Decision Support and Business Intelligence Systems

(9th Ed., Prentice Hall) Chapter 4:

Modeling and Analysis

Q4. Why are models not used in industry as frequently as they should or could be?

4.2 MSS Modeling

Modeling is a key element in most MSS and a necessity in a model-based DSS. 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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EQ1 What is the relationship between environmental analysis and problem identification?

Major Modeling Issues

1.

Problem identification and environmental analysis (information collection):

Environmental scanning and analysis, which is the monitoring, scanning, and interpretation of collected information. It is entirely possible that environmental factors have created the current problem. BI/business analytics (BA) tools can help identify problems by scanning for them

2.

Variable identification:

Identification of a model's variables (e.g., decision, result, uncontrollable), and relations between them. Influence diagrams (graphical models of mathematical models to facilitate the identification process), cognitive maps (A more general form of an influence diagram for better understanding of a problem)

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Major Modeling Issues

3.

Forecasting (predicting Analytics):

Forecasting is predicting the future. This form of predictive analytics is essential for construction and manipulating models, because when a decision is implemented the results usually occur in the future. Whereas DSS are typically designed to determine what will be, traditional MIS report what is or what was. There is no point in running a what-if (sensitivity) analysis on the past, because decisions made then have no impact on the future.

More information leads to better prediction

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Major Modeling Issues

4.

Multiple models: A MSS can include several models, each of which represents a different part of the decision-making problem.

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Major Modeling Issues 5. Categories of Models IMP

Category Optimization of problems with few alternatives 3. What are the major types of models used in DSS? Optimization via algorithm Optimization via an analytic formula Simulation Objective Find the best solution from a small number of alternatives Find the best solution from a large number of alternatives using a step-by-step process Find the best solution in one step using a formula Find a good enough solution by experimenting with a dynamic model of the system Find a good enough solution using common-sense rules Predict future occurrences, what-if analysis, what-if analysis, Techniques Decision tables, decision trees Linear and other mathematical programming models Some inventory models Several types of simulation Heuristic programming and expert systems Forecasting, Markov chains financial,

Heuristics Predictive models other models

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Major Modeling Issues

6.

Model management:
Models, like data. must be managed to maintain their integrity, and thus their applicability. Such management is done with the aid of model base management systems (MBMS).

7.

KNOWLEDGE-BASED MODELING: DSS uses mostly quantitative models, whereas expert systems use qualitative, knowledge-based models in their applications. Some knowledge is necessary to construct solvable (and therefore usable) models.

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Static and Dynamic Models

Static Analysis:

Models that describe relationships among parts of a system at a point in time

Single snapshot of the situation Single interval Steady state

Dynamic Analysis:

Models whose input data are changed over time (e.g. inventory models).

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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4.4 Decision Making: Treating Certainty, Uncertainty and Risk

Decision situations are often classified on the basis of what the decision maker knows (or believes) about the forecasted results. We customarily classify this knowledge into three categories, ranging from complete knowledge to complete ignorance:

Certainty Risk Uncertainty

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4.4 Decision Making: Treating Certainty, Uncertainty and Risk

Certainty Models (Decision Making Under Certainty)

Assume complete knowledge All potential outcomes are known May yield optimal solution

Uncertainty (Decision Making Under Uncertainty)

EQ4: Explain why solving problems under uncertainty sometimes involves assuming that the problem is to be solved under conditions of risk.

the decision maker considers situations in which Several outcomes are possible for each decision Probability of each outcome is unknown Knowledge would lead to less uncertainty
Probability of each of several outcomes occurring Level of uncertainty => Risk (expected value)

Risk analysis (probabilistic decision making)

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Influence Diagrams

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 CDs Interest Collected

UNCERTAINTY

Price Sales

The shape of the arrow indicates the type of relationship

RANDOM (risk) variable: Place a tilde (~) above the variables name ~ Demand Sales
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Influence Diagrams: Example

An influence diagram for the profit model
Unit Price ~ Amount used in Advertisement

Income Units Sold Profit

Profit = Income Expense Unit Cost Income = UnitsSold * UnitPrice UnitsSold = 0.5 * Advertisement Expense Expenses = UnitsCost * UnitSold + FixedCost
Fixed Cost

Expenses

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4.5 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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Decision Analysis: A Few Alternatives

Decision analysis lists the alternatives with their forecasted contributions to the goal and the probability of realizing such a contribution.

