Data modeling

Modeling is a key element in most DSS and a necessity in a model-based DSS. There are
many classes of models, and there are often many specialized techniques for solving each one. Many
readily accessible applications describe how the models incorporated in DSS contribute in a major
way to organizational success. A DSS can include several models, each of which represents different
part of the decision-making problem. some of the models are standard and built in to DSS
development generators and tools. Others are standard but are not available as built-in functions.
Instead, they are available as freestanding software that can interface with a DSS.

DSS models can be classified into seven groups and lists several representative techniques
for each category. Each technique can be applied to either a static or a dynamic model, which can be
constructed under assumed environments of certainty, uncertainty, or risk. To expedite model
construction, we can use special decision analysis systems that have modeling languages and
capabilities embedded in them. These include spreadsheets, data mining systems, OLAP systems, and
even fourth-generation languages (formerly financial planning languages) such as the Cognos
PowerHouse 4GL, PowerHouse Web, and Axiant 4GL.

A model is a simplified representation or abstraction of reality.

1. Iconic model: is a physical replica of a system.

2. Analog model: gives a symbolic representation of reality,

behaves like the real system but does not look like it.

3. Mathematical (quantitative) models: use mathematical relationships

Benefits:

– compression of time
– easy model manipulation
– low cost of the analysis
– cost of making mistakes is less than mistakes on real system
– can model risk and uncertainty

– a very large number of solutions can be analysed enhance learning and training
4. Optimisation: model generates an optimal solution

Limitations:

– works if the problem is structured and deterministic

5. Heuristics: find a good enough solution, using rules.

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.

Static and dynamic models

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 Dss models can be classified as static or dynamic.

(A) Static Analysis: A static model takes a single snapshot of a situation. During this snapshot,
everything occurs in a single interval. For example, a decision about whether to make or buy a
product is static in nature. A quarterly or annual income statement is static, and so is the
investment decision. When a model represents a year’s operations, it occurs in a fixed time
frame. The time frame can be rolled forward, but it is nonetheless static. However, the impact of
these decisions may last several decades. Most static decision-making situations are presumed to
repeat with identical conditions. The stability of the relevant data is assumed in a static analysis.
(B) Dynamic Analysis: Dynamic models are time dependent. For example, in determining how
many checkout points should be open in a supermarket, it is important to take into consideration
the time of day because different numbers of customers arrive during each hour. Demands must
be forecasted over time. Dynamic simulation, in contrast to steady-state simulation, represents
what happens when conditions vary from the steady state over time. There might be variations in
the raw materials (e.g., clay) or an unforeseen (even random) incident in some of the processes.
Dynamic models are important because they use, represent, or generate trends and patterns over
time. They also show averages per period, moving averages, and comparative analyses (e.g.,
profit this quarter against profit in the same quarter of last year). Furthermore, when a static
model is constructed to describe a given situation-say, product distribution- it can be expanded
to represent the dynamic nature of the problem. For example, the transportation model (a type
of network flow model) describes a static model of product distribution. It can be expanded to a
dynamic network flow model to accommodate inventory and back ordering (Aronson, 1989).

Certainty, Uncertainty, and Risk

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

 Certainty
 Risk
 Uncertainty

When models are developed, any of these conditions can occur, and different kinds of models are
appropriate for each case.

(1) Decision making under certainty:

In decision making under certainty, it is assumed that complete knowledge is available so
that the decision maker knows exactly what the outcome of each course of action will be (as in
deterministic environment). It may not be true that the outcomes are 100 percent known, nor is it
necessary to really evaluate all the outcomes, but often this assumption simplifies the model and
makes it tractable.

The zones of decision making

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 A situation involving decision making under certainty occurs most often with structured
problems with short time horizons (up to one year). Some problems under certainty are not
structured enough to be approached using analytical methods and models; they require a DSS
approach.

Certainty models are relatively easy to develop and solve, and they can yield optimal solutions. Many
financial models are constructed under assumed certainty, even though the market is anything but
100 percent certain. Problems that have an infinite (or a very large) number of feasible solutions are
extremely important.

(2) Decision making under uncertainty:

In decision making under uncertainty, the decision maker considers situations in which several
outcomes are possible for each course of action. In contrast to the risk situation, in this case, the
decision maker does not know, or cannot estimate, the probability of occurrence of the possible
outcomes. Decision making under uncertainty is more difficult than decision making under certainty
because there is insufficient information. Modeling of such situations involves assessment of the
decision maker’s (or the organization’s) attitude toward risk.

Managers attempt to avoid uncertainty as much as possible, even to the point of assuming it
away. Instead of dealing with uncertainty, they attempt to obtain more information so that the
problem can be treated under certainty (because it can be “almost” certain) or under calculated (i.e.,
assumed) risk. If more information is not available, the problem must be treated under a condition of
uncertainty, which is less definitive than the other categories.

