1. Supplement A Spreadsheet Modeling: An Introduction
Operations Management by
R. Dan Reid & Nada R. Sanders
2nd Edition © Wiley 2005
PowerPoint Presentation by
Roger B. Grinde, University of New Hampshire

2. Learning Objectives Explain what models are and why they are used.
Identify the main types of models.
Describe the different components of mathematical models.
Identify the recommended steps in the spreadsheet modeling process.
Explain the importance of model correctness, flexibility and documentation.
Construct spreadsheet models applying sound modeling principles.
Enter key Excel formulas and functions in models.
Use the Goal Seek and Data Table features of Excel to perform meaningful analysis.
Develop meaningful charts representing the results of analysis.

3. Types of Models Mental Models Visual Models Physical Models
Mathematical Models
Spreadsheet Models

4. Model Characteristics
Motivated by a decision
Inputs: quantities or factors that affect a decision
Controllable Inputs (decision variables)
Uncontrollable Inputs (parameters)
Outputs: Primary & secondary

5. Model Definition
A model is a purposeful representation of the key factors in a situation and the relationships among them.
Abstraction of real situation
Enough detail so results meet current needs
Omit unnecessary details
“Everything should be made as simple as possible, but not simpler.” (Albert Einstein)

6. Model Schematic

7. Spreadsheet Modeling Process
Turn off the computer. Draw a picture/diagram, identify controllable & uncontrollable inputs, outputs.
Sketch out overall plan for spreadsheet model. Determine where inputs, intermediate calculations, and outputs will go.
Develop the base case spreadsheet model.
Test the model using trial values.
Use the model to perform the needed analysis.
Document the model so others can understand it.

8. Evaluating Spreadsheet Models
Correct
Correct numerical answer for base case (i.e., “given” information)
Flexible
Accurate results if any of the input values are changed.
Each input value entered only once in the model.
Formulas contain only cell references, not numerical values.
Good: =B1+C1
Bad: =B1+55
Documented
Descriptive labels, units of measure, numerical formatting, cell formatting, cell comments
Printouts: include row/column headings, gridlines, footer

9. Example 1 Sports Feet: New line of footwear Variable Cost: $9.00
Selling Cost: $25.00
Fixed Cost: $52,000/year
Develop flexible spreadsheet model, perform sensitivity analysis, find breakeven point

10. Example 1: “Black Box”
Determine inputs & outputs

11. Example 1: Key Relationships
Annual Profit = Annual Revenue – Annual Total Cost
Annual Revenue = Unit Selling Price * Quantity Made and Sold
Annual Total Cost = Annual Fixed Cost + Annual Variable Cost
Annual Variable Cost = Unit Variable Cost * Quantity Made and Sold

12. Example 1: Excel Model
Trial value entered for “quantity made and sold.” At this trial value, Profit = ($12,000).

13. Example 1: Find Breakeven Point
What Quantity results in a Profit of $0?
We have a flexible model. Can do “what-if” analysis on cell B9 to determine when the Profit becomes $0.
However, Excel has Goal Seek tool which can automate this what-if analysis.

14. Excel: Goal Seek
Goal Seek works backwards to find the value of an input quantity that causes an output quantity to have a particular value.
Excel: ToolsGoal Seek
Set Cell: Output Cell (cell must contain a formula)
To Value: Specify the numerical value you want the output cell to have (e.g., 0 for a breakeven analysis).
By Changing Cell: Input Cell (cell must contain a value)

15. Example 1: Goal Seek ToolsGoal Seek After Solving
Goal Seek changes the value of the Quantity Cell (B9) to This results in the Profit Cell (B16) having a value of $0. Therefore, the breakeven point is 3250 pairs of shoes.

16. Goal Seek Comments
Sometimes critical values (e.g., breakeven points) can be found using algebraic methods. However, many real-world problems are quite complex and an algebraic approach is difficult, if not impossible. This is where Goal Seek is particularly useful.
There is nothing special about choosing $0 for profit. We used this because it is common to find a breakeven point. However, in a particular situation we may be interested in some other critical value (e.g., How much do we need to sell in order to make a $2000 profit?).
Goal Seek can be used to find a series of critical values for each of the input quantities. For example, we could find the variable cost, the fixed cost, and the selling price for which profit equals $0 (for a specified quantity made and sold).

17. Excel: Data Table Feature
Spreadsheets are a great “what-if” tool.
But, what-if analysis can be tedious.
Excel has a feature called a Data Table
Data Table allows one to systematically vary one or two input quantities, and keep track of a resulting input value.
For example, vary “quantity made and sold” and keep track of “profit.”

