Lecture 1

Introduction to Management Science

and Spreadsheet Modeling

CB 2011– Solving Business Problems with

Spreadsheet Modeling

Dr. Yixuan (Stella) Xiao

1
 Today’s Plan

• Syllabus

• Managerial decision making

• Mathematical models

• Introduction to the basics of spreadsheet

2
 Tentative Timeline of the Course
• Basic spreadsheet skills
format, chart, reference, what-if analysis, sensitivity analysis, data table, …

• Optimization using spreadsheets

– Linear programming
product mix, blending, multi-period investment, ...
– Integer programming
project selection, assignment problem, ...
– Nonlinear programming
cost modeling, all kinds of applications

• Simulation
Monte Carlo, random number generation, replication using data table, all kinds of
applications

• Project management

• Case study
logic functions, pivot table, comprehensive use of spreadsheets

• Group project presentation

3
 Course Specifics

Focus on
• Introduce you to 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
 practice on computers  cases

4
 Managerial Decision Making

Analysis
Model Results

Symbolic

Interpretation
Abstraction

World
Managerial
Real Judgment
World

Management Intuition
Decisions
Situation

5
A Scientific Approach
Define
the
Problem
Identify
the
Alternatives
Determine
the Modeling
Criteria Analysis
Evaluate
Problem the
Solving Alternatives
Recommend
an
Alternative
Implement
Decision
the
Decision
Evaluate
the
Results

6
 Application of Management Science
• Constructing a telecommunications network at low cost
while still guaranteeing quality of service

• Managing the flow of raw materials and products in a

supply chain

• Blending of raw materials

• Scheduling (sports scheduling, product launch)

• Revenue management (hotel, airlines)

7
 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; Dell, Wal-Mart,
reduce inventory and stock-outs. Amazon
Customer Identify customers with the greatest profit Harrah’s, Capital
selection, potential; increase likelihood that they will One, Barclays
loyalty, and want the product or service offering; retain
their loyalty
service
Pricing Identify the price that will maximize yield, Progressive,
or profit. Marriot
Human capital Select the best employees for particular New England
tasks or jobs, at particular compensation Patriots, Oakland
levels A’s, Boston Red Sox
Product and Detect quality problems early and minimize Honda, Intel
service quality them.

Financial Better understand the drivers of financial MCI, Verizon

performance performance and the effects of
nonfinancial factors
Research and Improve quality, efficacy, and where Novartis, Amazon,
development applicable, safety of products and services Yahoo
8
You want your diet to meet some nutrition standards.
According to your daily diet plan you need to have

at least 100 percent of the U.S. 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 a least-cost McDonald’s daily meal plan that meets your
daily nutritious standard?
McDonald's Food: the Facts
Menu Item Price Calories Protein Fat Sodium Vit. A Vit. C Calcium Iron

(US$)
(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
Small French Fries 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
Baked Apple Pie 0.79 260 3 13 200 0 40 2 6

9
 Model for the McDonald’s Diet Problem

MIN Money Spent on McDonald’s Food

such that
Vitamin C obtained ≥ 100% of U.S. RDA
Calcium obtained ≥ 100% of U.S. RDA
Protein obtained ≥ 55 g
Calories obtained ≤ 2000

• “McDonalds” workbook

10
 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 management decision making
• Uses of Models
– to improve a specific decision
– to increase one’s understanding of a system
– to make decision tradeoffs explicit

11
 Elements of Models

• Decisions
– choices, possible actions, controllable variables,
decision variables
• Data
– information, environmental conditions, uncontrollable
variables, parameters
• Structure
– relationships, cause and effect, logic,
equations/inequalities
• Outcomes
– performance measure, criteria, eventual
consequences, objective function

12
 Why Spreadsheet Modeling?
• Examples
– Microsoft Excel – still the industry standard…

• 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
– Often insufficient for advanced analysis
13
 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
– pivot tables

14
 Features in Excel Spreadsheet
• Open “Charting” workbook

– Data source -> Insert tab -> Charts group

– Chart tools -> Design & Format & Chart buttons

– Different types of chart

• Relative reference
• Fill, Fill handle, Format Painter

15
 Wrap up
• Homework
– Review and repeat the spreadsheet exercise of the
class
– Read and think about “Advertising Budget” case for
the next class

• Next Lecture: Basics of spreadsheet modeling

– Management situation -> Algebraic model ->
Spreadsheet model
– “What if” analysis - Data Table, Scenario Analysis
– Break-even analysis - Goal Seek

16