Single Goal Situations

Decision tables

Decision trees

Multiple criteria decision analysis Features include decision variables (alternatives), uncontrollable variables, result variables
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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1. 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: 2. Decision Table

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

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Investment Example: 3. Treating Uncertainty

Optimistic approach Pessimistic approach Treating Risk:

Use known probabilities Risk analysis: compute expected values

E.g. for Bonds calculation: (12*0.5) + (6* 0.3) + (3*0.2) = 8.4

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Decision Analysis: A Few Alternatives

Other methods of treating risk

Simulation, Certainty factors, Fuzzy logic

Yield, safety, and liquidity

Multiple goals

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4.3 MSS Mathematical Models

Mathematical Models (e.g., mathematical, financial, engineering).

All models are made up of four basic components: result (or outcome) variables, decision variables, uncontrollable variables (and/or parameters), and intermediate result variables. Mathematical relationships link these components together.

Uncontrollable Variables Mathematical Relationships

Intermediate

Decision Variables

Result Variables

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4.3 MSS Mathematical Models

Quantitative Models: Mathematically links decision variables, uncontrollable variables, and result variables

Decision variables describe alternative choices of action. Uncontrollable variables are outside decision-makers control Result (outcome) variables are dependent on chosen combination of decision variables, uncontrollable variables, and relationships among the variables. Intermediate result variables reflect intermediate outcomes in mathematical models

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4.6 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 (Q) 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 (Q list)

Linear programming is appropriate for the problems with the following 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 resources 4. Each activity (product or service) yields a return in terms of the goal 5. Allocation is restricted by constraints
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Linear Programming Steps

Q(components)

1. Identify the following: (Problem is composed of)

Decision variables (whose values are unknown) Objective function (a linear mathematical function that 1.relates the decision variables to the goal, 2.measures goal attainment, and is to be optimized maximized or minimized) Objective function coefficients : (unit profit or cost coefficients indicating the contribution to the objective of one unit of a decision variable)
Constraints: (expressed in the form of linear inequalities or equalities that limit resources and/or requirements; these relate the variables through linear relationships),

Capacities / Demands : capacities (which describe the upper and sometimes

lower limits on the constraints and variables), and input/output (technology) coefficients (which indicate resource utilization for a decision variable).

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Linear Programming Steps

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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4. Dene the product-mix problem.

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

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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4.7 Sensitivity, What-if, and Goal Seeking Analysis (Q compare)

Sensitivity

Assesses impact of change in inputs on outputs Eliminates or reduces variables Can be automatic or trial and error
Assesses solutions based on changes in variables or assumptions (scenario analysis)

What-if

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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1. What is a search approach?

4.10 PROBLEM-SOLVING SEARCH METHODS

search methods used in the choice phase of problem solving. These include analytical techniques, algorithms, blind searching, and heuristic searching. The choice phase of problem solving involves a search for an appropriate course of action (among those identified during the design phase) that can solve the problem. Several major search approaches are possible, depending on the criteria (or criterion) of choice and the type of modeling approach used. These search approaches are shown in Figure 4.10. For normative models, such as mathematical programming-based ones, either an analytical approach is used or a complete, exhaustive enumeration (comparing the outcomes of all the alternatives) is applied. For descriptive models, a comparison of a limited number of alternatives is used. either blindly or by employing heuristics. Usually the results guide the decision makers search.

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2. List the different problemsolving search methods.

