Analytics, Data Science and A I:

Systems for Decision Support

Eleventh Edition

Chapter 8
Prescriptive Analytics: Optimization
and Simulation

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Learning Objectives (1 of 2)
8.1 Understand the applications of prescriptive analytics
techniques in combination with reporting and predictive
analytics
8.2 Understand the basic concepts of analytical decision
modeling
8.3 Understand the concepts of analytical models for
selected decision problems, including linear
programming and simulation models for decision
support
8.4 Describe how spreadsheets can be used for analytical
modeling and solutions

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Learning Objectives (2 of 2)
8.5 Explain the basic concepts of optimization and
when to use them
8.6 Describe how to structure a linear programming model
8.7 Explain what is meant by sensitivity analysis, what-if
analysis, and goal seeking
8.8 Understand the concepts and applications of different
types of simulation
8.9 Understand potential applications of discrete
event simulation

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Opening Vignette (1 of 2)
School District of Philadelphia Uses Prescriptive
Analytics to Find Optimal Solution for Awarding Bus
Route Contracts
• Background and the problem
- Outsource 60%-70% of bus routes
- Which route to which vendor
- Strive for least cost to the school district
- Variables: cost, capabilities, reliance, financial stability, business
acumen
• The solution
– Premium Solver
– 1600 (yes/no) variables
– Route constraints and vendor constrains
• The results
– Contracts with vendors on routes ranging from 4 to 97 each
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Model Based Decision Making (1 of 2)
• Use models to make decision on real-world situations
• I NFO RM S (resources)
– cutting edge, model-based decision-making examples
• Prescriptive Analytics

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Model Based Decision Making (2 of 2)
• Prescriptive analytics model
– Descriptive analytics for understanding
– Predictive analytics for forecasting
– Mathematical models for decision recommendation
• Identification of the problem
– Environmental scanning and analysis
– Variable identification
– Forecasting
 As part of prescriptive analytics
 What is likely to happen
 Influencing the decision made for the future

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Application Case 8.1
Canadian Football League Optimizes Game
Schedule
Problem:
• Manually scheduling 81 games for 9 teams in a 5-month period
• Goals: sales revenue, television ratings, and team rest days

Solution:
• Excel Solver (Frontline Premium Version) for automated scheduling
• 8000 decision variables, additional constraints (such as telecasting
among different time zones, no overlapping for double header games,
arch rival games on Labor day, etc.)
Results:
• Higher ticket sales & Higher television ratings

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Model Categories
• Static versus dynamic models
– Time dependent / time independent
• Model management
• Knowledge-based modeling
• Current trends in modeling
– Model libraries
– Cloud-based modeling tools/platforms
– Model transparency / multi-dimensional modeling
– Influence diagrams for better modeling

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Categories of Models
Table 8.1 Categories of Models.
Category Process and Objective Representative Techniques
Optimization of problems Find the best solution from a small Decision tables, decision trees,
with few alternatives number of alternatives analytic hierarchy process
Optimization via Find the best solution from a large Linear and other mathematical
algorithm number of alternatives, using a programming models, network
step-by-step improvement process models
Optimization via an Find the best solution in one step, Some inventory models
analytic formula using a formula
Simulation Find a good enough solution or the Several types of simulation
best among the alternatives
checked, using experimentation
Heuristics Find a good enough solution, using Heuristic programming, expert
rules systems
Predictive models Predict the future for a given Forecasting models, Markov
scenario analysis
Other models Solve a what-if case, using a Financial modeling, waiting
formula lines

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Structure of Mathematical Models for
Decision Support (1 of 2)
• Quantitative Models: Mathematically links decision
variables, uncontrollable variables, and result variables
– Non-quantitative models: qualitative models
• Result or Goal (outcome variable)
• Decision variables
• Uncontrollable variable (or parameters)
• Intermediate results

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Structure of Mathematical Models for
Decision Support (2 of 2)

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Examples of Components of Models
Table 8.2 Examples of Components of Models.
Uncontrollable Variables
Area Decision Variables Result Variables
and Parameters
Financial Investment alternatives Total profit, risk, Rate of Inflation rate, Prime rate
investment and amounts return on investment Competition
(RO I), Earnings per
share, Liquidity level
Marketing Advertising budget Market share Customer’s income
Where to advertise Customer satisfaction Competitor’s actions
Manufacturing What and how much to Total cost Quality level Machine capacity
produce Inventory levels Employee satisfaction Technology Materials
Compensation programs prices
Accounting Use of computers Data processing cost Computer technology
Audit schedule Error rate Tax rates Legal
requirements
Transportation Shipments schedule use Total transport cost Delivery distance
of smart cards Payment float time Regulations
Services Staffing levels Customer satisfaction Demand for services

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Decision Modeling with Spreadsheets
• Spreadsheet
– Most popular end-user modeling tool
– Flexible and easy to use
– Powerful functions (add-in functions)
– Programmability (via macros)
– What-if analysis and goal seeking
– Simple database management
– Seamless integration of model and data
– Incorporates both static and dynamic models
– Examples: Microsoft Excel (with Solver add-in)

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Excel Spreadsheet - Static Model
Example
Simple loan calculation of monthly payments

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Excel Spreadsheet - Dynamic Model
Example
Simple loan calculation – effect of prepayment

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Mathematical Programming
Optimization

• Mathematical Programming
– allocate scarce resources among competing activities
to optimize a measurable goal
– Linear programming (L P): A mathematical model for
the optimal solution of resource allocation problems.
– All the relationships are linear.

