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Chapter 1
Introduction to Managerial Decision
Modeling
Management Science - BMGT 555
Professor Ahmadi
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Learning Objectives
Define decision model and describe its importance.
Understand two types of decision models:
deterministic and probabilistic models.
Understand steps involved in developing decision
models in practice.
Understand use of spreadsheets in developing
decision models.
Discuss possible problems in developing decision
models.
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Introduction
Quantitative approaches to decision making are based on
the scientific method.
Names for this body of knowledge include: Management
Science, Operations Research, and Decision Science.
It had its early roots in World War II and is flourishing in
business and industry with the aid of computers in
general and the microcomputer in particular.
Some of the primary applications areas of this body of
knowledge are management, marketing, production
scheduling, capital budgeting, and transportation.

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Types of Problem Information
Quantitative data - numeric values that
indicate how much or how many.
Production quantity
Rate of return
Financial ratios
Cash flows
Qualitative data - labels or names used
to identify an attribute -
Pending state or federal legislation
New technological breakthrough

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Role of Spreadsheets in Decision Modeling
Computers are an integral part of decision making.
Spreadsheet packages are capable of handling
management decision modeling techniques. Have
built-in functions and procedures, such as:

Goal Seek
Data Table
Solver
Chart Wizard, and others.
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Models
Models are representations of real objects or
situations.
Three forms of models are iconic, analog, and
mathematical.
Iconic models are physical replicas (scalar
representations) of real objects.
Analog models are physical in form, but do not
physically resemble the object being modeled.
Mathematical models represent real world
problems through a system of mathematical
formulas and expressions based on key
assumptions, estimates, or statistical analyses.

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Mathematical Models
Cost/benefit considerations must be made in selecting
an appropriate mathematical model.
Frequently a less complicated (and perhaps less
precise) model is more appropriate than a more
complex and accurate one due to cost and ease of
solution considerations.
Mathematical models relate decision variables with
fixed or variable parameters.
Frequently mathematical models seek to maximize or
minimize some objective function subject to
constraints.
The values of the decision variables that provide the
mathematically-best output are referred to as the
optimal solution for the model.
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Types of Decision Models
Decision
Models
Deterministic
Models
Stochastic
Models
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Transforming Model Inputs into Output
Uncontrollable Inputs
Controllable
Inputs
(Decision
Variables)
Output
(Projected
Results)
Mathematical
Model
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Steps Involved in Decision Modeling
1. Formulation.


2. Solution.


3. Interpretation.
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Step 1: Formulation
Defining the problem.
Develop clear and concise problem statement.
Developing a model.
Select and develop a decision model.
Select appropriate problem variables.
Develop relevant mathematical relation for
consideration and evaluation.
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Step 1: Formulation (Continued )
Acquiring input data.
Collect accurate data for use in the model.
Possible data sources are:
Official company reports.
Accounting, operating, and financial
information.
Views, and opinions from knowledgeable
individuals.


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Step 2: Solution
Developing a solution involves:
Manipulating model to arrive at the best
(optimal) solution.
Solution of a set of mathematical expressions.
Alternative trial and error iterations.
Complete enumeration of all possibilities or
utilization of an algorithm.
Series of steps repeated until best solution is
attained.

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Step 2: Solution (Continued )
Testing a solution involves:
Prior to implementation of model solution,
testing the solution.
Testing of solution is accomplished by
examining and evaluating:
Data utilized in the model and
On the model itself.



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Step 3: Interpretation
Interpretation and What-if Analysis.
Analyzing the results and sensitivity analysis.
1. Vary data input values and examine
differences in various optimal solutions.
2. Make changes in the model parameters and
examine differences in various optimal
solutions.
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Example: Iron Works, Inc.
Iron Works, Inc. (IWI) manufactures two products
made from steel and just received this month's
allocation of b pounds of steel. It takes a
1
pounds of
steel to make a unit of product 1 and it takes a
2

pounds of steel to make a unit of product 2.
Let x
1
and x
2
denote this month's production level of
product 1 and product 2, respectively. Denote by p
1

and p
2
the unit profits for products 1 and 2,
respectively.
The manufacturer has a contract calling for at least
m units of product 1 this month. The firm's facilities
are such that at most u units of product 2 may be
produced monthly. Develop a mathematical model
for the above.
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The Model
Mathematical Model Summary

Max p
1
x
1
+ p
2
x
2
s.t. a
1
x
1
+ a
2
x
2
< b
x
1
> m
x
2
< u
x
1
& x
2
> 0

Suppose b = 2000, a
1
= 2, a
2
= 3, m = 60, u = 720, p
1
= 100,
p
2
= 200. Rewrite the model with these specific values.

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Transforming Model Inputs into Output

Uncontrollable Inputs:
100, 200, 2, 3, 2000, 60, 720
Controllable Inputs:
x
1
, x
2
Output:
Profit Z
The Model:
Max Z = 100x
1
+ 200x
2

2 x
1
+ 3 x
2
< 2000
x
1
> 60
x
2
< 720
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Possible Problems in Developing
Decision Models
Defining the Problem.
Conflicting Viewpoints.
Impact on Other Departments.
Beginning Assumptions.
Solution Outdated.
Developing a Model.
Fitting the Textbook Models.
Understanding the Model.
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Possible Problems in Developing
Decision Models -continued
Acquiring Input Data.
Validity of Data.
Developing a Solution.
Hard-to-Understand Mathematics.
Only One Answer is Limiting.
Testing the Solution.
Analyzing the Results.

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Implementation Not Just The Final Step
Decision models assist decision maker by
providing scientific method, model, and process
which is defensible and reliable.
Overcome sole reliance upon intuition, hunches,
and experience.
Mathematical models are the primary forms of
models used in Management Science.
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Summary
Decision Models and Modeling -
The three types of models are Iconic, Analog, and
Mathematical models.
Mathematical Decision models are classified into two
categories:
Deterministic models.
Stochastic (Probabilistic) models.
Approach includes three primary steps:
Formulation.
Solution.
Implementation.
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The End of Chapter 1