Heuristic Programming - SEARCH

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4.10 PROBLEM-SOLVING SEARCH METHODS

Analytical Techniques: Analytical techniques use mathematical formulas to derive an optimal solution directly or to predict a certain result. Analytical techniques are used mainly for solving structured problems, usually of a tactical or operational nature, in areas such as resource allocation or inventory management. Blind or heuristic search approaches are generally employed to solve more complex problems Algorithms: Analytical techniques may use algorithms to increase the efficiency of the search. An algorithm is a step-by-step search process for obtaining an optimal solution (see Figure 4.11). (Note: There may be more than one optimum, so we say an optimal solution rather than the optimal solution.) Solutions are generated and tested for possible improvements. An improvement is made whenever possible, and the new solution is subjected to an improvement test. based on the principle of choice (i.e., possible. Most mathematical programming problems are solved by using efficient algorithms. Web search engines use algorithms to speed up searches and produce accurate results. Googles search algorithms are so good that Yahoo! pays millions of dollars annually to use them.
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4.10 PROBLEM-SOLVING SEARCH METHODS

4.11

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3. What are the practical limits to blind searching?

4.10 PROBLEM-SOLVING SEARCH METHODS

Blind Searching: In conducting a search, a description of a desired solution may be given. This is called a goal. A set of possible steps leading from initial conditions to the goal is called the search steps. Problem solving is done by searching through the possible solutions. The first of these search methods is blind searching. The second is heuristic searching. Blind search techniques are arbitrary search approaches that are not guided. There are two types of blind searches: a complete enumeration, for which all the alternatives are considered and therefore an optimal solution is discovered: and an incomplete, or partial, search, which continues until a good-enough solution is found. The latter is a form of suboptimization. There are practical limits on the amount of time and computer storage available for blind searches. In principle, in some situations, the scope of the search can be limited; however, this method is not practical for solving very large problems because too many solutions must be examined before an optimal solution is found.

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4. How are algorithms and heuristic search methods similar? How are they different?

Heuristic Programming

Cuts the search space Gets satisfactory solutions more quickly and less expensively Finds good enough feasible solutions to very complex problems Heuristics can be

Quantitative Qualitative (in ES)

Traveling Salesman Problem >>>

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Traveling Salesman Problem

What is it?

A traveling salesman must visit customers in several cities, visiting each city only once, across the country. Goal: Find the shortest possible route Total number of unique routes (TNUR): TNUR = (1/2) (Number of Cities 1)! Number of Cities TNUR 5 12 6 60 9 20,160 20 1.22 1018

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When to Use Heuristics

When to Use Heuristics

Inexact or limited input data Complex reality Reliable, exact algorithm not available Computation time excessive For making quick decisions

Limitations of Heuristics

Cannot guarantee an optimal solution

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Modern Heuristic Methods

Tabu search

Intelligent search algorithm

Genetic algorithms

Survival of the fittest

Simulated annealing

Analogy to Thermodynamics

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4.11 Simulation

Simulation is the appearance of reality. In MSS, simulation is a technique for conducting experiments (e.g., what-if analyses) with a computer on a model of the behavior of a system DSS deals with semistructured or unstructured situations, reality is complex, which may not be easily represented by optimization or other models but can often be handled by simulation Most commonly used DSS methods.
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(Q list)Major Characteristics of Simulation

1.

Models generally represent reality, whereas simulation Imitates reality and capture its richness

2. 3.

Technique for conducting experiments Descriptive, not normative tool: There is no

automatic search for an optimal solution. Instead, a simulation model describes or predicts the characteristics of a given system under different conditions. The simulation process repeats an experiment many times to obtain an estimate of the effect of certain actions.

4.

5.