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L P Problem Characteristics

1. Limited quantity of economic resources

2. Resources are used in the production of products or
services
3. Two or more ways (solutions, programs) to use the
resources
4. Each activity (product or service) yields a return in terms
of the goal
5. Allocation is usually restricted by constraints (limitations
or requirements)

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Linear Programming (L P) Steps
1. Identify the …
– Decision variables
– Objective function
– Objective function coefficients
– Constraints
 Capacities / Demands / …
2. Represent the model
– LI ND O: Write mathematical formulation (
https://www.lindo.com/index.php/ls-downloads)
– EXCE L Solver: enable add-in Solver, video example;
(https://www.solver.com/)
3. Run the model and observe the results
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L P Modeling – Example (1 of 3)
The Product-Mix Linear Programming Model
• Decision variable: How many computers to build next month?
• Two types of computers: C C-7 and C C-8
• Constraints: Labor limits, Materials limit, Marketing lower limits
CC-7 CC-8 Rel Limit
Labor (days) 300 500 <= 200,000 /mo
Materials ($) 10,000 15,000 <= 8,000,000 /mo
Units 1 >= 100
Units 1 >= 200
Profit ($) 8,000 12,000 Max

Objective: Maximize Total Profit / Month

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L P Modeling – Example (2 of 3)

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L P Modeling – Example (3 of 3)
Figure 8.6 Excel Solver Solution to the Product-Mix Example
(p. 480-482)

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Illustrating the Power of Spreadsheet Modelling
• Election Resource Allocation Problem (p. 481-483)
• Three aspects of the modeling
– What do we control:
 amount invested in advertisements across 9 states
(decision variables)
– What do we want to achieve:
 Maximize the total number of electoral votes gains
– What constrains us:
 Total financials
 5% minimum each state, 25% maximum
 Western States >= 60% of Eastern States
 9200 total people influenced, females>=males, >46% old
people
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Illustrating the Power of Spreadsheet Modelling

• Election Resource Allocation Problem (p. 481-484)

Analysis of “swing states” for the 2016 election

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Common Optimization Models
• Assignment (best matching of objects)
• Dynamic programming
• Goal programming
• Investment (maximizing rate of return)
• Linear and integer programming
• Network models for planning and scheduling
• Nonlinear programming
• Replacement (capital budgeting)
• Simple inventory models (e.g., economic order quantity)
• Transportation (minimize cost of shipments)
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Multiple Goals, Sensitivity Analysis,
What-If Analysis, and Goal Seeking
• Multiple Goals
– Simple-goal vs. multiple goals
– Vast majority of managerial problems has multiple
goals (objectives) to achieve
 Attaining simultaneous goals
– Methods of handling multiple goals
 Utility theory
 Goal programming
 Expression of goals as constraints, using L P
 A points system

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Multiple Goals, Sensitivity Analysis,
What-If Analysis, and Goal Seeking
• Certain difficulties may arise when analyzing multiple
goals
– Difficult to obtain a single organizational goal
– The importance of goals change over time
– Goals and sub-goals are viewed differently
– Goals change in response to other changes
– Dynamics of groups of decision makers
– Assessing the importance (priorities)

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Multiple Goals, Sensitivity Analysis,
What-If Analysis, and Goal Seeking
• Sensitivity analysis
– It is the process of assessing the impact of change in
inputs on outputs
– Helps to …
 eliminate (or reduce) variables
 revise models to eliminate too-large sensitivities
 adding details about sensitive variables or scenarios
 obtain better estimates of sensitive variables
 alter a real-world system to reduce sensitivities
– Can be automatic or “trial and error”

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Multiple Goals, Sensitivity Analysis,
What-If Analysis, and Goal Seeking
• What-if analysis
– Assesses solutions based on changes in variables or
assumptions (scenario analysis)
– What if we change our capacity at the milling station by
40% [what would be the impact]
• Goal seeking
– Backwards approach, starts with the goal and determines
values of inputs needed
– Example is break-even point determination
 In-order to break even (profit = 0), how many products
do we have to sell each month
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Multiple Goals, Sensitivity Analysis,
What-If Analysis, and Goal Seeking
Figure 8.10 Example of a What-If Analysis Done in an
Excel Worksheet. Video Example

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Multiple Goals, Sensitivity Analysis,
What-If Analysis, and Goal Seeking
Figure 8.11 Goal-Seeking Analysis.

