MGMT 580 APPLIED

RESEARCH AND BUSINESS

ANALYTICS
Unit 2: Modelling in a Problem Solving Framework.

Oct 2020
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Whiteboard
What’s in the news, reflections on the week…

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Agenda

• Welcome
• Modeling overview
• Breakout Group: Explore the “mess” (text book exercise)
• Group feedback
• Next week team presentations

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PROBLEM SOLVING

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 Problems!!!

• If I were given one hour to save the planet, I

would spend 59 minutes defining the
problem and one minute resolving it,”
• Albert Einstein

1. THE SLOW ELEVATOR PROBLEM

2. Blockbuster and Netflix story

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Problem Definition Process

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 Problem solving framework
First, identify the problem:
• A problem is a well-defined situation that is
capable of resolution.
• A mess is a morass of unsettling symptoms,
causes, data, pressures, shortfalls,
opportunities, etc.
• Identifying a problem in the mess is the first
step in the creative problem-solving process.

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 The Six-Stage Problem-Solving
Process
1. Exploring the mess
2. Searching for information
3. Identifying a problem
4. Searching for solutions
5. Evaluating solutions
6. Implementing a solution
Use both Divergent and Convergent Thinking in each stage.**

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 Divergent and Convergent
Thinking
• Divergent thinking
– Thinking in different directions
– Searching for a variety of answers to questions that may
have many right answers
– Brainstorming
• Convergent thinking
– Directed toward achieving a goal or single solution
– Involves trying to find the one best answer
– Emphasis shifts from idea generation to evaluation
• Decision makers need to be clear as to which they use at a
given time, and balance the two.

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Modelling as a decision tool

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What is modelling?
– A simplified representation of
reality to understand or
control some aspect
– A way to understand our
environment
– Mental, visual, physical,
mathematical, spreadsheet
– Generates insights
– Provides examples of clear
and logical analysis
– Raises level of thinking
– A laboratory in which we can
experiment and learn
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 Why model?
– Contributes to business
decision making
– A tool or strategy with
problem solving
– Allows us to make
inexpensive errors
– We can explore the
impossible
– Improves business
intuition
– Provides information in
a timely manner
– Can reduce costs
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MODELING IN A PROBLEM‐SOLVING
FRAMEWORK
• Modeling is an approach that helps us develop a better
understanding of business situations. As a result, it helps us
make better decisions
• Modeling is part of the broader process of business
decision making successful problem-
solving process

implementation of a
Recognition of a
proposed solution
problem

Modeling is just one of many tools

or strategies that can be used
within problem solving

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 Influence Charts
• A simple diagram to show outputs and how
they are calculated from inputs
• Tool of choice for complex, unstructured
problems
• Identifies main elements of a model
• Delineates the boundaries of a model
• Recommended for early stages of any
problem formulation task
• Flexible-supports frequent revision
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 Building an Influence Chart
• Built from right to left
• Conventions on types of variables
– Outputs – hexagons
– Decisions – boxes
– Inputs – triangles
– Other variables – circles
– Random variables – double circles
– See Figure 2.3
Figure 2.3

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INFLUENCE CHARTS –INCOME
STATEMENT

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 Modeling steps
• Simplify the model
– The essence of modeling
– Increases transparency - aids
with buy-in
– Requires a focus on key
connections and central trade-
offs
– Involves making assumptions
• Break the problem into modules
• Iterative process: Build a
prototype, refine, and test

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Technical vs Craft Skills
• Successful modelers draw on
both technical and craft skills
• Technical skills
– Lead to a single correct
answer
– Require no creativity, learned
quickly
– Example: Calculating present
values
• Craft skills
– Creative
– Develop over time
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 FOUR MODELING CASES

• Retirement Planning
• Draft TV Commercials
• Icebergs for Kuwait
• The Racquetball Racket

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Retirement Planning

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 RETIREMENT PLANNING
• Retirement Planning
– The client currently is 46 years old with an income of
about $126,000 per year
– His goal is to retire between age 62 and 67 and to have
enough savings to live comfortably in about the same
fashion he does now (with some money available for
expanded travel)
– The client's accumulated savings for retirement total
$137,000
– His employer contributes around $10,000 per year into
the retirement fund, while he has been contributing
$7,500.
– How much should he be saving?
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 Questions
White Board
What are the variables that influence Bob’s
retirement planning?

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 Explore the mess by answering
the following questions
• What do we know?
– Age, salary, assets, goals & family situation
• What can we assume?
– keeps his job, lives into retirement & parents
leave no estate
• What could the results look like?
– recommended plan, optimal savings rate, effect
of increasing savings rate on assets at
retirement & strategy for increasing savings

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 Explore the mess by answering
the following questions
• What information can be brought to bear?
– typical income needs in retirement, historical rates of
return on assets & expected lifetimes
• What can we ask the client?
– how early would he like to retire?
– how risk averse is he in investing?
– how much would he like to spend on travel in retirement?
– does he want to leave an inheritance to his heirs?
– how does he feel about seeking more consulting income?
– how easily can he save another 5% of his income? 10%?

