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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 Opening Vignette:
Model-Based Auctions Serve More
Lunches in Chile
Background: problem situation

Proposed solution

Results

Answer and discuss the case questions

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 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
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 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)
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 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
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 Categories of Models
Category Objective Techniques
Optimization of Find the best solution from a Decision tables,
problems with few small number of alternatives decision 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 Some inventory models
analytic formula step using a formula

Simulation Find a good enough solution Several types of

by experimenting with a simulation
dynamic model of the system
Heuristics Find a good enough solution Heuristic programming
using common-sense rules and expert systems

Predictive and Predict future occurrences, Forecasting, Markov

other models what-if analysis, chains, financial,
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 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
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 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)
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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)
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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 Excel spreadsheet - static model example:
Simple loan calculation of monthly payments

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

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

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 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
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 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

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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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 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 variables
and uncontrollable variables

Uncontrollable
Variables

Decision Mathematical Result

Variables Relationships Variables
Intermediate
Variables
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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

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
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 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

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

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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 Sensitivity, What-if, and
Goal Seeking Analysis
Sensitivity
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
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 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

>>>
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 Heuristic Programming - SEARCH

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 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

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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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 Modern Heuristic Methods
Tabu search
Intelligent search algorithm

Genetic algorithms
Survival of the fittest

Simulated annealing
Analogy to Thermodynamics

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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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 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
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 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

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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
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
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 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

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 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

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 End of the Chapter

Questions / Comments

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

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