Turban Dss9e Ch04

Decision Support and
Business Intelligence
Systems
(9th Ed., Prentice Hall)
Chapter 4:
Modeling and Analysis
Learning Objectives
4-2
Understand the basic concepts of

management support system (MSS) modeling
Describe how MSS 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
Explain the basic concepts of optimization,
simulation and heuristics; when to use which
Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall
Learning Objectives
4-3
Describe how to structure a linear

programming model
Understand how search methods are used to
solve MSS models
Explain the differences among algorithms,
blind search, and heuristics
Describe how to handle multiple goals
Explain what is meant by sensitivity analysis,
what-if analysis, and goal seeking
Describe the key issues of model management
Opening Vignette:
Model-Based Auctions Serve More
Lunches in Chile
Background: problem situation
Proposed solution
Results
Answer and discuss the case
questions
4-4
Modeling and Analysis Topics
4-5
Modeling for MSS (a critical component)

Static and dynamic models
Treating certainty, uncertainty, and risk
Influence diagrams (in the posted PDF file)
MSS modeling in spreadsheets
Decision analysis of a few alternatives (with
decision tables and decision trees)
Optimization via mathematical programming
Heuristic programming
Simulation
Model base management
MSS 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
4-6
Locating distribution centers, assignment of DCs to

warehouses/customers, forecasting demand, scheduling
production per product type, etc.
Fiat, Pillowtex (operational efficiency)
Major Modeling Issues
Problem identification and environmental

analysis (information collection)
Variable identification
Forecasting/predicting
4-7
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
Influence diagrams, cognitive maps
Categories of models >>>
Model management
Categories of Models
Category
4-8
Objective
Techniques
Optimization of
problems with few
alternatives
Find the best solution from Decision tables,

a small number of
decision trees
alternatives
Optimization via
algorithm
Find the best solution from

a large number of
alternatives using a stepby-step process
Linear and other

mathematical
programming
models
Optimization via
an analytic formula
Find the best solution in

one step using a formula
Some inventory
models
Simulation
Find a good enough

solution by experimenting
with a dynamic model of
the system
Several types of
simulation
Heuristics
Find a good enough

solution using commonsense rules
Heuristic
programming and
expert systems
Predictive
and
Predict future
Forecasting, Markov
other models
occurrences, what-if
chains, financial,
Static and Dynamic Models
Static Analysis
Dynamic Analysis
4-9
Single snapshot of the situation

Single interval
Steady state
Dynamic models
Evaluate scenarios that change over time
Time dependent
Represents trends and patterns over time
More realistic: Extends static models
Decision Making:
Treating Certainty, Uncertainty and
Risk
Certainty Models
Uncertainty
Several outcomes for each decision

Probability of each outcome is unknown
Knowledge would lead to less uncertainty
Risk analysis (probabilistic decision making)
4-10
Assume complete knowledge

All potential outcomes are known
May yield optimal solution
Probability of each of several outcomes

occurring
Level of uncertainty => Risk (expected value)
Certainty, Uncertainty and Risk
4-11
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)
4-12
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
4-13
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
Expenses
Fixed Cost
4-14
Influence Diagrams: Software
Analytica, Lumina Decision Systems
DecisionPro, Vanguard Software Co.
Integrates influence diagrams and Excel, also supports

Monte Carlo simulations
PrecisionTree, Palisade Co.
4-15
Includes influence diagrams, decision trees and

simulation
Definitive Scenario, Definitive Software
Supports hierarchical (tree structured) diagrams
DATA Decision Analysis, TreeAge Software
Supports hierarchical (multi-level) diagrams
Creates influence diagrams and decision trees directly

in an Excel spreadsheet
Analytica Influence Diagram of a

Marketing
Problem: The Marketing Model
4-16
Analytica: The Price Submodel
4-17
Analytica: The Sales Submodel
4-18
MSS Modeling with Spreadsheets
Spreadsheet: most popular end-user modeling

tool
Flexible and easy to use
Powerful functions
4-19
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
Excel spreadsheet - static model example:

Simple loan calculation of monthly
payments
F P(1 i ) n
i (1 i ) n
A P
n
(
1
i
)
4-20
Excel spreadsheet Dynamic model

example:
Simple loan
calculation of
monthly payments
and effects of
prepayment
4-21
Decision Analysis: A Few

Alternatives
Single Goal Situations
Decision tables
Decision trees
4-22
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
Decision Tables
Investment example
One goal: maximize the yield after one year
Yield depends on the status of the economy

(the state of nature)
4-23
Solid growth
Stagnation
Inflation
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%
4-24
Investment Example:
Decision Table
4-25
Payoff Decision variables (alternatives)

Uncontrollable variables (states of economy)
Result variables (projected yield)
Tabular representation:
Investment Example:
Treating Uncertainty
Optimistic approach
Pessimistic approach
Treating Risk:
4-26
Use known probabilities

