Introduction to MIS 1

Copyright © 1998-2002 by Jerry Post
Introduction to MIS
Chapter 8
Models and Decision Support

Introduction to MIS 2
Models
Data
Model
f x
x
( ) exp ·
− −

]
]
]
|
.

`
,


1
2
1
2
2
σ π
µ
σ
0
20
40
60
80
100
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Actual Forecast
Decision
Output
Strategy
Operations
Tactics
Company

Introduction to MIS 3
Outline

Biases in Decisions

Introduction to Models

Why Build Models?

Decision Support Systems: Database, Model, Output

Data Warehouse

Data Mining and Analytical Processing

Digital Dashboard and EIS

DSS Examples

Geographical Information Systems

Cases: Computer Hardware Industry

Appendix: Forecasting

Introduction to MIS 4
Decision Levels
Business Operations
Tactical
Management
Strategic
Mgt.



























E
I
S























E
S




















D
S
S










T
r
a
n
s
a
c
t
i
o
n











P
r
o
c
e
s
s
i
n
g
P
r
o
c
e
s
s

C
o
n
t
r
o
l
Models

Introduction to MIS 5
Choose a Stock
Stock Price
90
95
100
105
110
115
120
125
130
1 2 3 4 5 6 7 8 9 10 11 12
Month
CompanyA
CompanyB
Company A’s share price increased by 2% per month.
Company B’s share price was flat for 5 months and then increased by
3% per month.
Which company would you invest in?

Introduction to MIS 6
Human Biases

Acquisition/Input

Data availability

Selective perception

Frequency

Concrete information

Illusory correlation

Processing

Inconsistency

Conservatism

Non-linear extrapolation

Heuristics: Rules of thumb

Anchoring and adjustment

Representativeness

Sample size

Justifiability

Regression bias

Best guess strategies

Complexity

Emotional stress

Social pressure

Redundancy

Output

Question format

Scale effects

Wishful thinking

Illusion of control

Feedback

Learning on irrelevancies

Misperception of chance

Success/failure attribution

Logical fallacies in recall

Hindsight bias

Introduction to MIS 7
Optimization
1
2
3
4
5
6
7
8
9
10
1
3
5
0
5
10
15
20
25
O
u
t
p
u
t
Input Levels
Maximum
Model: defined
by the data points
or equation
Control variables
Goal or output
variables
File: C08Fig08.xls
Why Build Models?

Understanding the Process

Optimization

Prediction

Simulation or "What If"
Scenarios

Dangers

Introduction to MIS 8
Prediction
0
5
10
15
20
25
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Time/quarters
O
u
t
p
u
t
Moving Average
Trend/Forecast
Economic/
regression
Forecast
File: C08Fig09.xls

Introduction to MIS 9
Simulation
0
5
10
15
20
25
1 2 3 4 5 6 7 8 9 10
Input Levels
O
u
t
p
u
t
Goal or output
variables
Results from altering
internal rules
File: C08Fig10.xls

Introduction to MIS 10
Object-Oriented Simulation Models
Customer
purchase
order
Order Entry
Custom Manufacturing
purchase
order
routing
& scheduling
Production
Inventory
Shipping
Parts
List
Shipping
Schedule
Invoice

Introduction to MIS 11
DSS: Decision Support Systems
sales revenueprofit prior
154 204.5 45.32 35.72
163 217.8 53.24 37.23
161 220.4 57.17 32.78
173 268.3 61.93 47.68
143 195.2 32.38 41.25
181 294.7 83.19 67.52
Sales and Revenue 1994
Jan Feb Mar Apr May Jun
0
50
100
150
200
250
300
Legend
Sales
Revenue
Profit
Prior
Database
Model
Output
d
a
t
a

t
o

a
n
a
l
y
z
e
r
e
s
u
l
t
s
File: C08Fig11.xls

Introduction to MIS 12
Data Mining: Spotfire
http://www.spotfire.com

Introduction to MIS 13
Data Warehouse
OLTP Database
3NF tables
Operations
data
Predefined
reports
Data warehouse
Star configuration
Daily data
transfer
Interactive
data analysis
Flat files

Introduction to MIS 14
Multidimensional OLAP Cube
Tim
e
S
ale D
ate
Customer
Location
C
a
t
e
g
o
r
y
Pet Store
Item Sales
Amount = Quantity*Sale Price

Introduction to MIS 15
Microsoft SQL Server Cube Browser

Introduction to MIS 16
Microsoft Pivot Table

Introduction to MIS 17
Digital Dashboard
http://www.microsoft.com/business/casestudies/dd/honeywell.asp
Stock market
Exceptions
Plant or
management variables
Equipment details
Products
Quality control
Plant schedule

Introduction to MIS 18
EIS: Executive
Information System

Easy access to data

Graphical interface

Non-intrusive

Drill-down capabilities
EIS Software
from Lightship
highlights ease-
of-use GUI for
data look-up.