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RETIREMENT PLANNING
Date of Date of
Retirement Death

Savings Assets at Final

Rate Retirement Wealth

Initial Investment Post-retirement

Assets Return Consumption Rate

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 Dealing with the “mess”
In Breakout
What do we know about the problem?
groups discuss Agree/define the main objective
assigned mini- What are the key variables?
What can we assume or gain more information/research?
case study from What could the results look like – prepare a rough draft
textbook influence chart on a PowerPoint slide and be prepared to
discuss
(Pages 32-33)
Prepare rough Identify one person to speak on behalf of the team
during the class debrief.
draft of an
influence chart
Move into Breakout rooms
TV Commercials

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 TV COMMERCIALS
– The client directs TV advertising for a large corporation
– His budget for a single ad campaign is typically around $10
million
– Under current procedures, a single TV advertisement is
commissioned for about $500,000, and the remainder of the
budget is spent on airing the ad
– The client is considering a new approach, in which two or more
draft commercials (at about the same cost) would be
commissioned from different agencies
– The best of these drafts would then be aired using the
remainder of the budget
– Is this new plan more effective than the old procedure?

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TV COMMERCIALS

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Iceberg

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 ICEBERGS FOR KUWAIT
Drinking water is in short supply in Kuwait and is therefore
very expensive
One suggested remedy is to tow icebergs from Antarctica to Kuwait (a
distance of about 9,600 kilometers) and melt them for freshwater
The volume of an iceberg ranges from about 500,000 cubic meters to
more than 10 million cubic meters
Theoretical analysis suggests that an idealized spherical iceberg would
lose about 0.2 meter of radius per day during transport, although this
amount increases with the speed of towing and the distance from the
pole
Fuel costs for towboats depend on the size of the boat, the speed, and
the volume of the iceberg being towed
Would it be cost-effective to tow icebergs to Kuwait for freshwater, and,
if so, how should this be done?
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 ICEBERGs
Days Rental
Towed Cost

Size of Berg

Fuel Total
Cost Cost
Size of Boat

Cost of
Fresh
Speed
Distance Melting Volume
from Rate Delivered
Pole

Shrinkage

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RACQUETBALL Racket

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 THE RACQUETBALL RACKET
• A new and cheaper process has been invented for manufacturing
racquetballs.
• The new ball is bouncier but less durable than the major brand.
• Unit variable costs of production for the new process will run about $0.52,
while the current process costs $0.95.
• A new plant would cost between $4 million and $6 million. We have 14
years of data on the number of racquetball players in the United States,
the average retail price of balls, and the number of balls sold.
• The number of players is expected to increase about 10 percent per year
for 10 years and then level off.
• In a recent survey, 200 players were asked to use both balls over several
months, and their preferences were assessed at several different prices for
the new ball. What is the net present value of an investment in a new
plant to manufacture balls using this new process?
• What is the best price for the new ball, and how might the competitor
react to introduction of a new ball?
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 THE RACQUETBALL RACKET
Woodrow
Price

Our Variable Plant

Price Costs Investment

Demand Annual
Costs Profit
Units
Produced

Units Annual
Sold Revenue Product Life

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 FOUR MODELING CASES

• Mess
• Problem
• Variables
• Assumptions
• Influence chart
• Modeling

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 MODELING HEURISTICS

• Simplify the problem

• Break the problem into modules
• Build a prototype and refine it
• Sketch graphs of key relationships
• Identify parameters and perform sensitivity analysis
• Separate the creation of ideas from their evaluation
• Work backward from the desired answer
• Focus on model structure, not data collection

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 Pyramid Principle

• Put the key statement at the top

• Drill down the Key statement into relevant
issues Problem Statement

Communicate downwards
Synthesize and Structure

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 Six-Sigma Process
• 1980-Bill Smith
• Reduces Time
• Reduces Defects
• Reduces Variability
• 3.4 errors for 1 million parts (99.9996%)
• DMAIC- Design, Measure, Analyze, Improve and
Control
• DMADV-Design, Measure, Analyze, Design and
Control

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 Toyota’s 8-step Problem Solving
Model
1.Common Understanding of the problem
2.Time lost in debate
3.Built a team
4.Root-cause analysis-PDCA (Plan-Do-Check-
Act)
Do Check
Act

Plan

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 Toyota’s 8-step Problem Solving
Model
• 5. Implementation
• 6. Corrective Action
• 7. Problem statement----Root cause analysis
• 8. Congratulate the team

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 Video

• Michael Porter: Why business can be good

at solving social problems
• https://www.youtube.com/watch?v=0iIh5YY
DR2o

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 Reflections and Assignments
1. Before next class:
• Week 1 Excel poll
• Read chapters 3, 4 and Appendix 1 of Powell & Baker
• Influence chart posted to team forum.
• Week 2 Team Forums

2. Next Week: Guest speaker – Nidal Mousa!

**Don’t forget the individual assignment is due Nov 5th!

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Assignment 1: Due Nov 5th 2020

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 Next week

Guest speaker: Nidal Mousa on Excel skills

Team discussions about preliminary focus

and model design for assignment two

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 Closing thoughts

“ Without data, you are just another

person with an opinion.” (Deming)

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Questions and
Discussion