11)
Influence Diagrams:
• An influence diagram is a visual representation that shows which entities
influence others in a model.
• Parts of the model are represented by circular or oval symbols called
nodes, and arrows connecting the nodes show influence.

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Building Good Spreadsheet Models
(Slide 3 of 11)
Figure 10.1: An Influence Diagram
for Nowlin’s Manufacturing Cost

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Building Good Spreadsheet Models
(Slide 4 of 11)
Figure 10.2: An Influence
Diagram for Comparing
Manufacturing Versus
Outsourcing Cost for
Nowlin Plastics

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Building Good Spreadsheet Models (Slide 5 of 11)
Building a Mathematical Model:
• Consider the cost of manufacturing the required units of the Viper.
• As the influence diagram shows, this cost is a function of the fixed cost,
the variable cost per unit, and the quantity required.
• Define notation for every node in the influence diagram:
q = quantity (number of units) required.
FC = the fixed cost of manufacturing.
VC = the per-unit variable cost of manufacturing.
TMC  q  = total cost to manufacture q units.

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Building Good Spreadsheet Models (Slide 6 of 11)
Building a Mathematical Model (cont.):
• The cost-volume model for producing q units is:

• For the Viper, FC = $234,000 and VC = $2, so:

TMC  q   $234,000  $2q
• Mathematical model for purchasing q units is:

• P = the per unit purchase cost:

TPC  q  = the total cost to outsource or purchase q units
• For the Viper, since P  $3.50, TCP  q   $3.5q.

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Building Good Spreadsheet Models (Slide 7 of 11)
Building a Mathematical Model (cont.):
• Mathematical model for the savings associated with outsourcing:

S  q   the savings due to outsourcing

• Nowlin has to decide: For what quantities is it more cost-effective to
outsource rather than produce the Viper?
• Mathematically, this question is: For what values of q is S  q   0?

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Building Good Spreadsheet Models (Slide 8 of 11)
Spreadsheet Design and Implementing the Model in a Spreadsheet:
• For the Nowlin Plastics problem, we have defined the following
components: q, FC, VC, TMC  q  , P , TPC  q  , S  q  .
• TMC, TPC, and S are the functions of other components, whereas q, FC,
VC, and P are not.
• TMC, TPC, and S will be formulas involving other cells in the spreadsheet
model, whereas q, FC, VC, and P will just be entries in the spreadsheet.

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Building Good Spreadsheet Models (Slide 9 of 11)
Spreadsheet Design and Implementing the Model in a Spreadsheet
(cont.):
• The number of Vipers to make or buy for next year is really a decision
Nowlin gets to make, hence we refer to quantity q as a decision variable.
• FC, VC, and P are measurable factors that define characteristics of the
process we are modelling; hence, we refer to FC, VC, and P as
parameters.

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Building Good Spreadsheet Models (Slide 10 of 11)
Figure 10.3: Nowlin Plastics
Make-Versus-Buy
Spreadsheet Model

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Building Good Spreadsheet Models (Slide 11 of 11)
Spreadsheet Design and Implementing the Model in a Spreadsheet
(cont.):
• The general principles of spreadsheet model design and construction are:
• Separate the parameters from the model: This enables the user to update
the model parameters without the risk of mistakenly creating an error in a
formula.
• Document the model and use proper formatting and color as needed: A
good spreadsheet model is well documented. Clear labels and proper
formatting and alignment facilitate navigation and understanding.
• Use simple formulas: Clear, simple formulas can reduce errors and make
maintaining the spreadsheet easier. Long and complex calculations should
be divided into several cells.

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What-If Analysis
Data Tables
Goal Seek
Scenario Manager

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What-If Analysis (Slide 1 of 14)
Data Tables:
• Data Table: Excel tool which quantifies the impact of changing the value
of a specific input on an output of interest.
• One-way data table: Summarizes a single input’s impact on the output.
• Two-way data table: Summarizes two inputs’ impact on the output.

