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Qualitative Business Modelling

Decision modeling is a scientific approach to decision making that involves choosing the optimal alternative from a set of options based on their different risks and returns. There are deterministic and probabilistic decision models. The objective of decision modeling is to identify the optimal solution by integrating systems analysis and improving decision making through objective analysis. Some key steps in decision modeling include defining the problem, developing and solving a model, and interpreting the results. Linear programming is a common decision modeling technique that involves formulating a linear objective function and constraints to optimize decisions like production levels.

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32 views22 pages

Qualitative Business Modelling

Decision modeling is a scientific approach to decision making that involves choosing the optimal alternative from a set of options based on their different risks and returns. There are deterministic and probabilistic decision models. The objective of decision modeling is to identify the optimal solution by integrating systems analysis and improving decision making through objective analysis. Some key steps in decision modeling include defining the problem, developing and solving a model, and interpreting the results. Linear programming is a common decision modeling technique that involves formulating a linear objective function and constraints to optimize decisions like production levels.

Uploaded by

shamshabad mayuka reddy
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We take content rights seriously. If you suspect this is your content, claim it here.
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Decision Modeling

• Decision modeling is a scientific


approach to decision making

• Various decision alternatives are


What is available with different levels of risk
decision and return

modeling? • Need to choose the right alternative


from the set of alternatives available
based on scientific decision tools
Types of decision models...

• Deterministic models: All relevant data values are known with certainty;
• Eg. Assembling a computer
• Technique/tool used: Linear programming

• Probabilistic models: Some data values are not known with certainty;
• Eg. Sales of loafs of bread in a day
• Technique/tool used: Probabilistic models
Objective of decision modeling...
Decision making and improve its quality

Identify optimal solution

Integrating the systems

Improve the objectivity of analysis

Minimize the cost and maximize the profit

Improve the productivity

Success in competition and market leadership


Types of data: qualitative and quantitative...

Quantitative data are Qualitative data is


measures of values or concerned with description
counts and are expressed which can be observed but
in numbers; Eg. Marks cannot be computed;
obtained in an examination Eg. Importance of a subject
Steps involved in decision modeling...
Defining the problem
• Developing a model Formulation

Acquiring input data


• Developing a solution
Solution
Testing the solution
• Analysing the results and sensitivity analysis
Interpretation
Implementing the results
Advantages of a model...

Problems under consideration become controllable through a model

It provides a logical & systematic approach to the problem

It provides the limitations and scope of the activity

It helps in finding useful tools that eliminate duplication of methods applied to


solve problems

It helps in finding solutions for research and improvements in a system


Scope of decision modeling...

National plans and budget.


• Healthcare services and National Health Program.

Government development and public sector unit.


• Industrial establishment and private sector unit.

National defence services.


• Research & development.

Public works department.


• Business management.

Agriculture and irrigation projects.


• Education & training.

Transport & Communication.


• Production management
Linear Programming
• linear programming is a technique for the optimization of a linear
objective function, subject to linear equality and linear inequality
constraints.
Steps of linear programming

Formulation: Expressing a problem scenario in


terms of simple mathematical expressions

Solution: Solving mathematical expressions to find


values for the variables

Interpretation: Understanding the solution


obtained in order to evaluate the problem scenario
Properties of linear programming model
1. Problem seeks to maximize or
minimize an objective
2. Constraints limit the degree to
which the objective can be
obtained
3. There must be alternative
available
4. Mathematical relationships are
linear (First degree equations)
Assumptions of linear programming model

• Conditions of certainty exists

• Proportionality exists

• Additivity exists

• Divisibility exists

• Non-negative variables
Linear programming: An Overview
 Objectives of business decisions frequently involve maximizing profit
or minimizing costs.
 Linear programming uses linear algebraic relationships to represent
a firm’s decisions, given a business objective, and resource
constraints.
 Steps in application:
1. Identify problem as solvable by linear programming.
2. Formulate a mathematical model of the unstructured problem.
3. Solve the model.
4. Implementation
Model Components

• Decision variables - mathematical symbols representing levels of


activity of a firm.
• Objective function - a linear mathematical relationship describing an
objective of the firm, in terms of decision variables - this function is to
be maximized or minimized.
• Constraints – requirements or restrictions placed on the firm by the
operating environment, stated in linear relationships of the decision
variables.
• Parameters - numerical coefficients and constants used in the
objective function and constraints.
Summary of Model Formulation Steps

• Step 1 : Clearly define the decision variables

• Step 2 : Construct the objective function


•
• Step 3 : Formulate the constraints
LP Model Formulation: Example
LP Model Formulation : Example Contd……
• Product mix problem - Beaver Creek Pottery Company
• How many bowls and mugs should be produced to maximize profits
given labor and materials constraints?
• Product resource requirements and unit profit:
Resource Requirements

Labor Clay Profit


Product
(Hr./Unit) (Lb./Unit) ($/Unit)

Bowl 1 4 40
Mug 2 3 50
LP Model Formulation : Example Contd……
Resource 40 hrs of labor per day
Availability: 120 lbs of clay

Decision x1 = number of bowls to produce per day


Variables: x2 = number of mugs to produce per day

Objective Maximize Z = $40x1 + $50x2


Function: Where Z = profit per day

Resource 1x1 + 2x2  40 hours of labor


Constraints: 4x1 + 3x2  120 pounds of clay

Non-Negativity x1  0; x2  0
Constraints:
Example. A retail store stocks two types of shirts A and B. These are packed in attractive

cardboard boxes. During a week the store can sell a maximum of 400 shirts of type A and a

maximum of 300 shirts of type B. The storage capacity, however, is limited to a maximum of

600 of both types combined. Type A shirt fetches a profit of Rs. 2/- per unit and type B a profit

of Rs. 5/- per unit. How many of each type the store should stock per week to maximize the

total profit? Formulate a mathematical model of the problem.


Example. A retail store stocks two types of shirts A and B. These are packed in attractive
cardboard boxes. During a week the store can sell a maximum of 400 shirts of type A and a
maximum of 300 shirts of type B. The storage capacity, however, is limited to a maximum of
600 of both types combined. Type A shirt fetches a profit of Rs. 2/- per unit and type B a profit
of Rs. 5/- per unit. How many of each type the store should stock per week to maximize the
total profit? Formulate a mathematical model of the problem.
Decision Variables:
Let no. of type A shirt stocked be x1; Let no. of type B shirt stocked be x2

Objective Function: Zmax = 2x1 + 5x2

Constraints:
x1 < 400 (Demand constraint);
x2 < 300 (Demand constraint);
x1 + x2 < 600 (Capacity/structural constraint)
Non-negative constraints: x1, x2 > 0
Decision Variable: Let amount of tonic Y used be x1, Let amount of tonic Y used be x2

Objective Function: Zmin = 5x1 + 3x2

Constraints: 2x1 + 4x2 > 40 (Vitamin A);


3x1 + 2x2 > 50 (Vitamin D)

Non-negativity constraint: x1, x2 > 0

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