Introduction to MIS 19
Executive IS
Production
Distribution
Sales
Central Management
Executives
Data
Data
Sales
Production Costs
Distribution Costs
Fixed Costs
Production Costs
South
North
Overseas
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
1993 1994 1995 1996
South
North
Overseas
Production: North
Item# 1995 1994
1234 542.1 442.3
2938 631.3 153.5
7319 753.1 623.8
D
a
ta
f
o
r
E
I
S
Data
Data

Introduction to MIS 20
Marketing Research Data

Introduction to MIS 21
Marketing Sales Forecast
GDP and Sales
1000
1200
1400
1600
1800
2000
2200
2400
2600
2800
1 2 3 4 5 6 7 8 9
1
0
1
1
1
2
1
3
1
4
1
5
1
6
1
7
1
8
1
9
2
0
2
1
2
2
2
3
2
4
2
5
2
6
2
7
2
8
2
9
3
0
3
1
3
2
3
3
3
4
3
5
3
6
3
7
3
8
3
9
4
0
4
1
4
2
4
3
4
4
4
5
4
6
4
7
4
8
Quarter
G
D
P
30
40
50
60
70
80
90
100
S
a
l
e
s
GDP
Sales
Forecast
forecast
Note the fourth quarter sales jump.
The forecast should pick up this cycle.
File: C08-10 Marketing Forecast.xls

Introduction to MIS 22
Regression Forecasting
Sales = b0 + b1 Time + b2 GDP Model:
Data: Quarterly sales and GDP for 10 years.
Analysis: Estimate model coefficients with regression.
Forecast GDP for each quarter.
Output: Compute Sales prediction.
Graph forecast.
Coefficients Standard Error t Stat
Intercept -98.175 15.895 -6.176
Time -1.653 0.304 -5.444
GDP 0.102 0.012 8.507

Introduction to MIS 23
Human Resources
File: C08-19 HRM.xls

Introduction to MIS 24
Raises
0
500
1000
1500
2000
2500
3000
3500
4000
Caulkins Jihong Louganis Naber Spitz Weissmuller
d
o
l
l
a
r
s
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
Raise Raise pct Performance
Human Resources

Introduction to MIS 25
Finance Example: Project NPV
Project A NPV=$18,475
-250,000
-200,000
-150,000
-100,000
-50,000
0
50,000
100,000
0 1 2 3 4 5 6
Year
Costs-A
Revenue-A
Project B NPV=$6,064
-120,000
-100,000
-80,000
-60,000
-40,000
-20,000
0
20,000
40,000
60,000
80,000
0 1 2 3 4 5 6
Year
Costs-B
Revenue-B
Project C NPV =- $3,814
-100,000
-80,000
-60,000
-40,000
-20,000
0
20,000
40,000
60,000
0 1 2 3 4 5 6
Year
Costs-C
Revenue-C
Rate = 7%
Can you look at these cost and
revenue flows and tell if the
project should be accepted?
File: C08-14 Finance NPV.xls

Introduction to MIS 26
Accounting
Balance Sheet for 2003
Cash 33,562 Accounts Payable 32,872
Receivables 87,341 Notes Payable 54,327
Inventories 15,983 Accruals 11,764
Total Current Assets 136,886 Total Current Liabilities 98,963
Bonds 14,982
Common Stock 57,864
Net Fixed Assets 45,673 Ret. Earnings 10,750
Total Assets 182,559 Liabs. + Equity 182,559
File: C08-15 Accounting.xls

Introduction to MIS 27
Accounting
Income Statement for 2003
Sales $97,655 tax rate 40%
Operating Costs 76,530 dividends 60%
Earnings before interest & tax 21,125 shares out. 9763
Interest 4,053
Earnings before tax 17,072
taxes 6,829
Net Income 10,243
Dividends 6,146
Add. to Retained Earnings 4,097
Earnings per share $0.42

