1. Wiley 20101 Supplement A Spreadsheet Modeling: An Introduction Operations Management by R. Dan Reid & Nada R. Sanders 4th Edition © Wiley 2010

2. Wiley 20102 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.

3. Wiley 20103 Learning Objectives con’t 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.

4. Wiley 20104 What are Models? Mental Models Visual Models Physical Models Mathematical Models Spreadsheet Models

5. Wiley 20105 What is a model? Some model commonalities consist of Motivated by a decision need A model has inputs A model has outputs A model transforms inputs to outputs A model is defined as: A purposeful representation of the key factors in a situation and the relationships between them

6. Wiley 20106 Model Characteristics Inputs: quantities or factors that affect a decision Controllable Inputs (decision variables) Uncontrollable Inputs (parameters) Outputs: Primary & secondary, calculated from inputs and is of interest to the decision maker

7. Wiley 20107 Model Definition A model is a purposeful representation of the key factors in a situation and the relationships among them. So, it: is an abstraction of a real situation provides enough detail so results meet current needs omits unnecessary details

8. Wiley 20108 Model Schematic

9. Wiley 20109 Spreadsheet Modeling Process 1. Turn off the computer. Draw a picture/diagram, identify controllable & uncontrollable inputs, outputs. 2. Sketch out overall plan for spreadsheet model. Determine where inputs, intermediate calculations, and outputs will go. 3. Develop the base case spreadsheet model. 4. Test the model using trial values. 5. Use the model to perform the needed analysis. 6. Document the model so others can understand it.

10. Wiley 201010 Evaluating Spreadsheet Models Correct Correct numerical answer for base case (i.e., “given” information) Flexible Accurate results if any legitimate values of input are used. 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

11. Wiley 201011 Example 1 Sports Feet Company considering a 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

12. Wiley 201012 Sports Feet: “Black Box” Determine inputs & outputs

13. Wiley 201013 Sports Feet: 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

14. Wiley 201014 Sports Feet: Excel Model Trial value entered for “quantity made and sold.” At this trial value, Profit = ($12,000).

15. Wiley 201015 Sports Feet: 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.

16. Wiley 201016 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)

17. Wiley 201017 Example 1: Goal Seek Tools  Goal SeekAfter Solving Goal Seek changes the value of the Quantity Cell (B9) to 3250. This results in the Profit Cell (B16) having a value of $0. Therefore, the breakeven point is 3250 pairs of shoes.

18. Wiley 201018 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).

19. Wiley 201019 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.”

20. Wiley 201020 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!

21. Wiley 201021 Great Feet: Data Table “How To” 1. Enter labels in Rows 22 & 23 as shown in previous slide. 2. Cells A25:A41. Enter 0,500,…,8000 (use Edit  Fill or write a formula to add 500 to the above quantity). 3. Cell B24: Enter “=B16”. This is the “output” that Excel will compute each time. 4. Select A24:B41. Keep this range selected. 5. From menu, Data  Table. For the “column input cell,” select Cell B9. 6. Click OK. If all the profit values are the same, press the F9 key (F9 forces Excel to recalculate the spreadsheet).

22. Wiley 201022 Antonio’s Italian Restaurant: Multi-Criteria Decision Making Three possible locations for new restaurant. Seven different factors that are important in the decision. How to decide which location is “best?”

23. Wiley 201023 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.

24. Wiley 201024 Antonio’s: Constructing Model in Excel Cells B18:B24. Compute weighted scores for each factor/location combination. Cells B25:D25. Compute overall scores. Result: Location 1 has highest weighted score.

25. Wiley 201025 Antonio’s: Visualization (Stacked Column Chart)

26. Wiley 201026 Antonio’s Completed Model w/best score/location Completed model with enhancement to automatically show best score and best alternative. Uses Excel’s MAX, INDEX, and MATCH functions. See Excel Help system for more information.

27. Wiley 201027 Useful Spreadsheet Tips 1. Lay out data and the model in a logical and consistent way. 2. Name each worksheet of the workbook. 3. Learn to use Relative and Absolute References. 4. Use Cut (Ctrl-x) and Paste (Ctrl-V) to move formulas, Not Copy (Ctrl-C). 5. Use Shift + Arrow keys will select cells in a range. 6. Learn to use keyboard shortcuts to select cells and menu items. 7. Set up printouts to print with “Row and column headings” and “Gridlines.”

28. Wiley 201028 Useful Spreadsheet Tips con’t 8. Use Print Preview, Page Setup, and Page Break Preview to get your model to print exactly the way you want. 9. Create and use a standard footer for all your spreadsheet printouts. 10. Print a copy of the spreadsheet formulas in addition to the regular printout.

29. Wiley 201029 Important Excel Formulas

30. Wiley 201030 Important Excel Formulas con’t

31. Wiley 201031 Spreadsheet Modeling within OM: How it all fits together The models in this chapter have been fairly basic, but you should begin to see some of the powerful uses of models and quantitative analysis.

32. Wiley 201032 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 (essentially mathematical models) 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.

33. Wiley 201033 Supplement A Highlights con’t 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. 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 the test.

34. Wiley 201034 Supplement A Highlights con’t 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.

35. Wiley 201035 Supplement A Highlights con’t 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. Excel has many other chart types.

36. Wiley 201036 The End Copyright © 2010 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United State Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.