1. Spreadsheet Modeling & Decision Analysis:
A Practical Introduction to Management Science, 3e
by Cliff Ragsdale

2. Introduction to Modeling & Problem Solving
Chapter 1
Introduction to Modeling & Problem Solving
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

3. Introduction We face numerous decisions in life & business.
We can use computers to analyze the potential outcomes of decision alternatives.
Spreadsheets are the tool of choice for today’s managers.
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

4. What is a “Computer Model”?
A set of mathematical relationships and logical assumptions implemented in a computer as an abstract representation of a real-world object of phenomenon.
Spreadsheets provide the most convenient way for business people to build computer models.
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

5. What is Management Science?
A field of study that uses computers, statistics, and mathematics to analyze and solve business problems.
a.k.a. Operations Research, Decision Science, and/or OR/MS.
This book focuses on using OR/MS tools in spreadsheets.
Everyone using spreadsheets for model building and decision making is an OR/MS practitioner.
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

6. Home Runs in Management Science (see Figure 1.1)
Pacific Gas & Electric (PG&E)
Large privately owned utility supplying gas and electric power in California
Developed Hydro-Thermal Optimization system production scheduling, energy trading, fuel forecasting and pricing.
Benefits:
Estimated savings of $15 annually.
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

7. Home Runs in Management Science continued…
Taco Bell
Operates 6,490 units with annual sales of $4.6 billion
Uses mathematical models to predict customer arrivals, analyze service levels, and schedule crews to minimize payroll costs
Benefits:
Labor cost savings of $40.34 million over four years.
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

8. Home Runs in Management Science continued...
Sears, Roebuck & Company
One of the largest merchandise & service retailers in the world
Maintains 13,500 service and delivery vehicles, making approximately 20 million service and delivery calls annually
Combined OR techniques with GIS for more efficient service and delivery routes
Benefits:
Over $9 million in one time savings
Over $42 million in annual savings
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

9. Home Runs in Management Science continued...
Grantham, May, Van Otterloo and Co.
Boston-based investment firm with over $26 billion in assets
Developed a model to design portfolios that achieve investment objectives while minimizing custodial and transaction fees
Benefits:
40-60% reduction in the average number of stocks held
Number of trades reduced by 75-80%
Reduced annual trading costs by $4 million
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

10. The Modeling Approach to Decision Making
Everyone uses models to make decisions.
Types of models:
Mental (arranging furniture)
Visual (blueprints, road maps)
Physical/Scale (aerodynamics, buildings)
Mathematical (what we’ll be studying)
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

11. Characteristics of Models
Models are usually simplified versions of the things they represent
A valid model accurately represents the relevant characteristics of the object or decision being studied
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

12. Benefits of Modeling
Economy - it is often less costly to analyze decision problems using models.
Timeliness - models often deliver needed information more quickly than their real-world counterparts.
Feasibility - models can be used to do things that would be impossible.
Models give us insight & understanding that improves decision making.
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

13. Example of a Mathematical Model
Profit = Revenue - Expenses or
Profit = f(Revenue, Expenses)
Y = f(X1, X2)
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

14. A Generic Mathematical Model
Y = f(X1, X2, …, Xn)
Where:
Y = dependent variable (a bottom line performance measure)
Xi = independent variables (inputs having an impact on Y)
f(.) = function defining the relationship between the Xi and Y
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

15. Mathematical Models & Spreadsheets
At a conceptual level, most spreadsheet models are very similar to our generic mathematical model:
Y = f(X1, X2, …, Xn)
Most spreadsheets have cells representing inputs (or Xi) to which mathematical functions ( f(.)) are applied to compute some bottom line performance measure (or Y)
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

16. See file: Fig1-2.xls
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

17. Categories of Mathematical Models
Model Independent OR/MS
Category Form of f(.) Variables Techniques
Prescriptive known, known or under LP, Networks, IP,
well-defined decision maker’s CPM, EOQ, NLP,
control GP, MOLP
Predictive unknown, known or under Regression Analysis,
ill-defined decision maker’s Time Series Analysis,
control Discriminant Analysis
Descriptive known, unknown or Simulation, PERT, well-defined uncertain Queueing, Inventory Models
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

18. The Problem Solving Process
Formulate & Implement Model
Identify Problem
Analyze Model
Test Results
Implement Solution
unsatisfactory
results
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

19. Good Decisions vs. Good Outcomes
Good decisions do not always lead to good outcomes...
If sunny weather is predicted you may (rightly) decide to your umbrella at home. If it rains unexpectedly you may get wet (a bad outcome), but that doesn’t mean you made a bad decision.
A structured, modeling approach to decision making helps us make good decisions, but can’t guarantee good outcomes.
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.

20. End of Chapter 1
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.