(3) Decision making under Risk (risk analysis):

A decision made under risk (also known as a probabilistic, or stochastic, decision

making situation) is one in which the decision maker must consider several possible outcomes for
each alternative, each with a given probability of occurrence. The long-run probabilities that the
given outcomes will occur are assumed to be known or can be estimated. Under these assumptions,
the decision maker can assess the degree of risk associated with each alternative (called calculated
risk). Most major business decisions are made under assumed risk. Risk analysis (i.e., calculated
risk) is a decision-making method that analyzes the risk (based on assumed known probabilities)
associated with different alternatives. Risk analysis can be performed by calculating the expected
value of each alternative and selecting the one with the best expected value.

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 Sensitivity analysis

A model builder makes predictions and assumptions regarding input data, many of which
deal with the assessment of uncertain futures. When the model is solved, the results depend on these
data. Sensitivity analysis attempts to assess the impact of a change in the input data or parameters on
the proposed solution (i.e., the result variable).

Sensitivity analysis is extremely important in MSS because it allows flexibility and

adaptation to changing conditions and to the requirements of different decision-making situations,
provides a better understanding of the model and the decision-making situation it attempts to
describe, and permits the manager to input data in order to increase the confidence in the model.
Sensitivity analysis tests relationships such as the following:

 The impact of changes in external (uncontrollable) variables and parameters on

the outcome variable(s)
 The impact of changes in decision variables on the outcome variable(s)
 The effect of uncertainty in estimating external variables
 The effects of different dependent interactions among variables
 The robustness of decisions under changing conditions

Sensitivity analyses are used for:

 Revising models to eliminate too-large sensitivities

 Adding details about sensitive variables or scenarios
 Obtaining better estimates of sensitive external variables
 Altering a real-world system to reduce actual sensitivities
 Accepting and using the sensitive(and hence vulnerable) real world, leading to the
continuous and close monitoring or actual results

The two types of sensitivity analyses are:

(a) Automatic and (b) Trial-and-error.

(A) Automatic Sensitivity Analysis: Automatic sensitivity analysis is performed in standard

quantitative model implementations such as LP. For example, it reports the range within which a
certain input variable or parameter value (e.g., unit cost) can vary without having any significant
impact on the proposed solution. Automatic sensitivity analysis is usually limited to one change at
a time, and only for certain variables. However, it is very powerful because of its ability to
establish ranges and limits very fast (and with little or no additional computational effort). For
example, automatic sensitivity analysis is part of the LP solution report for the MBI Corporation
product-mix problem described earlier. Sensitivity analysis could be used to determine that if the

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 right-hand side of the marketing constraint on CC-8 could be decreased by one unit, then the net
profit would increase by $1,333.33. This is valid for the right-hand side decreasing to zero.

(B) Trial-and-Error Sensitivity Analysis: The impact of changes in any variable, or in several
variables, can be determined through a simple trial-and-error approach: when we change some
input data and solve the problem again. When the changes are repeated several times, better and
better solutions may be discovered. Such experimentation, which is easy to conduct when using
appropriate modeling software, such as Excel, has two approaches:

i. what if-analysis and

ii. Goal seeking.
iii.

What if-analysis: is structured as what will happen to the solution if an input variable, an
assumption, or a parameter value is changed? Some of the examples are;

 What will happen to the total inventory cost if the cost of carrying inventories increased by 10
percent?
 What will be the market share if the advertising budget increases by 5 percent?

With the appropriate user interface, it is easy for managers to ask a computer model these
types of questions and get immediate answers. Furthermore, they can perform multiple cases and
thereby change the percentage, or any other data in the question, as desired. The decision maker
does all this directly, without a computer programmer. What=if analysis is common in expert
systems. Users are given the opportunity to change their answers to some of the system’s questions,
and a revised recommendation is found.

Goal seeking: calculates the values of the inputs necessary to achieve a desired level of an output
(goal). It represents a backward solution approach. Some examples of goal seeking are:

 What annual R&D budget is needed for an annual growth rate of 15 percent by 2009?
 How many nurses are needed to reduce the average waiting time of a patient in the emergency
room to less than 10 minutes?

Computing a Break-Even point by using Goal Seeking

Some modeling software packages can directly compute break-even points, which is an
important application of goal seeking. This involves determining the value of the decision variables
(e.g., quantity to produce) that generate zero profit.

In many DSS, it can be difficult to conduct sensitivity analysis because the prewritten routines
usually present only a limited opportunity for asking what-if questions. In a DSS, the what-if and the
goal seeking options must be easy to perform.

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 DSS
Name : Nadiya Mushtaq.
Roll no.: 442.
MBA IInd sem.