Presentation on theme: "INTRODUCTION TO MODELING"— Presentation transcript:
1 INTRODUCTION TO MODELING Modeling Approach to Decision Making:Involves spreadsheet basedmanagement modelsUses spreadsheet software such as Excel®This approach is easy for managers to use,Results in better management decisions,Provides important insights into problem.
2 THE MODELING PROCESS Managerial Approach to Decision Making Manager analyzessituation (alternatives)These stepsUseSpreadsheetModelingMakes decision toresolve conflictDecisions areimplementedConsequences of decision
3 Operations Research / Management Science Origin: Military services early in World War 2.Urgent need to allocate scarce resources to the various military operations and to the activities within war operation in an effective mannerResearch teams called upon to apply a scientific approach to this and other strategic and tactical problemsThis scientific approach is transferred and, and is used extensively in the industrial part of business, as well as in a lot of other areas such as government, engineering, economics, natural and social sciencesDefinition.The use of modern science, with a special weight on numerical techniques, on complex problems concerning management of people, machines, raw materials and money, in business, industry, the public sector and military services. The goal of OR is to help the management to make strategical and tactical decisions on a more scientific basis.Mathematical programmingRoughly speaking, the part of OR that focuses primarily on deterministic problems where probability theory is not neededApproach: to construct a mathematical model to represent the problem of interest, identifying decisions to be made and constraints on the decisions. An algorithm is then used to solve for an optimal solution
4 Why learn Management Science? You will learn different techniques that may give public organizations and private firms and farms a more solid foundation for decision-makingYou will develop your modeling skills in general --> developing your abilities for logical thinkingYou will sharpen your quantitative skillsYou will develop your intuition by studying many different types of models
5 THE MODELING PROCESSas applied to the first two stages of decision making.ModelResultsAnalysisSymbolicWorldAbstractionInterpretationRealWorldManagementSituationDecisionsIntuition
6 THE MODELING PROCESS Managerial Judgment The Role of Managerial Judgment in the Modeling Process:AnalysisModelResultsSymbolicWorldManagerialJudgmentAbstractionInterpretationRealWorldManagementSituationDecisionsIntuition
7 THE MODELING PROCESS Decision Support Models force you to be explicit about your objectives.1.identify and record the types of decisions that influence those objectives.2.identify and record interactions and trade-offs among those decisions.3.think carefully about which variables to include.4.consider what data are pertinent and their interactions.5.recognize constraints or limitations on the values.6.Models allow communication of your ideas and understanding to facilitate teamwork.7.Models allow us to use the analytical power of spreadsheets hand in hand with the data storage and computational speed of computers.
8 MORE ON MODELS A model is a carefully selected abstraction of reality. Symbolic models1. always simplify reality.2. incorporate enough detail so thatthe result meets your needs,it is consistent with the data you have available,it can be quickly analyzed.Decision models are symbolic models in which some of thevariables represent decisions that must or could be made.Decision variables are variables whose values you can control, change or set.
9 MORE ON DECISION MODELS Decision models typically include an explicit performance measure that gauges the attainment of that objective.For example, the objective may be to maximize profit or minimize cost in relation to a performance measure (such as sales revenue, interest income, etc).In summary, decision models1. selectively describe the managerial situation.2. designate decision variables.3. designate performance measure(s) that reflect objective(s).
10 BUILDING MODELSTo model a situation, you first have to frame it (i.e.,develop an organized way of thinking about the situation).A problem statement involves possible decisions and amethod for measuring their effectiveness.Steps in modeling:1. Study the Environment to Frame the Managerial Situation2. Formulate a selective representation3. Construct a symbolic (quantitative) model
11 BUILDING MODELS 1. Studying the Environment 2. Formulation Select those aspects of reality relevant to the situationat hand.2. FormulationSpecific assumptions and simplifications are made.Decisions and objectives must be explicitly identified anddefined.Identify the model’s major conceptual ingredients using“Black Box” approach.
12 BUILDING MODELS The “Black Box” View of a Model Model Endogenous PerformanceMeasure(s)Decisions(Controllable)Parameters(Uncontrollable)ExogenousVariablesModelConsequenceEndogenous
13 BUILDING MODELS 3. Model Construction The next step is to construct a symbolic model.Mathematical relationships are developed. Graphing thevariables may help define the relationship.Var. XVar. YCost ACost BA + BTo do this, use “Modeling with Data” technique.
14 MODELING WITH DATA Consider the following data. Graphs are created to view any relationship(s) between the variables.This is the first step in formulating the equations in the model.
15 DETERMINISTIC AND PROBABILISTIC MODELS Deterministic Models are models in which all relevant data are assumed to be knownwith certainty.can handle complex situations with many decisions and constraints.are very useful when there are few uncontrolled model inputsthat are uncertain.are useful for a variety of management problems.are easy to incorporate constraints on variables.software is available to optimize constrained models.allows for managerial interpretation of results.constrained optimization provides useful way to frame situations.will help develop your ability to formulate models in general.
16 MODELING AND REAL WORLD DECISION MAKING Four Stages of applying modeling to real worlddecision making:Stage 1: Study the environment, formulate the modeland construct the model.Stage 2: Analyze the model to generate results.Stage 3: Interpret and validate model results.Stage 4: Implement validated knowledge.
17 MODELING AND REAL WORLD DECISION MAKING Management Lingo Modeling Term Formal DefinitionExampleDecision Variable Lever Controllable Exogenous InvestmentInput Quantity AmountParameter Gauge Uncontrollable Exogenous Interest RateInput QuantityConsequence Outcome Endogenous Output CommissionsVariable Variable PaidPerformance Yardstick Endogenous Variable Return onMeasure Used for Evaluation Investment(Objective Function Value)