Often to solve very complex problems Simulation is normally used only when a problem is too complex to be treated using numerical optimization techniques
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Q (list) Advantages of Simulation

The theory is fairly straightforward Great deal of time compression Experiment with different alternatives The model reflects managers perspective Can handle wide variety of problem types Can include the real complexities of problems Produces important performance measures is the only DSS modeling tool for non-structured problems
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Limitations (dis-adv) of Simulation

Cannot guarantee an optimal solution Slow and costly construction process Cannot transfer solutions and inferences to solve other problems (problem specific) So easy to explain to managers, may lead overlooking analytical solutions require special skills

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Simulation process Methodology steps

(q)

Model real system and conduct repetitive experiments. Steps:

1. 2. 3. 4. Define problem 5. Conduct experiments Construct simulation model 6. Evaluate results Test and validate model 7. Implement solution Design experiments (e.g. Determining how long to run the simulation)

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(Q. List) Simulation Types

1.

Stochastic vs. Deterministic Simulation

In probabilistic (Stochastic ) simulation, one or more of the independent variables (e.g., the demand in inventory problem) are probabilistic., Probabilistic simulation is conducted with the aid of Monte Carlo simulation technique Time-independent refers to a situation in which it is not important to know exactly when the event occurred. Time independent stochastic simulation via Monte Carlo technique (X = A + B)

2.

Time-dependent vs. Time-independent Simulation

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Simulation Types

Discrete event vs. Continuous simulation They follow certain probability distributions, which can be either (Discrete or Continuous probability distributions) Steady State vs. Transient Simulation ???? Simulation Implementation

Visual simulation: The graphical display of computerized results, which may include animation Object-oriented simulation: is an object-oriented process modeling tool that lets the user create a simulation model by using screen-based objects

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4.12 Visual Interactive Modeling (VIM) / Visual Interactive Simulation (VIS)

Visual interactive modeling (VIM) Also called

Visual interactive problem solving Visual interactive modeling Visual interactive simulation

Uses computer graphics to present the impact of different management decisions Often integrated with GIS Users perform sensitivity analysis Static or a dynamic (animation) systems

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4.13 Model Base Management

it is important, especially in large-scale DSS, to manage the models and their solutions. This is the job of a model base management system (MBMS), a software package that theoretically has capabilities similar to those of a DBMSto manage, manipulate, and run the models embedded in the DSS. There are also relational model base management systems (RMBMS) and object-oriented model base management systems (OOMBMS) that provide the capabilities of the MBMS, paralleling the concepts of RDBMS and OODBMS, respectively.

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EQ20: There are hundreds of DBMS packages on the market. Explain why there are no packages for MBMS. 4. List the reasons model management is difficult.

4.13 Model Base Management

MBMS: capabilities similar to that of DBMS But, there are no comprehensive model base management packages Each organization uses models somewhat differently There are many model classes

Within each class there are different solution approaches

Relations MBMS Object-oriented MBMS

3. Identify three classes of models and list two kinds of problems each can solve.???? P179

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EQ3: What is the difference between an optimistic approach and a pessimistic approach to decision making under assumed uncertainty? EQ4: Explain why solving problems under uncertainty sometimes involves assuming that the problem is to be solved under conditions of risk. EQ5: Excel is probably the most popular spreadsheet software for PCs. Why? What can we do with this package that makes it so attractive for modeling efforts? EQ6: Explain how OLAP provides access to powerful models in a spreadsheet structure. EQ7: Explain how decision trees work. How can a complex problem be solved by using a decision tree? EQ8: Explain how LP can solve allocation problems.
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9 What are the advantages of using a spreadsheet package to create and solve LP models? What are the disadvantages? 10 What are the advantages of using an LP package to create and solve LP models? What are the disadvantages? 11 What is the difference between decision analysis with a single goal and decision analysis with multiple goals (i.e.. criteria)? Explain in detail the difficulties that may arise when analyzing multiple goals. 12 Explain how multiple goals can arise in practice. 16 What are the advantages of using a spreadsheet package to perform simulation studies? What are the disadvantages? 17Compare the methodology of simulation to Simons four-phase model of decision making. Does the methodology of simulation map directly into Simons model? Explain. 18 Many computer games can be considered visual simulation. Explain why. 19 Explain why VIS is particularly helpful in implementing recommendations derived by computers. 21 Does Simons four-phase decision-making model fit into most of the modeling methodologies described? Explain.

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