You are on page 1of 50

Decision Support and

Business Intelligence
Systems
(9th Ed., Prentice Hall)
Chapter 4:

Modeling and Analysis

-2

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
Copyright
2011 Pearson Education, Inc. Publishing as Prentice Hall

-3

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 Inc.key
issues
of model
Copyright
2011 Pearson Education,
Publishing
as Prentice Hall

-4

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

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-5

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)
Optimization via mathematical programming
Heuristic programming
Simulation
Model base management

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-6

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)

2011 Pearson Education, Inc. Publishing as Prentice Hall


Copyright

-7

Major Modeling Issues

Problem identification and environmental


analysis (information collection)
Variable identification

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

Influence diagrams, cognitive maps

Categories of models >>>

Model management

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-8

Categories of Models
Category

Objective

Techniques

Optimization of
problems with few
alternatives

Find the best solution from Decision tables,


a small number of
decision trees
alternatives

Optimization via
algorithm

Find the best solution from


a large number of
alternatives using a stepby-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 commonsense rules

Heuristic
programming and
expert systems

Predictive and
Predict future
Forecasting, Markov
Copyright
2011 Pearson Education,
Inc. Publishing
as Prentice Hall chains, financial,
other
models
occurrences,
what-if
analysis,

-9

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

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-10

Decision Making:
Treating Certainty, Uncertainty and
Risk

Certainty Models

Uncertainty

Assume complete knowledge


All potential outcomes are known
May yield optimal solution
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
Copyright
2011 Pearson Education, Inc. Publishing as Prentice Hall
Level
of uncertainty => Risk (expected

-11

Certainty, Uncertainty and Risk

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-12

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)

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-13

Influence Diagrams:
Relationships
CERTAINTY
Amount in
CDs

Interest
Collected

UNCERTAINTY
Price
Sales

The shape of
the arrow
indicates the
type of
relationship

RANDOM (risk) variable: Place a tilde (~) above the variables name
~
Demand
Sales
Copyright 2011 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

Profit = Income Expense


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

-14

Expenses

Fixed Cost

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-15

Influence Diagrams: Software

Analytica, Lumina Decision Systems

DecisionPro, Vanguard Software Co.

Includes influence diagrams, decision trees and


simulation

Definitive Scenario, Definitive Software

Supports hierarchical (tree structured) diagrams

DATA Decision Analysis, TreeAge Software

Supports hierarchical (multi-level) diagrams

Integrates influence diagrams and Excel, also


supports Monte Carlo simulations

PrecisionTree, Palisade Co.

Creates influence diagrams and decision trees


directly in an Excel spreadsheet

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-16

Analytica Influence Diagram of a


Marketing
Problem: The Marketing Model

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-17

Analytica: The Price Submodel

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-18

Analytica: The Sales Submodel

Copyright 2011 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

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-20

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
)

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-21

Excel spreadsheet Dynamic model


example:
Simple loan
calculation of
monthly payments
and effects of
prepayment

Copyright 2011 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
exists
Copyright alternatives
2011 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
Copyright
2011 Pearson Education, Inc. Publishing as Prentice Hall

-24

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%

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-25

Investment Example:
Decision Table

Payoff Decision variables (alternatives)


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

Copyright 2011 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

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-27

Decision Analysis: A Few


Alternatives

Other methods of treating risk

Simulation, Certainty factors, Fuzzy


logic

Multiple goals

Yield, safety, and liquidity

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-28

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 combination of decision
s
variables and uncontrollable
variables
bl e

In d

n
de
n
pe

Decision
Variables

a
ari
V
t

Uncontrollable
Variables

Dependent Variables
Mathematical
Relationships
Intermediate
Variables

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Result
Variables

-29

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
Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall
are linear

-30

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
Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-31

Linear Programming Steps

1. Identify the

Decision variables
Objective function
Objective function coefficients
Constraints

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


Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall
results

Line

-32

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


Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-33

LP Solution

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-34

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

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-35

Sensitivity, What-if, and


Goal Seeking Analysis

Sensitivity

What-if

Assesses impact of change in inputs on


outputs
Eliminates or reduces variables
Can be automatic or trial and error
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
Copyright
2011 Pearson Education,
Inc. Publishing as Prentice
Hall
is break-even
point
determination

-36

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 2011 Pearson Education, Inc. Publishing as Prentice Hall
>>>

-37

Heuristic Programming - SEARCH

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-38

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

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-39

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

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-40

Modern Heuristic Methods

Tabu search

Genetic algorithms

Intelligent search algorithm

Survival of the fittest

Simulated annealing

Analogy to Thermodynamics

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-41

Simulation

Technique for conducting experiments


with a computer on a comprehensive
model of the behavior of a system

Frequently used in DSS tools

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-42

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

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-43

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
Copyright
2011 Pearson Education, Inc. Publishing as Prentice Hall
measures

-44

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

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-45

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

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-46

Simulation Types

Stochastic vs. Deterministic Simulation

Time-dependent vs. Time-independent


Simulation

In stochastic simulations: We use distributions


(Discrete or Continuous probability distributions)

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

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-47

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

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-48

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 2011 Pearson Education, Inc. Publishing as Prentice Hall

-49

End of the Chapter

Questions / Comments

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

-50

All rights reserved. No part of this publication may be reproduced, stored in a


retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.

Copyright 2011 Pearson Education, Inc.


Publishing as Prentice Hall

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

You might also like