LECTURE 1

INTRODUCTION TO SPREADSHEET
MODELING

1
TODAY’S PLAN

 Syllabus

 Mathematical models to aid decision making

 Topics will be covered in this course
 Basic spreadsheet skills

2
MANAGERIAL DECISION MAKING

Analysis
Model Results

Symbolic

Interpretation
Abstraction

World
Managerial
Real Judgment
World

Management Intuition
Decisions
Situation

3
A SCIENTIFIC APPROACH

Define the Problem

Identify the Alternatives

Determine the Criteria Modeling

Problem Analysis
Solving Evaluate the Alternatives

Recommend an Alternative

Implement the Decision Decision

Evaluate the Results

4
 COMPETING ON ANALYTICS
 Analytics competitors make expert use of statistics and modeling to improve a wide
variety of functions:
Function Description Examples
Supply chain Simulate and optimize supply chain flows; reduce inventory and Dell, Wal-Mart, Amazon
stock-outs.
Customer selection, Identify customers with the greatest profit potential; increase Harrah’s, Capital One,
loyalty, and service likelihood that they will want the product or service offering; Barclays Credit card company
retain their loyalty.
Pricing Identify the price that will maximize yield, or profit. Progressive, Marriot
Human capital Select the best employees for particular tasks or jobs, at New England Patriots,
particular compensation levels. Oakland A’s, Boston Red
Sox
Product and service Detect quality problems early and minimize them. Honda, Intel
quality
Financial performance Better understand the drivers of financial performance and the MCI, Verizon
effects of non-financial factors.
Research and Improve quality, efficacy, and where applicable, safety of Novartis, Amazon, Yahoo
development products and services.
5

Source: T. H. Davenport, “Competing on Analytics,” HBR, Jan. 2006

 MCDONALD’S DIET PROBLEM
 You want your diet to meet some nutritious standards. According to your daily diet plan, you
need to have:
 at least 100 percent of the U.S. Recommended Dietary Allowance 1 (RDA) of vitamin C &
calcium,
 at least 55 grams of protein,
 and at most 2000 calories.
 You are wondering if this can be accomplished by eating at McDonald’s. Can you design the
least-cost McDonald’s daily meal plan that meets your daily nutritious standards?
Price
Menu Item (USD) Calories Protein Fat Sodium Vit. A Vit. C Calcium Iron
(g) (mg) % U.S. RDA
Hamburger 0.69 260 13 9 530 2 2 15 15
Big Mac 1.99 560 25 30 1010 8 2 25 25
Filet-O-Fish 1.89 400 14 18 640 2 0 15 10
French Fries (S) 1.39 250 2 13 140 0 6 2 4
Chicken McNuggets (6pcs) 1.99 250 15 15 670 2 2 2 4
Garden Salad 2.05 35 2 0 20 120 40 4 6
Honey 0 45 0 0 0 0 0 0 0 6
Baked Apple Pie 0.79 260 3 13 200 0 40 2 6

National Institutes of Health (https://ods.od.nih.gov/Health_Information/Dietary_Reference_Intakes.aspx)

1
MODEL FOR THE MCDONALD’S DIET
PROBLEM

 MIN Money Spent at McDonald’s

such that:
Vitamin C obtained of U.S. RDA
Calcium obtained of U.S. RDA
  
Protein obtained
Calories obtained

 See “McDonalds” workbook

7
 MATHEMATICAL MODELS
 Model
 Abstraction of a real thing or process; some elements must be omitted
 Contains decision variables and represents a system in mathematical terms
 Finds values of decision variables which will improve system performance
 Used as a guide for aiding decision making
 Uses of Models
 To improve the existing decision
 To increase the understanding of a system
 To explicitly make trade-offs for a decision

8
ELEMENTS OF MODELS

 Decisions: choices, possible actions, controllable variables; decision variables

 Data: information, environmental conditions, uncontrollable variables;
parameters
 Structure: relations, causes and effects, logics; equations or inequalities
 Outcomes: performance measures, criteria, eventual consequences; objective
function

9
TENTATIVE TIMELINE OF THE COURSE

 Basic spreadsheet skills

 Formatting, charting, referencing, what-if analysis, …
 Building spreadsheet model & Use of solver
 Linear programming - product mix, blending, multi-period investment, ...
 Integer programming - project selection, ...
 Nonlinear programming - cost modeling, all kinds of applications
 Simulation
 Monte Carlo, random number generation, all kinds of applications
 Project management
 Project scheduling

10
COURSE SPECIFICS

 Focus:
 Introduce the basic principles and techniques of management science
 Sharpen your ability to structure problems and to perform logical analysis
 Expose you to settings in which models are helpful

   Reinforce your computer skills



 Approach
 Start with small problems Introduce methodology Practise on computers
Cases

11
 WHY SPREADSHEET MODELING ?
 Examples of spreadsheets:
 Microsoft Excel – still the industry standard…
 Numbers
 Google Spreadsheets
 Open office spreadsheet
 Advantages:
 Ubiquity
 Availability of Add-ins
 Low cost alternative to more specialized tools (statistics, optimization)
 Disadvantages:
 Data size limitations, slow calculation speeds (large models)
 Difficult to document and organize models 12

 Often insufficient for advanced analysis

 COMMON USE OF SPREADSHEETS
 The spreadsheet as a calculator:
 Easy access to the standard mathematical functions, probability distributions
 Easy “what-if” calculations
 The spreadsheet as a mathematical tool:
 Simulation
 Optimization
 The spreadsheet as a statistical tool:
 Regression
 Graphical analysis
 The spreadsheet as a database:
13
 Pivot tables
FEATURES IN EXCEL SPREADSHEET

 Charting: See “Charting” workbook

 Data source Insert tab Charts group
 Chart tools Design & Format & Chart buttons
 Different types of chart
  
 Frequency table
 Relative reference
 Fill, Fill handle, Format painter

14
NEXT LECTURE

 Before next lecture

 Read “Advertising Budget” problem

 Next Lecture: Basics of spreadsheet modeling

  
 Management Situation Algebraic Model Spreadsheet Model
 “What-if” analysis - Data Table, Scenario Analysis
 Break-even analysis - Goal Seek

15