18. Example 1: Data Table This is a completed Data Table
Excel automatically calculates the profit for each of the sales quantities in the left column.
The results are dynamic. If we change, for example, the variable cost, this data table will be automatically re-calculated.
Powerful tool for sensitivity analysis!

19. Example 1: Data Table “How To”
Enter labels in Rows 22 & 23 as shown in previous slide.
Cells A25:A41. Enter 0,500,…,8000 (use EditFill or write a formula to add 500 to the above quantity).
Cell B24: Enter “=B16”. This is the “output” that Excel will compute each time.
Select A24:B41. Keep this range selected.
From menu, DataTable. For the “column input cell,” select Cell B9.
Click OK. If all the profit values are the same, press the F9 key (F9 forces Excel to recalculate the spreadsheet).

20. Example 2: Multi-Criteria Decision Making
Antonio’s Italian Restaurant
Three possible locations for new restaurant.
Seven different factors that are important in the decision.
How to decide which location is “best?”

21. Multi-Criteria Model: Basic Ideas
Develop weights for each factor. Sum of weights to equal 100. Higher weights imply more important factors.
For each location and factor, assign a score representing how well that location scores with respect to that factor. Here we use a 1-5 scale, with higher values indicating a better score.
Overall score for each location is a weighted sum of the factor weights and the scores for that location.

22. Example 2: Spreadsheet Model
Cells B18:B24. Compute weighted scores for each factor/location combination.
Cells B25:D25. Compute overall scores.
Result: Location 1 has highest weighted score.

23. Example 2: Visualization (Stacked Column Chart)

24. Example 2 Enhancement
Automatically show best score and best alternative.
Uses Excel’s MAX, INDEX, and MATCH functions. See Excel Help system for more information.

25. SUMPRODUCT Function
SUMPRODUCT function a handy way to computed weighted sums, such as in this example.
=SUMPRODUCT (range1, range2)
Range1 and range2 must be the same size.
SUMPRODUCT multiplies corresponding elements of range1 and range2, and then sums these products.
Example: =SUMPRODUCT(A1:A3,B1:B3) is equivalent to =A1*B1 + A2*B2 + A3*B3.
However, with large ranges, SUMPRODUCT is much easier and less error-prone!

26. Example 2 with SUMPRODUCT
When using SUMPRODUCT, the individual weight*score calculations are not needed. They are included as part of the SUMPRODUCT calculation.

27. Supplement A Highlights
A model is a purposeful representation of the key factors in a situation, and the relationships among them. It abstracts the real situation, incorporating those factors that are important to the decision it was designed to address.
The main types of models are mental models, visual models, physical models, and mathematical models. Spreadsheet models are essentially mathematical models, and are the focus of this supplement.
Mathematical models translate inputs into outputs through a set of relationships. Inputs consist of uncontrollable inputs and controllable inputs, sometimes called decision variables. There can be many outputs of mathematical models, but often we are interested in a relatively small number of primary outputs.
The recommended spreadsheet modeling process consists of understanding the problem, drawing a sketch of the model, developing a base case spreadsheet, testing the spreadsheet, using the model to perform analysis, and documenting the model.
Models should be correct, flexible, and documented. Correctness implies the numerical calculations are correct for the current situation. Being flexible implies that the user can change any of the input values, and the results will be correctly calculated. A well-documented spreadsheet can be understood by someone else without a detailed explanation by the developer.

28. Supplement A Highlights (continued)
This supplement focused on the construction of models by applying sound modeling principles. You should invest time applying the principles to problems in this supplement as well as other problems in this text.
Key Excel formulas and functions were addressed in this supplement. A critical skill is the correct use of Relative and Absolute References. Mastery allows you to develop a model in a fraction of the time it would take otherwise. Several important functions were shown in Table A-3.
Two useful Excel analysis tools, Goal Seek and Data Table, were illustrated. Goal Seeks allows you to find the value of an input that causes an output to be equal to a value you specify. A Data Table allows you to vary one (or two) inputs, and automatically calculate the value of an output for each of the input values in the range. We covered data tables where one input was varying.
Several different chart types were used to illustrate model results. These were the XY chart, the Column chart, and the Stacked Column chart. Other useful chart types for presentation of model results are Pie charts, Line charts, and Bar charts. Excel has many other chart types.

29. The End
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