LGT2425 INTRODUCTION

TO BUSINESS ANALYTICS
Lecture 6: Spreadsheet models

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Spreadsheet models

■ Mathematical and logic-based models

■ what-if models
■ Allow for easy instantaneous recalculation for a change in model
inputs
■ Are less expensive
■ Are fairly easy to use
■ The most used business analytics tool

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Nowlin Plastics produces a line of cell
phone covers
■ Make-versus-buy decision
– Comparing the costs of manufacturing in-house to the costs of
outsourcing production to another firm
■ Total cost of manufacturing
– Fixed cost
■ Portion of the total cost that does not depend on the production quantity
and remains the same no matter how much is produced
– Variable cost
■ Portion of the total cost that is dependent on and varies with the
production quantity

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Influence diagram

■ Influence diagram
– A visual representation
that shows which entities
influence others in a
model
– Circular or oval symbols
called nodes
– Arrows connecting the
nodes show influence

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Make Buy

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Building a mathematical model
■ Define notation for every node in the influence diagram
– q = quantity (number of units) required
– FC = the fixed cost of manufacturing
– VC = the per-unit variable cost of manufacturing
– P = the per unit purchase cost
■ Total cost
– Total manufacturing cost=TMC(q)=FC+VC*q
– Total purchasing cost=TPC(q)=P*q
■ Example
– FC=$234,000, VC=$2, P=$3.5
– TMC(q)=234000+2q
– TPC(q)=3.5q
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Building a mathematical model
■ Saving due to outsourcing
– S(q)=TMC(q)-TPC(q)
– For what quantities is it more cost-effective to outsource rather than
produce?
– For what values of q for S(q)>0?
■ Entries
– q, FC, VC and P
– q is decision variable
– FC, VC and P are parameters
■ Functions
– TMC, TPC and S
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Spreadsheet model design

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Spreadsheet model design
■ Three general principles
– Separate the parameters from the model
■ This enables the user to update the model parameters without the risk of
mistakenly creating an error in a formula
– Document the model and use proper formatting and color as needed
■ A good spreadsheet model is well documented
■ Clear labels and proper formatting and alignment facilitate navigation and
understanding (e.g., $ for cost)
– Use simple formulae
■ Clear, simple formulas can reduce errors and make maintaining the spreadsheet
easier
■ Long and complex calculations should be divided into several cells
■ S(q)=TMC(q)-TPC(q)=FC+VC*q-P*q=FC+(VC-P)*q
■ S(q)=234000+1.5q=234000+1.5*B11
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What-if analysis

■ Data table
■ Goal seek
■ Scenario manager

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Data table

■ Data table
– Excel tool which quantifies the impact of changing the value of a
specific input on an output of interest
■ One-way data table
– Summarizes a single input’s impact on the output
– E.g., q on S
■ Two-way data table
– Summarizes two inputs’ impact on the output
– E.g., q and P on S
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 One-way data table

■ Step 1. Select cells D4:E17

■ Step 2. Click the DATA tab
■ Step 3. Click What-If Analysis in the Data
Tools group, and select Data Table
■ Step 4. When the Data Table dialog box
appears
– Enter B11 in the Column input cell:
– Click OK

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Decision?

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Two-way data table

■ Suppose that Nowlin has now received five different bids on the per-
unit cost for outsourcing
■ The five current bids are P=$2.89, $3.13, $3.50, $3.54, and $3.59
■ Quantify the differences in savings for various quantities and bids

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 Two-way data table

■ Step 1. Select cells D4:I17

■ Step 2. Click the DATA tab in the Ribbon
■ Step 3. Click What-If Analysis in the Data
Tools group, and select Data Table
■ Step 4. When the Data Table dialog box
appears:
– Enter B7 in the Row input cell:
– Enter B11 in the Column input cell:
– Click OK

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Decision?

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Goal seek

■ Goal Seek
– Excel tool that allows the user to determine the value of an input
cell that will cause the value of a related output cell to equal
some specified value (the goal)
■ Example
– Want to know the value of the quantity where it becomes more
cost effective to manufacture rather than outsource
– Find q when S=0

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 Goal seek
■ Step 1. Click the DATA tab
■ Step 2. Click What-If Analysis in the
Data Tools group, and select Goal Seek
■ Step 3. When the Goal Seek dialog box
appears
– Enter B17 in the Set cell:
– Enter 0 in the To value:
– Enter B11 in the By changing cell:
– Click OK
■ Step 4. When the Goal Seek Status
dialog box appears, click OK

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Scenario Manager

■ Excel tool that quantifies the impact of changing multiple inputs (a

setting of these multiple inputs is called a scenario) on one or more
outputs of interest
■ Change more than two inputs and want to quantify the changes these
inputs have on one or more outputs of interest

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Middletown Amusement Park daily profit model

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 Scenarios
Partly Cloudy Rain Sunny
Season-pass Holders 3000 1200 8000
Admissions 1600 250 2400
Average Expenditure – Season-Pass Holders $15 $10 $18
Average Expenditure – Admissions $45 $20 $57
Cost of Operations $33,000 $27,000 $37,000

Profit?

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SUM and SUMPRODUCT

■ SUM
– Function that adds up all of the numbers in a range of cells
■ SUMPRODUCT
– Function that returns the sum of the products of elements in a set
of arrays
– =SUMPRODUCT(array1, array2)

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■ =SUMPRODUCT(B5:E7,B17:E19)
■ =B5*B17 + C5*C17 + D5*D17 + E5*E17
+ B6*B18 + . . . . . + E7*E19

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 IF and COUNTIF

■ =IF(condition, result if condition is true, result if

condition is false)
– 10% off if order at least 50
– =IF(B16 >= $B$10, $B$11*B6, B6)*B16
■ =COUNTIF(range, condition)
– Count the number of components having a
positive order quantity
– =COUNTIF(B16:E16, “>0”)

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VLOOKUP

■ This function allows the user to pull a subset of data from a larger table of data
based on some criterion
■ =VLOOKUP(value, table, index, range)
– value = the value to search for in the first column of the table
– table = the cell range containing the table
– index = the column in the table containing the value to be returned
– range = TRUE if looking for the first approximate match of value and
FALSE if looking for an exact match of value

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VLOOKUP
■ = VLOOKUP(B18,$A$7:$C$11,3,TRUE)
■ The range is set to TRUE indicates a search
for the first approximate match
– Excel searches in the first column of
the table from the top until it finds a
number strictly greater than the value
of B18
– B18 is 44 percent, and the first value
in the table in column A larger than 44
percent is in cell A9 (51 percent)
– It then backs up one row (to row 8)
– Bonus Points = 10

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 Watch Window

■ Allow the user to observe the values of cells included in the Watch Window box list
■ Useful for large models when not all of the model is observable on the screen or
when multiple worksheets are used

■ Step 1. Click the FORMULAS tab

■ Step 2. Click Watch Window in
the Formula Auditing group to
display the Watch Window
■ Step 3. Click Add Watch. . .
■ Step 4. Select the cell you would
like to add to the watch list (in
this case B17)
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 Descriptive and predictive spreadsheet
models
■ Decision making is difficult because of uncertainty and an overwhelming number of
choices
■ Spreadsheet what-if models are descriptive models
■ Basic what-if spreadsheet models can be extended to help deal with uncertainty or
the many alternatives a decision maker may face
■ Predictive models can be estimated from data in spreadsheets using tools provided
in Excel
– The regression tool and other data analysis tools such as exponential
smoothing and moving average allow us to develop predictive models based on
data in the spreadsheet
– What-if model that helps us deal with uncertainty is simulation
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