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I Ntroduction To Managerial Decision Modeling
I Ntroduction To Managerial Decision Modeling
MANAGERIAL
DECISION
MODELING
OBJECTIVES
Define management science
Define and classify decision models
List and explain steps involved in developing decision models
Remind breakeven analysis with computer applications
Make a classification of management science modeling
techniques
Give examples of management science applications
Discuss possible problems in developing decision models
Decision Modeling
ROLE OF SPREADSHEETS IN
DECISION MODELING
Computers are an integral part of decision making
Spreadsheet packages
Are capable of handling management decision
modeling techniques.
Have built-in functions and procedures
Optimization
Models
Predictive
Models
OPTIMIZATION MODELS
Optimization Models seek to maximize a quantity
(eg. profit) or minimize a quantity (eg. cost, time, etc.)
that may be restricted by a set of constraints (limitations on
the availability of capital, workers, supplies, machines etc.)
PREDICTIVE MODELS
At times however, the function of a model is not to maximize or
minimize any particular quantity, but to describe or predict
events given certain conditions These models are known as
Predictive Models.
These techniques do not generate an answer or a recommended
decision. Instead they provide descriptive results: results that
describe the system being modeled. They usually provide
important input to optimization models
Deterministic
Models
Probabilistic
Models
DETERMINISTIC MODELS
Deterministic models assume:
Complete certainty.
All information needed is available with fixed and known
values.
Most commonly used deterministic modeling technique is
Linear Programming.
PROBABILISTIC MODELS
Probabilistic models are also called stochastic models.
Probabilistic models
assume some of data is not known with certainty.
take into account that information will be available after
the decision is made.
2. Solution.
3. Interpretation.
EXAMPLES
EXAMPLE (1 of 2)
Information and Data:
Business firm makes and sells a steel product
Product costs $5 to produce
Product sells for $20
Product requires 4 pounds of steel to make
Firm has 100 pounds of steel
Business Problem:
Determine the number of units to produce to make the most
profit given the limited amount of steel available.
EXAMPLE (2 of 2)
Variables:
Model:
Parameters:
BREAK-EVEN ANALYSIS
(1 of 4)
Used to determine the number of units of a product to sell
or produce (i.e. volume) that will equate total revenue with
total cost
The volume at which total revenue equals total cost (zero
profit) is called the break-even point.
Profit at break-even point is zero.
BREAK-EVEN ANALYSIS (2 of 4)
Model Components:
Fixed Costs (FC) - costs that remain constant regardless of
number of units produced. $s necessary to invest in facilities
Variable Cost (VC) - unit cost of product.
Total variable cost (Q.VC) - function of volume (Q) and
variable per-unit cost.
Total Cost (TC) - total fixed cost plus total variable cost.
Profit (Z) - difference between total revenue vp (p = price) and
total cost.
BREAK-EVEN ANALYSIS (3 of 4)
Profit = Total Revenue - Total Cost
Profit = Revenue - Fixed Cost - Variable Cost
Where:
Revenue
BREAK-EVEN ANALYSIS (4 of 4)
Z = P.Q - FC VC.Q
Set profit equal to 0:
P.Q = FC + VC.Q
Compute the Break-Even Point:
Break-even quantity = FC/(P - VC)
Sensitivity Analysis : Break-Even Model with Changes in Fixed and Variable Costs
a. Decision Analysis
b. Waiting Line (Queuing) Models
c. Simulation Models
d. Forecasting Models
Network Techniques
a. Network Flow
b. Project Management Techniques (PERT/CPM)
CHARACTERISTICS OF MODELING
TECHNIQUES
Linear Mathematical Programming - clear objective;
restrictions on resources and requirements; parameters known
with certainty.
Probabilistic Techniques - results contain uncertainty.
Network Techniques - model often formulated as diagram;
deterministic or probabilistic.
Forecasting and Inventory Analysis Techniques - probabilistic
and deterministic methods in demand forecasting and
inventory control.
Other Techniques - variety of deterministic and probabilistic
methods for specific types of problems.
Project Planning
Capital Budgeting
Inventory Analysis
Production Planning
Scheduling
sole
reliance
upon
intuition,
hunches,
and
experience.
A Swedish study found 40% of projects suggested by decision analysts were ever
implemented.
70% of modeling projects initiated by users, and 98% of
projects suggested by top managers, were implemented.