Business Intelligence

andAnalytics:System
s for Decision
Support

Chapter 10 :
Model Based Decision
Making
 Learning Objectives
 Understand the basic concepts of analytical
decision modeling
 Describe how prescriptive models interact
with data and the users
 Understand the well-known model classes and
decision making with a few alternatives
 Describe how spreadsheets can be used for
MSS modeling and solution
Describe how to structure a linear
programming model
Explain what is meant by sensitivity analysis,
what-if analysis, and goal seeking
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 Decision Support Systems
Modeling
 A key element in most MSS

 Leads to reduced cost and increased revenue

 DuPont Simulates Rail Transportation System and
Avoids Costly Capital Expenses

 Procter & Gamble uses several DSS models

collectively to support strategic decisions
 Locating distribution centers, assignment of DCs to
warehouses/customers, forecasting demand, scheduling
production per product type, etc.
 Fiat, Pillowtex (…operational efficiency)…

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 Major Modeling Issues
 Problem identification and environmental
analysis (information collection)
 Variable identification
 Influence diagrams, cognitive maps
 Forecasting/predicting
 More information leads to better prediction
 Multiple models: A MSS can include several
models, each of which represents a
different part of the decision-making
problem
 Categories of models >>>
 Model management
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 Categories of Models
Category Objective Techniques
Optimization of Find the best solution from a Decision tables,
problems with few small number of alternatives decision trees
alternatives
Optimization via Find the best solution from a Linear and other
algorithm large number of alternatives mathematical
using a step- by-step process programming
models
Optimization via an Find the best solution in one step Some inventory
analytic formula using a formula models
Simulation Find a good enough solution by Several types of
experimenting with a dynamic simulation
model of the system
Heuristics Find a good enough solution Heuristic
using “common- sense” rules programming and
expert systems
Predictive models Predict the future for a given Forecasting
scenario models
Other models Solve a what-if case, using a Financial Modelling
 Static and Dynamic Models
 Static Analysis
 Single snapshot of the situation
 Single interval
 Steady state
 Dynamic Analysis
 Dynamic models

Evaluate scenarios that change over time

Time dependent
 Represents trends and patterns over time
 More realistic: Extends static models
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 Decision Making:
Treating Certainty, Uncertainty and
iCsekrtainty Models
RiskAssume
 complete knowledge
 All potential outcomes are known
 May yield optimal solution
 Uncertainty
 Several outcomes for each decision
 Probability of each outcome is unknown
 Knowledge would lead to less uncertainty
 Risk analysis (probabilistic decision making)
 Probability of each of several outcomes
occurring
 Level of uncertainty => Risk (expected
value)
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 Certainty, Uncertainty and Risk

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 Influence Diagrams
(Posted on the Course Website)
 Graphical representations of a model
“Model of a model”
 A tool for visual communication
 Some influence diagram packages create and
solve the mathematical model
 Framework for expressing MSS model
relationships
Rectangle = a decision variable
Circle = uncontrollable or intermediate variable
Oval = result (outcome) variable: intermediate or final

Variables are connected with arrows  indicates the

direction of influence (relationship)
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 Influence Diagrams:
Relationships
CERTAINTY

Amount in Interest
CDs Collected
The shape of
UNCERTAINTY
the arrow
indicates the
Price type of
Sales relationship
RANDOM (risk) variable: Place a tilde (~) above the variable’s name

~
Demand
S
ales
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 Influence Diagrams: Example
An influence diagram for the profit model
Unit Price

~ Income
Amount used in
Advertisement Units Sold
Profit

Profit = Income – Expense Unit Cost Expenses

Income = UnitsSold * UnitPrice
UnitsSold = 0.5 * Advertisement Expense
Expenses = UnitsCost * UnitSold + FixedCost

Fixed Cost

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 Influence Diagrams: Software
 Analytica, Lumina Decision Systems
 Supports hierarchical (multi-level) diagrams
 DecisionPro, Vanguard Software Co.
 Supports hierarchical (tree structured) diagrams
 DATA Decision Analysis, TreeAge Software
 Includes influence diagrams, decision trees and
simulation
 Definitive Scenario, Definitive Software
 Integrates influence diagrams and Excel, also supports
Monte Carlo simulations
 PrecisionTree, Palisade Co.
 Creates influence diagrams and decision trees directly
in an Excel spreadsheet
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 Analytica Influence Diagram of a
Marketing
Problem: The Marketing Model

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 Analytica: The Price Submodel

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 Analytica: The Sales Submodel

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 MSS Modeling with Spreadsheets
 Spreadsheet: most popular end-user modeling
tool
 Flexible and easy to use
 Powerful functions
 Add-in functions and solvers
 Programmability (via macros)
 What-if analysis
 Goal seeking
 Simple database management
 Seamless integration of model and data
 Incorporates both static and dynamic models
 Examples: Microsoft Excel, Lotus 1-2-3
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 Excel spreadsheet - static model example:
Simple loan calculation of monthly
payments