Introduction to MIS 28
Accounting Analysis
Results in a CIRCular calculation.
Cash $36,918
Acts Receivable 96,075
Inventories 17,581
Net Fixed Assets 45,673
Total Assets $196,248
Accts Payable $36,159
Notes Payabale 54,327
Accruals 12,940
Total Cur. Liabs. 103,427
Bonds 14,982
Common Stock 57,864
Ret. Earnings 14,915
Liabs + Equity 191,188
Add. Funds Need 5,060
Bond int. rate 5%
Added interest 253
Balance Sheet projected 2004
Income Statement projected 2004
Sales $ 107,421
Operating Costs 84,183
Earn. before int. & tax 23,238
Interest 4,306
Earn. before tax 18,931
taxes 8,519
Net Income 10,412
Dividends 6,274
Add. to Ret. Earnings $ 4,165
Earnings per share $0.43
Tax rate 45%
Dividend rate 60%
Shares outstanding 9763
Sales increase 10%
Operations cost increase 10%
Forecast sales and costs.
Forecast cash, accts receivable, accts payable, accruals.
Add gain in retained earnings.
Compute funds needed and interest cost.
Add new interest to income statement.
1
2
3
4
5
1
2
4
2
3
5
Total Cur. Assets 150,576

Introduction to MIS 29
Geographic Models
File: C08-25 GIS.xls
City 1990 pop 2000 pop 1990 per capita income 2000 per capita income 1990 soft sales 1990 hard sales 2000 hard sales 2000 soft sales
Clewiston 6085 8549 13598 15466 562.5 452.0 367.6 525.4
Fort Myers 45206 59491 16890 20256 652.9 535.2 928.2 1010.3
Gainesville 84770 101724 13672 19428 281.7 365.2 550.5 459.4
Jacksonville 635230 734961 15316 19275 849.1 990.2 1321.7 1109.3
Miami 258548 300691 16874 18812 833.4 721.7 967.1 1280.6
Ocala 42045 55878 12027 15130 321.7 359.0 486.2 407.3
Orlando 164693 217889 16958 20729 509.2 425.7 691.5 803.5
Perry 7151 8045 11055 14144 267.2 300.1 452.9 291.0
Tallahassee 124773 155218 14578 20185 489.7 595.4 843.8 611.7
Tampa 280015 335458 15081 19062 851.0 767.4 953.4 1009.1

Introduction to MIS 30
Tampa
Miami
Fort Myers
Jacksonville
Tallahassee
Gainesville
Ocala
Orlando
Clewiston
Perry
17,000
15,800
14,600
13,400
12,200-
1990 2000
20,700
19,400
18,100
16,800
15,500-
per capita income
Red
3.2
Yel low
2.3
Bl ue
1.9
Green
2.3
Red
1.7
Yel low
1.1
Bl ue
1.0
Green
1.1
Red
2.1
Yel low
1.7
Bl ue
1.1
Green
1.4
Red
5.0
Yel low
4.2
Bl ue
3.2
Green
3.7
Red
1.8
Yel low
1.5
Bl ue
1.2
Green
1.4
Red
2.6
Yel low
3.0
Bl ue
1.9
Green
1.6
Red
3.6
Yel low
3.8
Bl ue
3.2
Green
2.9
Red
3.5
Yel low
3.8
Bl ue
2.5
Green
2.0
Red
1.4
Yel low
2.0
Bl ue
2.1
Green
1.7
Red
3.7
Yel low
4.8
Bl ue
3.2
Green
2.7
2000
Hard
Goods
2000
Soft
Goods
1990
Hard
Goods
1990
Soft
Goods

Introduction to MIS 31
Cases: Computer Hardware Industry

Introduction to MIS 32
Cases: Dell Computer
Gateway 2000, Inc.
What is the company’s current status?
What is the Internet strategy?
How does the company use information technology?
What are the prospects for the industry?
www.dell.com
www.gateway.com