Risk analysis: compute expected values
Decision Analysis: A Few

Alternatives
Other methods of treating risk
Multiple goals
4-27
Simulation, Certainty factors, Fuzzy

logic
Yield, safety, and liquidity
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-makers control
Result variables are dependent on chosen combination of decision
les
variables and uncontrollable
variables
b
a
ari
V
t
en
d
en
p
e
In d
Decision
Variables
Uncontrollable
Variables
Dependent Variables
Mathematical
Relationships
Intermediate
Variables
4-28
Result
Variables
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
4-29
Linear programming (LP): A mathematical model

for the optimal solution of resource allocation
problems. All the relationships are linear
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
4-30
Linear Programming Steps
1. Identify the
Decision variables
Objective function
Objective function coefficients
Constraints
2. Represent the model
4-31
Capacities / Demands
LINDO: Write mathematical formulation

EXCEL: Input data into specific cells in Excel
3. Run the model and observe the

results
Line
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
Materials ($) 10,000
Units
1
Units
1
Profit ($) 8,000
Rel
500
15,000
>=
>=
12,000
Limit
<=
<=
100
200
Max
200,000 /mo
8,000,000 /mo
Objective: Maximize Total Profit / Month

4-32
LP Solution
4-33
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
4-34
Sensitivity, What-if, and

Goal Seeking Analysis
Sensitivity
What-if
Assesses solutions based on changes in variables

or assumptions (scenario analysis)
Goal seeking
4-35
Assesses impact of change in inputs on outputs

Eliminates or reduces variables
Can be automatic or trial and error
Backwards approach, starts with goal

Determines values of inputs needed to achieve
goal
Example is break-even point determination
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
4-36
Quantitative
Qualitative (in ES)
Traveling Salesman Problem

>>>
Heuristic Programming - SEARCH
4-37
Traveling Salesman Problem
What is it?
4-38
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
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
4-39
Cannot guarantee an optimal solution
Modern Heuristic Methods
Tabu search
Genetic algorithms
Survival of the fittest
Simulated annealing
4-40
Intelligent search algorithm
Analogy to Thermodynamics
Simulation
4-41
Technique for conducting experiments

with a computer on a comprehensive
model of the behavior of a system
Frequently used in DSS tools
Major Characteristics of
Simulation
!
4-42
Imitates reality and capture its richness

Technique for conducting experiments
Descriptive, not normative tool
Often to solve very complex problems
Simulation is normally used only when
a problem is too complex to be treated
using numerical optimization
techniques
Advantages of Simulation
4-43
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
Often it is the only DSS modeling tool for
non-structured problems
Limitations of Simulation
4-44
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/sell to managers,
may lead overlooking analytical
solutions
Software may require special skills
Simulation Methodology
Model real system and conduct repetitive experiments.

Steps:
1.
2.
3.
4.
4-45
Define problem
5. Conduct experiments
Construct simulation model 6. Evaluate results
Test and validate model
7. Implement solution
Design experiments
Simulation Types
Stochastic vs. Deterministic Simulation
Time-dependent vs. Time-independent Simulation
Time independent stochastic simulation via Monte Carlo

technique (X = A + B)
Discrete event vs. Continuous simulation

Steady State vs. Transient Simulation
Simulation Implementation
4-46
In stochastic simulations: We use distributions (Discrete

or Continuous probability distributions)
Visual simulation
Object-oriented simulation
Visual Interactive Modeling (VIM)

/ Visual Interactive Simulation
Visual interactive modeling (VIM)
(VIS)
Also called
4-47
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
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
4-48
Within each class there are different

solution approaches
Relations MBMS
Object-oriented MBMS
End of the Chapter
4-49
Questions / Comments
All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher. Printed in the United States of America.
Copyright 2011 Pearson Education, Inc.

Publishing as Prentice Hall
4-50

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Decision Support and

Modeling and Analysis

Understand the basic concepts of

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Describe how to structure a linear

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Modeling and Analysis Topics

Modeling for MSS (a critical component)

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

A key element in most MSS

DuPont Simulates Rail Transportation System and

Procter & Gamble uses several DSS models

Locating distribution centers, assignment of DCs to

Fiat, Pillowtex (operational efficiency)

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Major Modeling Issues

Problem identification and environmental

More information leads to better prediction

Multiple models: A MSS can include several

Influence diagrams, cognitive maps

Categories of models >>>

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Find the best solution from Decision tables,

Find the best solution from

Linear and other

Find the best solution in

Find a good enough

Find a good enough

Static and Dynamic Models

Single snapshot of the situation

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Several outcomes for each decision

Risk analysis (probabilistic decision making)

Assume complete knowledge

Probability of each of several outcomes

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Certainty, Uncertainty and Risk

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Graphical representations of a model

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Influence Diagrams: Example

Profit = Income Expense

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Influence Diagrams: Software

Analytica, Lumina Decision Systems

DecisionPro, Vanguard Software Co.

Integrates influence diagrams and Excel, also supports

PrecisionTree, Palisade Co.

Includes influence diagrams, decision trees and

Definitive Scenario, Definitive Software

Supports hierarchical (tree structured) diagrams

DATA Decision Analysis, TreeAge Software

Supports hierarchical (multi-level) diagrams

Creates influence diagrams and decision trees directly

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Analytica Influence Diagram of a

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Analytica: The Price Submodel

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

Analytica: The Sales Submodel

Copyright 2011 Pearson Education, Inc. Publishing as Prentice Hall

MSS Modeling with Spreadsheets