F  P(1  i)n

A  P  i(1 
i)(1
n  n
i)  
1

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 Excel spreadsheet -
Dynamic model
example:
Simple loan
calculation of
monthly payments
and effects of
prepayment

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 Decision Analysis: A Few
Alternatives
Single Goal Situations
Decision tables
 Multiple criteria decision analysis
 Features include decision
variables (alternatives),
uncontrollable variables, result
variables

 Decision trees
 Graphical representation of
relationships
 Multiple criteria approach
 Demonstrates complex
relationships
 Cumbersome, if many
alternatives exists

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 Decision Tables
 Investment example

 One goal: maximize the yield after one year

 Yield depends on the status of the economy

(the state of nature)
 Solid growth
 Stagnation
 Inflation

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 Investment Example:
Possible Situations

1. If solid growth in the economy, bonds yield

12%; stocks 15%; time deposits 6.5%

2. If stagnation, bonds yield 6%; stocks 3%;

time deposits 6.5%

3. If inflation, bonds yield 3%; stocks lose 2%;

time deposits yield 6.5%

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 Investment Example:
Decision Table
 Payoff Decision variables (alternatives)
 Uncontrollable variables (states of economy)
 Result variables (projected yield)
 Tabular representation:

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 Investment Example:
Treating Uncertainty
 Optimistic approach
 Pessimistic approach
 Treating Risk:
 Use known probabilities
 Risk analysis: compute expected values

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 Decision Analysis: A Few
Alternatives
 Other methods of treating risk
 Simulation, Certainty factors, Fuzzy
logic
 Multiple goals
 Yield, safety, and liquidity

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 MSS Mathematical Models
 Non-Quantitative Models (Qualitative)
 Captures symbolic relationships between decision variables,
uncontrollable variables and result variables
 Quantitative Models: Mathematically links decision
variables, uncontrollable variables, and result
variables
 Decision variables describe alternative choices.
 Uncontrollable variables are outside decision-maker’s control
 Result variables are dependent on chosen combination of decision
variables and uncontrollable
les variables
b
Varia
t Uncontrollable
nden Variables
e
ep
Ind D
Decision Mathematical e Result
Variable Relationships p Variable
s Intermediate e s
Variables
n
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d
 Optimization
via Mathematical Programming
 Mathematical Programming
A family of tools designed to help solve
managerial problems in which the decision
maker must allocate scarce resources among
competing activities to optimize a measurable
goal

 Optimal solution: The best possible solution

to a modeled problem
 Linear programming (LP): A mathematical model
for the optimal solution of resource allocation
problems. All the relationships are linear

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 LP Problem Characteristics
1.Limited quantity of economic resources
2.Resources are used in the production
of
products or services
3. Two or more ways (solutions, programs)
to use the resources
4. Each activity (product or service) yields
a return in terms of the goal
5. Allocation is usually restricted by
constraints
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 Linear Programming Steps
 1. Identify the …
 Decision variables
 Objective
 function
 Objective function coefficients
Capacities / Demands
Constraints

Line
 2. Represent the model
 LINDO: Write mathematical formulation
 EXCEL: Input data into specific cells in Excel

 3. Run the model and observe the

results
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 LP Example
The Product-Mix Linear Programming Model
 MBI Corporation
 Decision: How many computers to build next month?
 Two types of mainframe computers: CC7 and CC8
 Constraints: Labor limits, Materials limit, Marketing
lower limits

CC7 Rel Limit

500 <= 200,000 /mo
CC8 ($) 10,000 15,000 <=
Materials 8,000,000 /mo
Labor (days) 1
Units 300 >= 100
Units 1 >= 200
Profit ($) 8,000 12,000 Max

Objective: Maximize Total Profit / Month

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 LP Solution

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 LP Solution

 Decision Variables:
X1: unit of CC-7
X2: unit of CC-8
 Objective Function:
Maximize Z (profit)
Z=8000X1+12000X2
 Subject To
300X1 + 500X2 
200K
10000X1 + 15000X2  8000K
X1  100
X2  200

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 Sensitivity, What-if, and
Goal Seeking Analysis
 Sensitivity
 Assesses impact of change in inputs on outputs
 Eliminates or reduces variables
 Can be automatic or trial and error
 What-if
 Assesses solutions based on changes in variables
or assumptions (scenario analysis)
 Goal seeking
 Backwards approach, starts with goal
 Determines values of inputs needed to achieve
goal
 Example is break-even point determination
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 End of the Chapter

 Questions / Comments…

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Copyright © 2011 Pearson Education, Inc.

Publishing as Prentice Hall

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