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What-If Analysis (Slide 2 of 14)
Figure 10.4: The Input for
Constructing a One-Way
Data Table for Nowlin
Plastics

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What-If Analysis (Slide 3 of 14)
Figure 10.5 Results of One-
Way Data Table for Nowlin
Plastics

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What-If Analysis (Slide 4 of 14)
Figure 10.6: The
Input for
Constructing a
Two-Way Data
Table for Nowlin
Plastics

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What-If Analysis (Slide 5 of 14)
Figure 10.7: Results of Two-Way Data Table for Nowlin Plastics

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What-If Analysis (Slide 6 of 14)
Goal Seek:
• Goal Seek: Excel tool that allows the user to determine the value of an
input cell that will cause the value of a related output cell to equal some
specified value (the goal).
• In the case of Nowlin Plastics, suppose we want to know the value of the
quantity of Vipers where it becomes more cost effective to manufacture
rather than outsource.

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What-If Analysis (Slide 7 of 14)
Figure 10.8: Goal Seek
Dialog Box for Nowlin
Plastics

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What-If Analysis (Slide 8 of 14)
Figure 10.9: Results from
Goal Seek for Nowlin
Plastics

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What-If Analysis (Slide 9 of 14)
Scenario Manager:
• Scenario Manager: Excel tool that quantifies the impact of changing
multiple inputs (a setting of these multiple inputs is called a scenario) on
one or more outputs of interest.
• Scenario Manager extends the data table concept to cases when you are
interested in changing more than two inputs and want to quantify the
changes these inputs have on one or more outputs of interest.

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What-If Analysis (Slide 10 of 14)
Figure 10.10:
Middletown Amusement
Park Daily Profit Model

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What-If Analysis (Slide 11 of 14)
Table 10.1: Weather Scenarios for Middletown Amusement Park
Scenarios
Partly Cloudy Rain Sunny
Season-pass Holders 3000 1200 8000
Admissions 1600 250 2400
Average Expenditure –
Season-Pass Holders $15 $10 $18
Average Expenditure –
Admissions $45 $20 $57
Cost of Operations $33,000 $27,000 $37,000

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What-If Analysis (Slide 12 of 14)

Figure 10.11: Figure 10.12:

Scenario Manager Dialog Box Add Scenario Dialog Box
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What-If Analysis (Slide 13 of 14)

Figure 10.13: Figure 10.14:

Scenario Values Dialog Box Scenario Summary Dialog Box

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What-If Analysis (Slide 14 of 14)
Figure 10.15: Scenario Summary for Middletown Amusement Park

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Some Useful Excel
Functions for Modeling
SUM and SUMPRODUCT
IF and COUNTIF
VLOOKUP

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Some Useful Excel Functions for Modeling
(Slide 1 of 6)

SUM and SUMPRODUCT:

• SUM: Function that adds up all of the numbers in a range of cells.
• SUMPRODUCT: Function that returns the sum of the products of
elements in a set of arrays.

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Some Useful Excel Functions for Modeling
(Slide 2 of 6)

Figure 10.16: What-If Model

for Foster Generators

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Some Useful Excel Functions for Modeling
(Slide 3 of 6)

IF and COUNTIF:
• =IF(condition, result if condition is true, result if condition is false).
• =COUNTIF(range, condition).
• Counts the number of components having a positive order quantity.
Illustration:
• Gambrell Manufacturing produces car stereos.
• Gambrell likes to keep its components inventory to a minimum.
• Hence, it uses an inventory policy known as an order-up-to policy.
• Order-up-to policy: Whenever the inventory on hand drops below a certain
level, enough units are ordered to return the inventory to that
predetermined level.

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Some Useful Excel Functions for Modeling
(Slide 4 of 6)

Figure 10.17: Gambrell

Manufacturing Component
Ordering Model

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Some Useful Excel Functions for Modeling
(Slide 5 of 6)

VLOOKUP
• This function allows the user to pull a subset of data from a larger table
of data based on some criterion.
• General form =VLOOKUP(value, table, index, range).
where,
value = the value to search for in the first column of the table.
table = the cell range containing the table.
index = the column in the table containing the value to be returned.
range = TRUE if looking for the first approximate match of value and
FALSE if looking for an exact match of value.