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Modelling and Decision Making -
Under Certainty, Uncertainty, and
Risk (1 of 2)
• Certainty
– Assume complete knowledge
– All potential outcomes are known
• Uncertainty
– Several outcomes for each decision
– Probability of each outcome is unknown
• Risk analysis (probabilistic decision making)
– Probability of each outcomes is known
– Level of uncertainty  Risk (expected value)
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Modelling and Decision Making -
Under Certainty, Uncertainty, and
Risk (2 of 2)
The Zones of Decision Making

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Decision Analysis with Decision
Tables and Decision Trees
• Decision Tables – a tabular representation of the decision
situation (alternatives)
• Investment Example
– Goal: maximize the yield after one year
– Yield depends on the status of the economy (the state
of nature)
 Solid growth
 Stagnation
 Inflation

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Decision Table: Investment Example
(1 of 2)

1. If solid growth in the economy, bonds yield 12%; stocks

15%; time deposits 6.5%
2. If stagnation, bonds yield 6%; stocks 3%; time deposits
6.5%
3. If inflation, bonds yield 3%; stocks lose 2%; time
deposits yield 6.5%

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Decision Table: Investment Example
(2 of 2)
• Payoff decision variables (alternatives)
• Uncontrollable variables (states of economy: 50% SG,
30% Stagnation, and 20% Inflation)
• Result variables (projected yield)
• Tabular representation

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Decision Table: Investment Example
(Treating Uncertainty)
• Optimistic approach
• Pessimistic approach
• Treating Risk/Uncertainty:
– Use known probabilities
– Expected values

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Decision Table: Investment Example
(Multiple Goals)
• Multiple goals
– Yield, safety, and liquidity

Alternative Yield (%) Safety Liquidity

Bonds 8.4 High High
Stocks 8.0 Low High
CDs 6.5 Very high High

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Simulation
• Simulation is the “appearance” of reality
• Conduct what-if analysis on the model of the actual
system
• Conduct experiments with a computer on a
comprehensive model of the system to assess its dynamic
behavior
• Often used when the system is too complex for numerical
optimization techniques

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Major Characteristics of Simulation
• Imitates reality and captures its richness both in shape
and behavior
• “Represent” versus “Imitate”
• Technique for conducting experiments
• Descriptive, not normative tool
• Often to “solve” [i.e., analyze] very complex
systems/problems
• Simulation should be used only when a numerical
optimization is not possible

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Advantages of Simulation
• The theory is fairly straightforward
• Great deal of time compression
• Experiment with different alternatives
• The model reflects manager’s perspective
• Can handle wide variety of problem types
• Can include the real complexities of problems
• Produces important performance measures

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Disadvantages of Simulation
• Cannot guarantee an optimal solution
• Slow and costly construction process
• Cannot transfer solutions and inferences to solve other
problems (problem specific)
• So easy to explain/sell to managers, may lead to
overlooking analytical solutions
• Software may require special skills

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Simulation Methodology
Steps:
1. Define problem 5. Conduct experiments
2. Construct the model 6. Evaluate results
3. Test and validate model 7. Implement solution
4. Design experiments

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Simulation Types
• Probabilistic/Stochastic vs. Deterministic Simulation
– Uses probability distributions
• Time-dependent vs. Time-independent Simulation
– Monte Carlo technique (X = A + B)
[A, B, and X are all distributions]
• Discrete Event vs. Continuous Simulation
• Simulation Implementation
– Visual Simulation and/or Object-Oriented Simulation

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Visual Interactive Simulation (VI S)
• Visual interactive modeling (VI M), also called Visual
Interactive Simulation or Visual interactive problem solving
• Uses computer graphics to present the impact of different
management decisions
• Often integrated with G I S
• Users can perform sensitivity analysis
• Static or dynamic (animation) systems
• Virtual reality, immersive, …

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Simulation Software
• Stand-alone desktop simulation tools
• Web-based simulation tools
• See O R/M S Today for software reviews
• Examples:
– Simio
– Arena
– ExtendSim
– SA S Simulation Studio
– Visual Components
– AnyLogic

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Application Case 8.9
Improving Job-Shop Scheduling Decisions
through R F I D: A Simulation-Based Assessment
Questions for Discussion:
1. In situations such as what this case depicts, what other
approaches can one take to analyze investment
decisions?
2. How would one save time if an RFI D chip can tell the
exact location of a product in process?
3. Research to learn about the applications of RFI D sensors
in other settings. Which one do you find most interesting?

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Application Case 8.9 – Simio Model
(1 of 4)
Figure 8.13 Simio Interface View of the Simulation System.

Source: Used with permission from Simio LL C.

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Application Case 8.9 – Simio Model
(2 of 4)
Figure 8.14 Process View of the Simulation Model.

Back End - Process

Source: Used with permission from Simio LL C.

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Application Case 8.9 – Simio Model
(3 of 4)
Figure 8.15 Standard Report View.

Source: Used with permission from Simio LL C.

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Application Case 8.9 – Simio Model
(4 of 4)
Figure 8.16 Pivot Grid Report from a Simio Run.

OUTPUT

Source: Used with permission from Simio LL C.

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