Introduction to MIS 33
Appendix: Forecasting Uses

Marketing

Future sales

Consumer
preferences/trends

Sales strategies

Finance

Interest rates

Cash flows

Financial market conditions

HRM

Labor costs

Absenteeism

Turnover

Strategy

Rivals’ actions

Technological change

Market conditions

Introduction to MIS 34
Forecasting Methods

Structural Models

Derive underlying models

Estimate parameters

Evaluate model

Focus on explanation and
cause

Time Series

Collect data over time

Identify trends

Identify seasonal effects

Forecast based on patterns
Q
P
S
D
D’
Increase in income
time
sales
trend

Introduction to MIS 35
Structural Equations

Demand is a function of

Price

Income

Prices of related products
Q
D
= b0 + b1 Price + b2 Income + b3 Substitute
Q
D
= 1114 - 0.1 Price + 1.2 Income - 1.0 Substitute
Model
Estimate
Data
Forecast 33318 = 1114 - 0.1 (155) + 1.2 (20000) - 1.0 (160)
Need to know (estimate) future price, income, and substitute price.

Introduction to MIS 36
Time Series Components
time
sales
Dec Dec Dec Dec
1. Trend
2. Seasonal
3. Cycle
4. Random
Trend
Seasonal
A cycle is similar to the seasonal pattern,
but covers a time period longer than a year.

Introduction to MIS 37
Exponential Smoothing
Exponential Smoothing
800
900
1000
1100
1200
1300
1400
1500
1600
1 3 5 7 9 11 13 15 17 19 21
Raw Data
Smooth:0.20
S
t
= αY
t
+ (1 - α) S
t-1
S is the new data point
α is the smoothing factor
Use Excel:
Tools, Data Analysis
Exponential Smoothing

Introduction to MIS 38
Exponential Smoothing
Choosing the smoothing factor (α):
It is usually between 0.01 and 0.20
Test multiple values and compare errors:
(actual - smooth) * (actual - smooth)
Compute the sum. Choose the factor with
the least total sum-of-squared error.
Sum Sum Sum
(A2-D2)*(A2-D2)
929,916 848,686 769,265
Larger factors place
more importance on
recent data, which
results in less
smoothing.

Introduction to MIS 39
Smoothing with Trends
Double Exponential Smoothing
20000
22000
24000
26000
28000
30000
32000
34000
1 3 5 7 9 11 13 15 17 19
Raw Data
Smooth:0.20
Apply exponential smoothing and choose smoothing factor (α).
Apply exponential smoothing a second time to the smoothed data.

Introduction to MIS 40
Forecasting with Exponential Smoothing
Forecast for time T+τ
] 2 [
1
1
1
2
T T T
S S y

,
`

.
|

+ −

,
`

.
|

+ ·
+
α
ατ
α
ατ
τ

T = 20 last of the raw data
τ = 1 forecast one period ahead
α = 0.2 smoothing factor
S
20
= 32,064 (value at time 20, after one smoothing)
S
[2]
= 33,141 (value at time 20, after second smoothing)
Y
21
= (2.25)32,064 - (1.25)33,141
= 30,718

Introduction to MIS 41
Trendline
Linear Trend Line
y = 511.63x + 24099
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Moving Average(3) Trend Line
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Linear captures
the trend only.
Moving average
captures all
elements, but
lags the actual
pattern.

Introduction to MIS 42
Regression Analysis
=$F$20+$F$21*B6
Time Sales Forecast
Tools + Data Analysis + Regression
Dependent = Sales
Independent = Time

Introduction to MIS 43
Estimating Trend
Y
t
= b
0
+ b
1
(t)
Use regression to estimate b
0
and b
1
.
Plug t into equation to estimate new value (on trend):
Y
21
= 23,986 + 498.6 * (21)
= 34,456
Result is the prediction on the trend, with no
random factors and no cycles.
Time Quantity Trend Difference
1 24917 24484 432
2 26152 24983 1169
3 27297 25482 1816
4 26157 25980 177
5 26710 26479 231
6 26103 26977 -874
7 27981 27476 505
8 26327 27975 -1647
9 24913 28473 -3560
10 28524 28972 -448
11 29774 29470 303
12 29136 29969 -833
13 29332 30468 -1136
14 30306 30966 -660
15 32133 31465 669
16 33329 31963 1366
17 34522 32462 2060
18 34769 32961 1808
19 33355 33459 -104
20 32684 33958 -1274
21 34456
22 34955
23 35454
24 35952
Coefficients Std Error t Stat P-value
Intercept 23985.81 652.48 36.76 2.2E-18
Time 498.60 54.47 9.15 3.4E-08

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