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Some Useful Excel Functions for Modeling
(Slide 6 of 6)

Figure 10.18: Granite

Insurance Bonus Model

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Auditing Spreadsheet
Models
Trace Precedents and Dependents
Show Formulas
Evaluate Formulas
Error Checking
Watch Window

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Auditing Spreadsheet Models (Slide 1 of 13)
• Excel contains a variety of tools to assist you in the development
and debugging of spreadsheet models.
• These tools are found in the Formula Auditing group of the Formulas
tab.

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Auditing Spreadsheet Models (Slide 2 of 13)
Figure 10.19: The Formula Auditing Group

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Auditing Spreadsheet Models (Slide 3 of 13)
Trace Precedents and Dependents:
• Trace Precedents button: After selecting cells, this button creates arrows
pointing to the selected cell from cells that are part of the formula in that
cell.
• Trace Dependents button: Shows arrows pointing from the selected cell
to cells that depend on the selected cell.
• Both of the tools are excellent for quickly ascertaining how parts of a
model are linked.

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Auditing Spreadsheet Models (Slide 4 of 13)
Figure 10.20: Trace
Precedents for Foster
Generator

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Auditing Spreadsheet Models (Slide 5 of 13)
Figure 10.21: Trace
Dependents for the Foster
Generators Model

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Auditing Spreadsheet Models (Slide 6 of 13)
Show Formulas:
• To see the formulas in a worksheet, simply click on any cell in the
worksheet and then click on Show Formulas—you will see the formulas
residing in that worksheet.
• To revert to hiding the formulas, click again on the Show Formulas
button.

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Auditing Spreadsheet Models (Slide 7 of 13)
Evaluate Formulas:
• The Evaluate Formulas button allows you to investigate the calculations
of a cell in great detail.
• Provides an excellent means of identifying the exact location of an error
in a formula.

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Auditing Spreadsheet Models (Slide 8 of 13)
Figure 10.22: The
Evaluate Formula Dialog
Box for Gambrell
Manufacturing

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Auditing Spreadsheet Models (Slide 9
of 13)
Figure 10.23: The Evaluate Formula Dialog Box for Gambrell
Manufacturing Cell B17 after Four Clicks of the Evaluate Button

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Auditing Spreadsheet Models (Slide 10 of 13)
Error Checking:
• The Error Checking button provides an automatic means of checking for
mathematical errors within formulas of a worksheet.
• Clicking on the Error Checking button causes Excel to check every formula
in the sheet for calculation errors.
• If an error is found, the Error Checking dialog box appears.

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Auditing Spreadsheet Models (Slide
11 of 13)
Figure 10.24: The Error Checking Dialog Box for a Division by Zero Error

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Auditing Spreadsheet Models (Slide 12 of 13)
Watch Window:
• The Watch Window, located in the Formula Auditing group, allows the
user to observe the values of cells included in the Watch Window box list.
• Useful for large models when not all of the model is observable on the
screen or when multiple worksheets are used.

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Auditing Spreadsheet Models (Slide 13 of 13)
Figure 10.25: The Watch Window for Cell B17 of the Gambrell
Manufacturing Model

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Predictive and Prescriptive
Spreadsheet Models

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Predictive and Prescriptive Spreadsheet
Models (Slide 1 of 2)
• Decision making is difficult because of uncertainty and an overwhelming
number of choices.
• Spreadsheet what-if models are descriptive models.
• Basic what-if spreadsheet models can be extended to help deal with
uncertainty or the many alternatives a decision maker may face.
• Predictive models can be estimated from data in spreadsheets using tools
provided in Excel:
• The Regression tool and other Data Analysis tools such as Exponential
Smoothing and Moving Average allow us to develop predictive models
based on data in the spreadsheet.
• What-if models help us deal with uncertainty is simulation.

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Predictive and Prescriptive
Spreadsheet Models (Slide 2 of 2)
• Optimization models can be used to help make smart decisions.
• Optimization models are prescriptive models:
• Characterized by having an objective to be maximized or minimized.
• Usually have constraints that limit the options available to the decision maker.
• Optimization models are one type of prescriptive analytics.
• Excel includes a special tool called Solver that solves optimization models.
• Solver is used to extend a what-if model to find an optimal (or best) course
of action that maximizes or minimizes an objective while satisfying the
constraints of the decision problem.

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